When it comes to growing your wealth in the equity market, you may have conflated investing and trading or assumed that they’re essentially the same thing. It’s easy to see why too, as the end goal of seeking profits through market participation is more or less the same.
Furthermore, there are also lots of people that tend to do both. However, the two are not synonymous with each other. While they have some similarities, trading and investing are two distinct approaches with their pros and cons, and learning these is key to succeeding in the stock market.
Let’s look at the difference between each of these two.
When it comes to differences between trading and investing, the most notable perhaps is the timeline. Whereas trading is a transactional process specifically designed for the short-term, investing is a long-term process that often takes years before the position matures and is liquidated by the investor.
In trading, you buy a stock, pay for the transaction, and hope to sell it in a short period for a quick profit. On the other hand, investing will put you in an ongoing process that involves assessing risk, setting different financial goals, and then building a plan around it.
Undoubtedly, both trading and investing put risk on your capital. However, the risk of loss is greater when you’re trading to earn a short-term profit, as your money can be squandered if the stock you bought immediately slides in value.
On the other hand, investors have time on their side, as they can ride those risk fluctuations out in favor of higher returns. Additionally, daily market cycles also don’t affect the quality of stock investments.
With trading, your gain is merely the return you’re getting from several trades. You also don’t control the price movement of stocks. When it comes to long-term investments, however, you may also end up getting other capital gains along with your stock. Holding quality stocks in the market as an investment may also result in compounding interest, which adds to your gains.
If you manage to make excellent long-term investments in the market, then your chances of barely having to do any work at all to make money are higher. You can keep occasional tabs on it to see how the market performs, but your money will typically work for you.
By contrast, the world of day trading is a constant and quickly-paced environment that will have you regularly staying up-to-date on your brokerage account to see how well your returns are. Missing the right time may lead to loss, which is why so many day traders do it full-time.
Ultimately, trading and investing are all about seeking capital growth in the stock market, and they pursue that goal in their ways. If you’re a beginner looking to dip your toes in this field, then doing your research and using an extensive Forex trading guide from places like Capital.com is a great way to get started.