Trading or Investing: Which is Best?
In the stock market, two types of race are there, one is running slow and steady with consistency and reach the line successfully. The other one is sprinting fast and sometimes walking fast and reach the line. Trading and investing are the two types of approaches in the stock market. It is very hard to tell, who will win the race, but we can analyze here the differences between trading and investing which helps, the investors will decide on their own.
Trading:
Trading involves many transactions like buying and selling commodities, stocks, currencies on a daily or weekly basis. They can even buy and sell for minutes. The main goal of traders is to beat the long-term investors because long-term investors aim is to get 20% annual returns but traders aim for 10% return monthly. Traders aim to make a profit within a specific period. when they feel the market goes up, they buy, and then they sell. when traders feel the market will go down they first sell and then buy. Mainly traders use technical analysis for their trades such as Moving averages, Rsi, Bollinger bands, stochastic oscillators for a high probability of profit and they will not look at economic data, fundamental analysis.
Day Trader:
Day traders do not like to hold their positions for the next day. They have more knowledge about the market and they are very active during the market hours. Even they can earn 5% in a single day but there is some risk also involved.
Scalp Trader:
They just hold their positions for minutes or seconds but no overnight positions. They do more transactions like buy and sell the shares many times which they will get profit, but sometimes it may lead to losses.
Swing Trader:
Swing traders hold their positions from days to weeks. They didn't care about daily fluctuations in the market. Profits can earn by buying an asset or short selling. They aim for big profits when the price moves from high to low or low to high. They use momentum signals like 52 week low high and trend lines and some patterns for their trades.
Positional Trader:
Positional traders hold their position for weeks to months. They wait for big price movement and when the breakout happens they enter into trade and wait till the right time to sell. Positional traders are trend followers. They identify the correct trend and follow the same and make profits. They buy at low and sell at high, also they use some risk management like hedging.
Investing:
Investing is like creating wealth for your future and investors hold their positions from years to decades. Investing is a long-term horizon and you invest your money in Stocks, Bonds, Debentures, mutual funds, exchange-traded funds, etc.
Investors use fundamental analysis and they do a deep analysis of the company with the Balance sheet, profit & loss statement, cash flow statement, and some financial ratios and then they invest and hold it for a long time.
Some investors put their money in some specific companies or an index fund and leave it for years and they do not take any risk. It is called passive investing.
Some investors sell their shares of a particular company in two years and again they put their money in another company share. They aim to get good returns by following the company trend. If they feel the company does not perform well, they take out the money from the particular company and put in another company's shares. It is called Active investing.
Investing in a company based on its intrinsic value is called growth investing. They analyze the growth of the company for the next two years and based on that they invest. They try to find the undervalued stocks in the market.
In investing you can enjoy the benefits of dividends given by the company, compounded growth of returns, part of ownership in the company, and voting rights.
Summary:
Finally which one is better? Trading or investing.
If you have tons of knowledge about the stock market and if you have time to sit with the market from morning to evening you can go into trading. you need to make quick decisions in trading. Also, trading needs a lot of practice and risk management to avoid losses.
For investing you need patience, you need to wait for the company business will do well every year and after that only your stock price will move up and you can make profits. Investing is less risky than trading, you need not worry about market fluctuations but you need to know about the economy, industry, and the company. In the end, it's your decision whether you are an investor or trader based on your time, knowledge, and patience.
