People who are new to investing have numerous questions and concerns. One of the most pressing concerns is whether to earn from the stock market by trading or investing.
Investing and trading are two distinct ways to earn from the financial markets. While investing is buying and keeping a portfolio of stocks for an extended length of time, trading entails buying and selling stocks frequently in order to profit from price fluctuations driven by demand and supply considerations as well as overall market mood. Compounding growth, often known as reinvestment of profits, is a strategy used by investors to grow their money over time. Many advantages are available to investors, such as dividend income, bonus shares, stock splits, and so on.
Traders, on the other hand, earn by evaluating market sentiments and looking for equities that are likely to see a large upswing in a short period of time. Traders acquire these stocks for a limited period of time and sell as soon as the price reaches the target. Traders also employ a strategy known as stop loss, in which failing trades are automatically closed out, reducing the possible loss.
Trading and investing have both shown to be efficient methods of benefitting from the stock market. It’s vital to consider the benefits and drawbacks of trading and investing before weighing them against each other.
Advantages Of Trading
1. Traders can outperform the market:
Traders seek high returns on their investments by purchasing at a low price and selling at a higher price. You can earn 15 percent to 20 percent each month on your money once you learn and grasp the concepts of trading. Profits are more frequent and consistent as a result.
2. Traders can profit from a sinking market:
Traders can profit from a declining market by short selling the stock, or selling it before buying it again later. After a trader has a negative perspective of a stock or the market in general, he will employ derivatives to short sell the stock and then purchase it back when the prices have dramatically corrected.
3. Traders’ profits are recurring:
Because traders buy and sell regularly, their gains are predictable and recurring, allowing them to reinvest their profits to expand their trading capital base. Furthermore, because their investment horizon is so short, their capital is not tied to a stock for an extended period of time, lowering their market risk exposure.
Disadvantages Of Trading
1. Predicting short term trends:
Trying to predict market changes in the short term necessitates a thorough examination of market sentiment and other traders’ psychology. It’s tough to analyse attitudes since there are so many variables at play, making it impossible to forecast future consequences. As a result, trading is a high-risk, high-reward game.
2. Trading necessitates constant vigilance:
Because trading is a short-term game, it necessitates constant vigilance of market movements, which means that in order to make money successfully, you must continuously examine market data, news, and trends. Because not everyone has such a large amount of free time, stock trading is not for everyone.
3. Trading stocks is expensive:
Each transaction in the stock market comes with a cost, such as brokerage, which is paid to the broker that buys or sells stocks on your behalf, as well as taxes. These costs must be paid every time you buy or sell a stock. Because a trader buys and sells frequently, he must pay this fee on each transaction, making it an expensive affair.
Advantages Of Investing
A. The power of compounding works in your favour:
This reminds me of a Warren Buffett phrase. An ideal business achieves very high returns on capital and continues to use a large amount of capital to achieve those high returns. This turns into a compounding machine. Every stock represents a stake in the company’s operations. The power of compounding works in your advantage when you invest in a solid business. As the value of the company’s business rises, so does the value of your investments. Even if they are not working, this allows investors to earn a source of passive income.
B. Dividend income, bonus issues & other advantages:
Long-term investing in equities has a number of advantages that traders do not have. Investors benefit from frequent cash flows in the form of dividends and bonus shares declared by the company, in addition to compounding their wealth. Dividends can be re-invested in the firm, allowing you to make more money in the future without having to put any money out of your pocket, while bonus shares allow you to grow your position in a company by receiving additional shares in exchange for the ones you already have.
C. Excellent passive income source:
When you invest in a company, a one-time investment continues to compound as long as the firm’s value rises. Because investors do not have to worry about day-to-day market volatility, this produces an excellent source of passive income. All an investor needs to do once in a while is take a quick glance at the company’s financial performance and make some modifications to their portfolio.
Disadvantages Of Investing
A. Long-term capital commitment:
Because investing is a long-term game, it necessitates committing your wealth over a longer length of time, exposing your money to a variety of risks you may not be comfortable with. Long-term investing necessitates patience and a larger risk appetite, as you could lose all of your money if your investment selection fails.
B. A slow method of earning money:
When comparing the % returns received from trading vs. investing, the percentage return on investment is significantly lower. An investor may be content with a 20% annual return, however a trader with some experience and analytical talent can earn 20% per week! You may be wasting your time investing rather than trading if you have a talent for selecting the appropriate stocks that will go up in the short run.
C. Cannot be an active source of income:
Investing is a passive source of income that necessitates a long-term financial commitment. Unlike any other business or job where money comes in on a consistent basis, investing does not generate a cash flow, making it difficult to make a living from it.
How To Choose Between The Both?
1) Analyze your risk appetite:
The first step is to figure out how much risk you’re willing to face in order to make money. Traders incur more risk than investors, but they are frequently rewarded with bigger profits in a shorter period of time. To determine your risk tolerance, start trading with a virtual account and put your trading skills to the test. If you consistently gain money over time, that’s excellent; if you lose money, ask yourself if you’d be alright losing the same amount of money in real life. If you answered yes, you are almost certainly ready to trade. Investing is a better option if you have a limited risk appetite and can’t handle large losses.
2) Time constraints and commitments
The second deciding aspect is the amount of time you are willing to devote to your venture. You can be a trader if you are someone who is always keeping an eye on the market and enjoys doing so. If, on the other hand, you prefer not to work hard and instead prefer to let money do the work for you, investing is a better alternative for you.
3) Understanding the market
How well do you understand the market? Trading can make you very wealthy if you are good at recognising chart patterns and analysing behaviour; however, investing is the way to go if you have a better understanding of firms and can study financial statements more effectively.
In the stock market, both trading and investing have shown to be profitable strategies of making money. Investing, on the other hand, is a more laid-back and casual approach than trading, which necessitates constant tracking, discipline, and swift decision-making. Both have their own set of benefits and drawbacks; which one best suits you is entirely up to you. After all, it’s your money that’s on the line