It is common knowledge that by making the right choices and defining the right strategies, the equity market can be a treasure trove for wealth creation. However, not all investors make the same choices or define the same strategies to earn profits. Within the equity market itself, there are various approaches and strategies that work best for specific groups of investors. The most popular of these are known as Trading and Investing.
So, in the debate of trading vs investing, which approach would be ideal for you? And what exactly are the differences between day trading and investing that can help you make your mind? To make this point simpler, let us first look at what is day trading and investing, when considered in terms of the stock market.
What is “Trading” in the Stock Market?
To start with the trading vs investing debate, let us understand what trading implies in terms of the stock market. ‘Trading’ typically refers to the strategy of day trading whereby an individual sells and buys shares within the time frame of a single trading day. With day trading, the trader determines his loss or profit margin as well as closes all his positions before the market itself closes for the day.
What is “Investing” in the Stock Market?
Next, let us review what it means to ‘invest’ in the stock market. Investment in the stock market usually refers to the approach of buying and holding of shares over an extended period of time to make long-term profits. Even as the market keeps fluctuating, investing in the stock market results in ‘riding out’ the downtrends till the market stabilises. Eventually, the profit and loss margin is determined by the investor after several years, or even decades.
Differences Between Trading and Investing
Now that we have an understanding of what is day trading and investing in the market, it is time to determine the factors that set them apart. The two approaches work for different types of investors and therefore, come with their own share of features and benefits. To make the trading vs investing comparison clearer, here is a look at the major differences between day trading and investing:
1. Time frame: The first difference between the two approaches is clearly that of time period. With day trading, the individual holds the shares of a company for a very short period of time ie. for a trading day. Day traders make the most of daily trends and buy and sell on the basis of minor price fluctuations.
On the other hand, investors in the stock market buy shares with the intention of holding on to them for as long as they may be profitable. The investment is always made with a longer time horizon in mind, such as years or decades, and is unbothered by short term price fluctuations.
2. Risk Factor: Both trading and investing rely heavily on the movements of the market and therefore come with their own share of market-linked risk. However, with day trading, the time window is relatively much shorter and therefore, every sale or purchase decision is crucial. On a good day, day trading can reap high rewards while on another, result in unexpected losses.
The risk factor with investing is somewhat different. This is because since the investment takes place over a long term, an investor can hold on to a stock till the market becomes just favourable enough to sell it off. The returns might be lower than with day trading, but the risk is lowered as well.
3. Technique: The trading vs. investing debate is often likened to a ‘skill vs. art’ comparison. With day trading, an individual needs to be able to make quick decisions, know how to time the market and carefully select every single stock. His expertise in the market is tested on a daily basis and every decision is a reflection of this expertise. Hence, learning day trading is in the vein of developing a skill.
On the other hand, investing in the stock market is a process that requires time, patience and a keen eye on the market. It requires careful analysis and a slow and steady approach. Therefore, stock market investing is often compared to learning an art.
In conclusion, day trading and investing are both profitable approaches to the stock market in their own right. A person’s preference for one approach over the other depends largely on his risk appetite, investment horizon and investment style.