Stock Investing vs Trading: Which is Right for You?
Did you know over 31 lakh new demat accounts were opened in the month of August 2023? This is the highest number since January 2022!
This indicates a strong inclination towards the stock market. But the stock market can be a confusing place for beginners. There are so many different terms and strategies to leave you puzzled. However, if you're thinking about putting a few bucks in the stock market, then we have got you covered! Let's delve into the world of the stock market and differentiate the terms.
What is Stock Investing?
Investing is the act of buying stocks with the goal of holding them for the long term. Investors typically invest in stocks that they believe in. It could include companies with strong fundamentals or promising growth prospects. To put it simply: buy the stock and forget about it. Don’t keep checking it every moment and get mini heart attacks!
Stock investors are willing to tolerate short-term volatility in the stock price. But how do they keep calm with the constant fluctuation in price and not start biting their nails? Investors have the calm because they believe that the stock will eventually appreciate in value over time.
What is Trading?
Trading is the act of buying and selling stocks in the short term. The goal of trading is to make a profit from short-term price movements. Traders typically use technical analysis to identify stocks that are overbought or oversold. Another common method that traders use is leverage to magnify their profits.
Trading is a more risky activity than investing. Simply because traders are exposed to more volatility and the possibility of losing money. For example, you buy the shares of a company at Rs 100. And the price shoots up to Rs 200. Hurray, you made a profit! But the share price might hit the lowest and you can lose all your money. That’s the risk of trading.
Stock Investing vs Trading
|Time horizon||Long term||Short term|
|Strategies||Fundamental analysis, technical analysis||Technical analysis, leverage|
|Suitable for||Investors who are willing to tolerate short-term volatility||Traders who are comfortable with risk and want to make quick profits|
When is the best time to start stock investing or trading?
There is no right or wrong time to start your journey in the stock market. The right time would depend on your individual goals, risk tolerance, and time horizon. Whenever you have enough knowledge about the market, you are good to go!
- If you're looking to grow your money over the long term, then stock investing might be a good option. The stock market has historically trended upwards over the long term. So you're likely to see your money grow if you invest for the long haul.
|Indices||1-year||5-year||YTD (Year-to-date)||All-time high|
(Data as of 13th September, 2023)
- If you're looking to make quick profits, then trading may be a better choice. However, trading is a riskier activity than investing. You could lose money if you're not careful! Trading should be practiced only once you have learned enough about the stock market.
Questions to Ask Yourself Before You Start!
Q1. Do I know enough about the stock market?
Before you leap in, you should have a strong foundation of what and how the stock market operates. To clear the cloud of “What” and “How”, there are a lot of resources readily available. You can read books, and articles, or take online courses to learn about the stock market.
Once you understand the basics, you can judge where you would fit apt. You can take the call whether long-term stock investing or trading is the one for you!
Q2. Do I know my risk appetite?
You should determine your risk tolerance. How much risk are you comfortable taking with your money? If you're not sure, it's a good idea to talk to a financial advisor. Your risk appetite would determine your stop-loss points in trading. And this would directly protect your capital. So get some dose of risk management!
Q3. Do I know my goals?
Set your goals! What are you hoping to achieve with your investment? Are you saving for retirement, a down payment on a house, or something else? Jot down your goals to design the course of plan to achieve the goal.
Q4. Do I have a plan?
Create a plan before jumping into the market! For that, you should know your goals and risk tolerance. Once you are sorted with the above questions, you can create a plan for your investment or trading activities. Avoid over-trading or putting all your eggs in one basket in stock investing.
1. Stock investing means long-term buying and holding for growth with lower risk, while trading involves short-term buying and selling for quick profits with higher risk.
2. Whether stock investing or trading: the decision should be based on your goals, risk tolerance, and time horizon.
3. Understand the stock market, assess your risk tolerance, set financial goals, and create a well-planned strategy before entering the market.
4. No One-Size-Fits-All! Both methods have their individual pros and cons. Choose the one that aligns with your financial goals and personal preferences.