When delving into discussions about financial markets, we frequently encounter two key terms: investing and trading. Although both methods aim to enhance your wealth, it's vital to grasp the difference between investment and trading to determine which aligns best with your objectives and preferences. Read on to know more about these two approaches.
What is investing?
Investing involves purchasing shares of a company, mutual funds, bonds, etc., and holding them for a long period to benefit from capital appreciation. When you select suitable stocks or mutual funds, thorough research is necessary initially. For example, you will study a company's financials, profit margins, ratios, etc., to decide which stocks to buy. Similarly, for a mutual fund, you will study a fund’s historical performance across market cycles, fund manager's experience, portfolio attributes, expense ratio, and others.
Common investing strategies
- Value Investing: It involves selecting stocks that are priced lower than their intrinsic value. The main idea is to buy these undervalued stocks and sell them when they reach their true worth or exceed it.
- Growth Investing: This strategy focuses on identifying companies with strong potential for future growth. Investors with a growth investing approach look for companies that are expected to experience rapid revenue and earnings growth in the future.
What is trading?
Trading involves frequent buying and selling of various financial instruments such as stocks, bonds, currencies, and derivatives. Traders seek to generate quick profits, often daily, weekly, or monthly by leveraging short fluctuations. Traders perform technical analysis by reading charts, market trends, and patterns to generate returns. Because of the short time horizon, traders continuously monitor their entry and exit to make good profits.
Common trading strategies
- Day trading: It entails purchasing and selling securities within the same trading day. The goal is to profit from small price fluctuations and mitigate overnight market risks.
- Swing trading: This approach focuses on profiting from short to medium-term shifts in stock prices. Swing traders maintain positions for several days to weeks by identifying market trends.
- Positional trading: The strategy is to hold stocks for an extended period, usually for a few months. Positional traders actively seek optimal selling opportunities within this timeframe to capitalize on potential gains.
- Scalp trading: It is an intraday trading strategy where traders aim to profit from small price movements by making numerous trades within a single day.
Differences between trading and investing
Time and efforts
Time and effort play a key role in this investment vs. trading comparison. Successful trading often demands significant time and effort due to the extensive research and constant monitoring required. As a trader, you must perfectly time your entry and exit to avoid booking losses. On the other hand, long-term investing typically adopts a more hands-off approach, often characterized by a "buy and hold" attitude. By investing in a diversified portfolio, you can potentially make profits without being actively involved. Long-term investors will likely endure the market's fluctuations without reacting to every market event. This passive nature of long-term investing can yield significant returns over time.
Risk factors
Every kind of investment carries inherent risk. Profit and loss are part of the game. In trading, the risk element is always higher because you have a limited time to recover your losses. As a trader, trying to leverage short-term mispricing, managing risk is very important due to inherent volatility. However, investors stay invested for a longer period of time to benefit from the power of compounding. Historical trends have shown that the chances of negative returns (or capital loss) in equities decrease with the increase in the holding period.
Tax implications
Taxation rules for Capital Gains remain consistent across all equity-oriented investments. However, owing to the difference in return generation between trading and investing, the taxes incurred are generally higher in trading. Since traders typically hold investments for short periods, usually ranging from days to months, income generated from equity trading is subject to the short-term capital gains tax, which currently stands at 15%. Regarding investing profits, long-term capital gains tax (LTCG) applies if you sell your equity instruments after 1 year. LTCG attracts a 10% tax for profits above Rs 1 lakh in a financial year.
Investing or Trading: Choosing your financial path
Trading is best suited for those who have enough time as it requires full focus and dedication. You should also have a thorough understanding of market dynamics and a higher risk tolerance. Such traders remain focused even during market downturns or when facing losses. They know how to reduce risk and exit at the right time.
Investing offers a reliable path to fortifying your financial well-being and generating consistent passive income, especially when time is a constraint. Investing is well-suited for individuals who prioritise long-term financial goals, have a lower risk tolerance, and prefer a passive approach to managing their investments.
Also Read: [Plan your finances strategically to enjoy your retirement in peace]
Conclusion
In summary, investing is better suited for long-term wealth accumulation and passive income generation, while trading may offer opportunities for more immediate profits but comes with higher risks and requires active management. The choice between trading and investing depends on your financial objectives, risk tolerance, and preferences. It's essential to consider above mentioned factors and choose the approach between investment vs trading that aligns best with your goals and circumstances.
Disclaimer: This article is for information purpose only. The views expressed in this article are personal and do not necessarily constitute the views of Axis Bank Ltd. and its employees. Axis Bank Ltd. and/or the author shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision.
Mutual Fund investments are subject to market risk, read all scheme related documents carefully. Axis Bank Ltd is acting as an AMFI registered MF Distributor (ARN code: ARN-0019). Purchase of Mutual Funds by Axis Bank’s customer is purely voluntary and not linked to availment of any other facility from the Bank. T&C apply.
