Most of Stock Market Beginners wonder about the difference between Stock Investing & Trading. The more you read and explore about investing, trading, technical analysis, fundamental analysis etc, the more you get confused. The overwhelming amount of information that you get from social media and other website end up confusing you. The stories that you read and hear from different people as how someone made millions out of nothing in no time or how somebody lost millions in matter of second can thrill and scare you at the same time. Understanding the basics of how to make money from Stock Market can help you win.
In simple term, investing and trading are the structured methods of participating in stock market and make money out of it. Investing is based on fundamentals with long term outlook and trading is based on technicals with short term outlook.
When someone reads the fundamentals of underlying assets like Stock, Bond etc and buys the security in hope of positive returns over a usually longer period, its called INVESTING!
Return on investment can be by way of rise in price, dividend, bonus NCD, bonus share allotment, share split, additional stock allocation due to demerger etc.
When someone follows the technical aspects of price and volume of underlying assets like Stock, Bond etc and buys or sells the security in hope of positive returns over a usually shorter period, its called TRADING!
Profits can is made mostly due to fluctuation in price. The reason could be anything. Buyers & Sellers, alternatively called Bulls and Bears may keep pushing prices in their favor and understanding of equilibrium between bulls and bears can help traders predict where the price is going to be in a expected time duration. While positive news can shoot the price up, negative news or event can push the prices down.
Key differences between Investing & Trading
Investing: Investors essentially use fundamentals of an underlying asset or instrument before taking a position in it. In case of Stocks, they read the financial statements, management, sales and revenue performance, business outlook, industry cycle etc. They need to evaluate whether the prices are expected to rise ahead.
Trading: Traders essentially try to catch the movement in price due to any reason. They usually rely on technical analysis which is more about the price and volume of an underlying security or instrument. They rarely bother about the fundamentals of business. Some of them do keep an eye on happenings in earnings, news and events just to make speculate how its going to impact price in stipulated time.
DIRECTION OF TRADE
Investing: When the fundamental analysis is done and a positive outlook is developed in possibility of upward price movement, Investors BUY the security thus they essentially take Long Positions!
Trading: Technical analysis reveals to traders whether the price of a stock or security is expected to rise or fall. They are free to take Long or Short position depending on their anticipation whether the price will rise further or fall in stipulated time.
Investing: Investors usually position for long term which is usually for years or several months.
Trading: A trader may hold position for few minutes to hours to few days and weeks; months in case of its a positional trade. Holding duration for traders is usually short.
|Outlook||Long Term||Short Term|
|Position||Long||Long & Short|
|Leverage||Selectively Available||Readily Available|
|Cost of Leverage||18% per annum||Nil|
|Cost of Buying/Selling||Higher than Trading||Usually lower|
|Taxation||Long / Short Term Capital gains tax can apply||Short Term Capital Gains Tax|
|Business Treatment||Its usually considered personal||Tax authority may treat it as Speculative Business and Taxation could be accordingly.|
|Benefits of Ownership||Very High||Low|
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