Skip to main content

Investing vs Trading : What's The Difference?


Why Trading and Investing are so Fundamentally Different 

There is a popular misconception that trading and investing could be used interchangeably with one another. But as professional traders and investors can attest to, they are both radically different. It’s easy to mix the terms when both activities share the same objective ie, to make money in the stock market. 

But their opposite approaches to achieve that objective is what makes them so distinct. To put it in its simplest form, traders trade Tickers and investors invest in companies. Let’s break this phrase down in more detail by focusing on three main concepts associated with each activity. 

  1. Primary Philosophy: Although investors could sometimes bleed into what a trader does and traders could bleed into what an investor does, the main philosophy to take away is that one is purely based off fundamentals and the other is based on technicals

Investors primarily look at the stock market from a fundamental standpoint. When choosing a stock, investors are entirely invested in what a company does and will continue to do. They care more about the bottom line. They look at a company’s financial reports which consist of balance sheets, income statements, cash flow statements, and various other required documents that the company has to disclose to their shareholders. 

These reports give shareholders a look at a company’s debt relative to their overall cash flow, their market share compared to their competitors, their growth and projections, and most importantly, how much profit they’re bringing in. These are all things investors care about. They’re thoroughly listening to a company’s conference call during earnings season, the amount of dividend they’ll pay out for the quarter, and any other relevant information an investor would need to decide if they’re willing to buy the company’s stock.

While investors are viewing a company’s financial reports, traders are vigorously viewing a company’s stock chart. And within that chart, traders have many study indicators they use at their disposal to figure out entries and exits. They study indicators that could be tools like moving averages to assess whether a stock’s trend is bullish or bearish or a relative strength index (RSI) to determine whether that stock is oversold or overbought & Pivots.

But before traders even trade a stock, they are watching for certain patterns within that chart. Every trader has a strategy and they’re looking to see if they can find a pattern that falls within their strategy. Traders then look for validated levels of support and resistance. They evaluate a myriad of other factors like the spread between the bid and the ask on the level 2, the kind of transaction going through on the time & sales, and the type of candlestick they’re about to buy into. All of these tools are specifically important for a day trader. More on that later. 

  1. Duration: As any sound investor can tell you, never try to time the market. Investors are not interested in paying attention to daily price movements or even weekly price movements for that matter like traders are. They’re not paying attention to market volatility as much as a trader. Their outlook is substantially longer-term than a trader’s. And that outlook could be at least 5 years and certainly greater than a year. Timing the market is a fool’s errand for an investor. 

For a trader, however, timing the market is everything. Swing traders are looking to buy low and sell high or buy high and sell low if they’re shorting multiple times by taking advantage of these price fluctuations where as an investor would typically not care and just sit back. A trend trader tries to buy high and sell higher or short sell low and buy back lower. In other words, a trader will buy a stock short to mid-term where as an investor will buy a stock for the long-term. Traders Date the Stock until it's within their Framework whereas Investors Stick to the Stock as long as its According to their Expectations.

It’s also important to distinguish the kind of trader a person is. A day trader will buy and sell a stock on that same day within hours, minutes, or even seconds. And a swing trader will hold a stock for at least a day. 

  1. Skill Level: Spending more time in the market naturally will expose you to more level of risk. A trader’s time in the market can be significantly longer than an investor’s in terms of buying and selling and therefore require a bit more skill level to be successful in making money. 

A trader has to cut losses more quickly where as an investor can wait for the company to bounce back if they hit a roadblock as long as their fundamentals remain intact. 

Each of these activities require a different kind of mindset as well. Investors need to have some level of belief or intuition in a company that they’re buying. A trader’s approach is a little less emotional. In fact, their decisions should all be based on logic when analyzing the technical setup of a stock. 

Final Thoughts 

Regardless of how you approach the stock market, extensive research is undoubtedly required. A trader must check off a multitude of technical conditions to see if a stock is worth trading. And an investor has to study the ins and outs of a company to see if their financial philosophy and overall product or service is sustainable for long-term growth. 

Investing Generates Wealth in the Longer Term whereas Trading Generates Regular income.


stockmarketadvisory.in

Comments

Popular posts from this blog

U.S Markets firing 🔥 (8th Feb 2024)

1. U.S Markets closed higher Yesterday. 2. U.S Markets are trading at their all time high on daily basis. 3. S&P 500 is now at 5k. 4. This has been a stellar show across the globe. 5. We have an Election Year in the U.S as well. 6. As you might not be aware more than 45% U.S citizens invest in stock market. 7. So for the Government to have a good impression and to gain vote Bank stock market have to be kept higher. 8. Government and FED will do what all they can to keep pro markets  9. Bank Nifty showed signs of comeback yesterday but the rally failed again. 10. Largecap stocks continue to underperform whereas Mid & Small caps continue to soar new highs. 11. Once a trend develops in the markets it can go on for a long time than expected. 12. Interestingly , I was doing some number crunching yesterday and found that small & mid cap companies have given better than expected results than large caps. 13. Most of the large caps have disappointed. 14. Star of the pack

Reversal from 20k (24th July 2023)

1. U.S Markets closed lower on Friday. 2. Dow Jones was flat. 3. Nasdaq was the underperformer. 4. Gift Nifty is down 30-40 Points. 5. Asian markets are mostly lower as well. 6. Friday the Nifty opened with a gap down of 200 points. 7. Within the next 10 minutes , Nifty recovered 100 points. 8. Bulls expected recovery is on the cards but Nifty started to Crack. 9. Bank Nifty was holding up Nifty for most of the while. 10. It couldn't be able to provide much of a support and Bank nifty also began to correct. 11. The issue now is market has had vertical rallies. 12. One way quick rallies so now the downfall will also be vertical. 13. When markets go up quick , they come down quicker. 14. Infy dragged the mood and also HUL didn't post extraordinary results so it was also a laggard. 15. Banks tried hard to hold the markets but couldn't. 16. Over the weekend , AU Bank and icici bank reported very good numbers. 17. These banks have already rallied a lot before results

Consolidation (2nd August 2023)

1. U.S Markets closed mixed Yesterday.  2. Dow Jones closed mildly in Green. 3. Rest of the indices closed lower. 4. Right now , Dow Futures is lower. 5. Gift Nifty is down 40-50 Points. 6. Asian markets are mostly lower as well. 7. It's a sort of Consolidation going on in the markets. 8. Markets are trading flat in between 19600 to 19800. 9. Within this range , Nifty is swinging like a pendulum. 10. Bank Nifty range is 45300 to 45800. 11. Both the Indices are moving at tandem. 12. Yesterday's expiry was quite flat. 13. FIN Nifty traded flat for whole of the expiry. 14. All option buyers in FIN Nifty lost huge. 15. Markets are likely to consolidate for few more sessions. 16. 19600 is the buying zone. 17. 19800 is the selling zone. 18. Unless we don't get any signs of range breakout we won't have to take one side view  19. Nifty might trade between 19600 to 19800 today. 20. Post this fed rate hike markets have become dizzy. 21.  stockmarketadvisory.in