Investing and trading – these two terms are often used interchangeably. But in reality, both terms have fundamental differences. Knowing their meaning will help you decide which option suits you!
What is Investing?
Investing is the activity of putting your money into an asset with the hope of generating capital gains. This asset may be equity, bonds, real estate, commodity, or mutual funds. Investing is a long-term strategy to build wealth and grow your savings.
Here’s an analogy to help you understand –
Investing is like planting a seed and watching it grow into a tree. It’s putting your money into assets that will grow over time, like stocks, bonds, and real estate. The goal is financial freedom and stability, but it takes time and effort.
Every month, putting Rs.1000 in your piggy bank will grow into a hefty sum. Your savings will increase if you consistently invest your money in the stock market or real estate. Thus, the added benefit of investing is saving money rather than splurging on it.
Financial Goal Setting and Inflation
Inflation is like a silent thief, slowly eating away at your hard-earned money. It’s essential to remember that money’s value decreases over time. The cost of living rises, and your money loses its buying power.
Investing is a way to beat inflation and reach your financial goals. It is a way to protect yourself against exponential price rises and ensure that your money retains its value. Over time, Investing in assets that have the potential to grow at a rate that exceeds the rate of inflation is an ideal way to protect your wealth.
Assume you save Rs.5000 per month. You keep it aside in your account instead of investing in any asset or opting for a recurring deposit. Over a period of 1 year, your saved amount grows to Rs.60,000. After 5 years of consistent saving, you have Rs.3,00,000 idle in your account.
If you had invested the same amount in an asset like stocks or mutual funds, the amount would have increased by 15-20 per cent at least. So, your buying power would have increased to better deal with the inflationary pressures. Thus, while straightforward savings is good, investing helps you save AND grow your wealth over time.
Here’s some advice – When setting financial goals, it’s essential to consider your investment horizon – the length of time you plan to hold an investment. The longer your investment horizon, the more time you have to ride out market volatility and achieve your goals.
Investment as a Secondary Income
Have you heard of moonlighting? The act of pursuing side hustles along with primary employment to increase your overall income. While moonlighting helps you earn, it can increase your workload.
Here’s a fun fact – investment can act as your secondary source of income. Imagine waking up one day and finding out that your stocks have gone up, giving you an extra boost of cash for the month. That’s the beauty of investing; it has the potential to provide a steady stream of income.
You must get creative with your investment portfolio and widen your knowledge base. For instance, if you invest in stocks that pay dividends, you can receive regular payments in addition to the capital gains you may earn when you sell the stock. Investing in real estate can also provide rental income.
What is Trading?
Trading is buying and selling financial instruments to earn profits within a short period. Unlike investing, trading is far more active, requiring your involvement and attention. When you invest, you buy assets and hold them for an extended period. But, when you decide to trade, you buy and sell shares within hours or days.
Here’s an analogy to put things into perspective –
Trading is like chess, where you’re constantly making strategic moves. The risk involved is high. But the core strategy often remains the same – buy low and sell high.
Trading as a Side Hustle/Career
Trading can be a side hustle or a full-time career. Professional traders have the skills and knowledge to make informed decisions and capitalise on market opportunities.
As a side hustle, trading allows you to make money in your free time, and as a career, it provides a steady income.
With the rise of online trading platforms, anyone with a computer and internet connection can start trading. It’s like a virtual stock market where you can buy and sell stocks from your home. However, there is no denying that it is a high-risk, high-reward activity. So you need to be well-informed and disciplined to be successful.
How Does Trading Work?
Trading involves buying an asset at a low price and selling it at a higher price to make a profit. There are several trading styles, including:
- Swing Trading: This involves holding positions for several days to a few weeks, taking advantage of market swings.
- Intraday Trading involves buying and selling assets within a single day, taking advantage of short-term price movements.
- Scalping: This fast-paced trading style involves taking advantage of small price movements by holding positions for a short time.
- Positional Trading involves holding positions for several weeks to months, taking advantage of longer-term price movements.
Trading vs Investing: Which is Better for You?
Have you ever found yourself torn between wanting to grow your wealth and wanting to play it safe? On the one hand, you have the excitement of trading with its short-term potential for big wins. On the other hand, you have the stability and long-term potential of investing. Which one is the right choice for you?
This is like asking if you prefer a steady jog or a sprint. Both have their advantages and disadvantages. So, the answer to this question depends on your financial goals, risk tolerance, and investment horizon.
Long-Term vs. Short-Term
Investing is a long-term strategy, while trading is a short-term strategy. Investing is about building wealth over time, while trading is about making quick profits.
Investing may be your better option if you’re looking for a long-term strategy to build wealth and secure your financial future. On the other hand, if you’re looking to make money in the short term, trading may be more appropriate.
Think of it this way: if you’re a patient gardener who enjoys watching your trees grow tall, investing might be for you. But if you’re a thrill-seeker who loves the adrenaline rush of a high-stakes card game, then trading might be the better choice.
Building Wealth with Trading/Investing
Both trading and investing can help you build wealth, but the approach and outcome are different. Trading is like flipping houses, you make quick profits, but it’s essential to have a strategy and adapt to market changes. Investing is like building a home, it takes time and patience, but in the end, you have a solid foundation for wealth.
- Investing is the activity of putting your money into an asset with the hope of generating capital gains over time. This asset may be equity, bonds, real estate, commodity or mutual funds.
- Investing is a long-term strategy to build wealth and, invariably, grow your savings. The ultimate aim behind all this is to secure your financial future.
- Trading is buying and selling financial instruments to earn profits within a short period. Unlike investing, trading is far more active, requiring your involvement and attention.
- Investing is a long-term strategy, while trading is a short-term strategy. Investing is about building wealth over time, while trading is about making quick profits.
- Investing may be your better option if you’re looking for a long-term strategy to build wealth and secure your financial future. On the other hand, if you’re looking to make money in the short term, trading may be more appropriate.
- Both trading and investing can help you build wealth, but the approach and outcome are different.