There are no entry barriers to enter the stock market. Once you get the
Demat account, you are ready to hit the stock market. This easy-entry is what makes most of the people vulnerable. With the hope to earn easy money, they enter the market but get their hands burnt. They soon realize there is no free lunch in the stock market. Making money in the stock market is a skill that can be developed with practice. That’s why it becomes important to gain knowledge.
When you enter the stock market, you may face a dilemma, that whether you should go for Trading (Buy & sell) or Investing (buy & hold).
When a person decides to try his hand in the stock market, he faces the beginner’s dilemma: whether to trade or invest. Both are the approaches to make money in the financial markets.
Before opting for one and rejecting the other, let’s understand the differences in investing and trading.
To give you an insight, we have presented here the comparison between Trading & Investing. As with most of the things in life, nothing is bad or good. Depends on each & every person’s preference.
|Objective||The objective of trading is to make money by frequently buying & selling shares within a short period of time.||The goal of investing is to build wealth over an extended period of time by buying & holding the stock.|
|Tenure||The holding period can be from a few seconds to few months.||The holding period is usually more than a year.|
|Risk Involved||Higher risk with a potential of higher rewards.||Lower risk as compared to risk in Trading|
|Mindset||Aggressive. Need to be continuously active.||Passive. Once invested, sit passively & let the company earn money for you.|
|Skills required||Understanding of Technical Analysis||Understanding of Fundamental Analysis|
|Area of Concern/Methods employed||Not concerned with the fundamentals of the company. Aims to profit by anticipating the short-term price movement||Focuses on fundamentals of the company. Considers short term price movements as noise.|
|Time required||It is a full-time job. You need to continuously monitor the stocks in which you trade. Difficult to manage with your day Job||As it involves holding for a long term after buying, you are not required to monitor on a daily basis. You just need to monitor the fundamentals of the company. Can be managed with your day job.|
Trading keeps you glued to your screener whereas investing gives you the luxury to enjoy your vacations while your money is working for you. So then why would a person choose trading above investing? The reason is simple. In Investing, you aim to earn returns of 18-20% p.a. On the other hand, in trading, you aim to earn a 10% return in a month.
If you ask us, we would suggest having a balance between the two approaches. Trade to generate income while invest with a focus to build wealth. Also, if you are new to this, start with investing with mutual funds. Once you gain enough knowledge, you can start trading/investing on your own.
We have explained technical & fundamental analysis in our next articles – what are they and how to conduct this researches. So please read them also for a better understanding.