Trading Vs Investing – What is a Better Option 

There is no dearth of complicated terminology in the securities market, which can be daunting particularly for new investors. One of the most common yet most confusing conundrums pertaining to the market is the trading vs investing one. In order to ascertain whether trading is better for you or investing (or a combination of the two), it is important to understand what is trading, what is investing, and which aligns more with your investment goals. In this article, we shall discuss how you can approach between trading vs investing. 

What is trading and what is investing 

Let us begin by discussing what is trading and investing. In the context of the securities market, trading refers to the purchase and sale of assets with the prime objective of benefitting from the price movements in the market. Investing, on the other hand, is the purchase and sale of market-linked securities with the goal of long-term capital appreciation and profit. While trading is mostly driven by market volatility and short-term goals, investing is driven by a long-term investment plan and philosophy. 

By opting for trading, you can potentially make a profit from the fluctuations that define the market. In order to do so, you must have adequate knowledge of the market and the implications of various events on demand and supply in the market. If you opt for investing, you can simply purchase assets for the long term and not worry about the short-term volatility in their prices. You can also benefit from dividend income, the issue of bonus shares, and, above all, the power of compounding. 

Trading vs Investing – how to determine which is better for you 

Now than we have discussed what is trading and what is investing, let us turn our focus towards trading vs investing. There is no universal answer to the question ‘what is better – trading or investing?’ You must consider various important factors to gauge trading vs investing and choose either or both for your investing plan. Here are some of the major factors that you must take into account while gauging trading vs investing. 

• Investment goals: To begin with, you must have clarity about your investment goals. If you wish to benefit from the volatility in the market in the short run, trading may be better for you. In stark contrast, should your goal be long term capital appreciation and wealth building through a stable portfolio powered by the magic of compounding, investing is a better option. 

• Risk tolerance: Another key metric in the trading vs investing analysis is the quantum of risk both approaches carry. Generally, trading tends to entail a greater degree of risk as compared to investing. Since investing is done with a long-term lense in mind, risk and market volatility tend to be somewhat reduced. If you want to undertake a high degree of risk, trading is a better option and the converse is true for investing. 

• Investment horizon: Another important consideration in trading vs investing is your investment timeline. If you wish to participate in the market for a short period and potentially earn high returns, trading can be the go to option. On the other hand, investing can more feasible if you wish to stay invested in assets for a sustained length of time without the goal of high returns in a short time. 

• Knowledge of the market: Since trading revolves around tapping into the minutest price fluctuations that occur in the market as well as understanding the sentiment of the market, it requires active involvement and a considerable knowledge of the market and its workings. Therefore, trading can be a better option for seasoned investors and/ or people who have the knowledge, time, and skill to regularly observe and analyse the market. For beginners and passive investors, investing can be a better option. 

The bottom line 

Both trading and investing have their fair share of pros and cons. You must select one or both after taking into account the factors discussed above (amongst other important metrics). We hope this guide on what is trading and investing and how to approach trading vs investing is useful to you. 

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