While talking about the investment world, it’s quite common to hear words like “trading” and “investing” both used interchangeably. In actuality, though, these activities are quite different. Both traders and investors tend to participate in the same marketplace, but they are accomplishing very different types of tasks, and the strategies that they employ are also very much different. Still, it’s very important that a marketplace have both traders and investors in order to function properly.
Stock traders are individuals (or entities) who are engaged in the trading of equity securities, or the transfer of other financial assets. They work either for themselves or on the behalf of someone else, and may operate as agents, hedgers, arbitrageurs, or investors.
Stock investors, on the other hand, are those who use their own money to buy equity securities. The aim of the stock investor is to gain returns, which come in the form of income, interest, or appreciation in value (capital gains).
Now, before jumping to the conclusion that trading is probably better and a myth which has been going around that investing is always lucrative, let us first take into consideration the issue of misconceptions which most of the people carry which will bring more clarity :
- No professional trader makes gains DAILY.
- Traders usually loose as often as they make money, but the wise ones make consistent multiple gains which tend to overtake their losses resulting in net gains at the end.
- Amongst the traders also there are 4 major categories – intraday, short term positional, option writers and swing traders. It has been observed that if an average of 10 years is taken for any successful trader, he/she is found to fall in the swing or short term positional trading. Intraday traders seldom tasted massive success.
- Traders do not use leverage to the fuller capacity as they are good with the risk management. We are talking about the wise traders.
- Each trader uses his/her own setup which they rarely discuss with people openly during their active careers.
So, now with all the above mentioned ambiguities, the question rises, which one is better? It all depends upon the following factors :
- Your passion.
- Your intention.
- Your knowledge.
- Your Experience.
- Your time devotion.
- Your financial goals and personal obligations.
- Your capital.
Let’s understand the advantages of both Investing and trading before we dig into deep to understand which could be better for you :
Advantages of Investing :
- Proven since ages to make good wealth.
- Uses power of compounding.
- Less tax burden (LTCG introduced) .
- Dividend benefit.
- Less day to day monitoring involved.
- Mutual funds adopt these.
Advantages of trading :
- Power of leverage to multiply wealth.
- Short term so usually one can avoid overnight holding risk.
- One can short sell first and make money by buying at bottom.
- Hedge funds adopt these frequently.
- Lesser capital required.
Now, based on the above mentioned points and parameters given before those, one needs to introspect and ask themselves :
- Could I be able to monitor the screen for all day long or for most periods?
- Could I be able to devote 3–4 hours for studying markets each day?
- Could I be able to take considerable amount of risk and afford to lose some XYZ amount of money?
- Am I a patient guy or someone who easily gets into the anxiety zone?
- Am I passionate enough to leave everything and pursue a full time career in trading?
The answer for the above question in most of the cases would be a NO. And that’s the major reason why India has dearth of QUALITY traders. On one hand there are multiple scams running around the country which promise to double your money in a week via trading which traps many people who eventually tend to lose their faith in the system and on the other hand Indian markets got standardization almost after 30 years of US markets reaching those levels. People don’t know that traders like George Soros made a billion dollar in a day or James Harris made 20 million dollars in a single trade. We are lack of examples in India because trading as a profession is still in a nascent stage.
In a nutshell, both trading and investing can make money and also same day payday. Trading also can generate a lot of wealth and as our markets are getting regulated, there are ample of opportunities for traders to make it big here. The only question is :
Are you REALLY PASSIONATE about it or just want to earn money?