Table of contents
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.
This way, 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
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 ₹5000 per month. You keep it aside in your account instead of investing in any asset or opting for a recurring deposit. After 5 years of consistent saving, you have ₹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 at least 15-20 per cent. So, your buying power would have increased to better deal with the inflationary pressures.
Investment as a secondary income
Here’s a fun fact – investment can act as your secondary source 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.
Professional traders have the skills and knowledge to make informed decisions and capitalise on market opportunities.
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?
There are several trading styles, including:
- Swing trading 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 is a fast-paced trading style that 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?
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.
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.
Conclusion
In summary, investing is a long-term strategy for growing wealth gradually, while trading is a short-term approach for generating quick profits. The choice between the two depends on your financial goals, risk appetite, and the time and effort you can commit. Evaluate your investment horizon, capital, and knowledge to decide which approach suits you better.
FAQs
In India, the seven types of investments typically include Equity, where you invest in stocks; Debt Instruments, like bonds and debentures; Mutual Funds, which pool money to invest in a diversified portfolio; Fixed Deposits, offering guaranteed returns; Real Estate, for property investment; Gold, as a traditional investment; and Cryptocurrencies, representing the digital asset class.
Students in India can start investing through Mutual Funds, Bonds, Cryptocurrencies, Deposit Schemes, Share Market, Target-Date Funds, and High-Yield Savings Accounts or CDs. Starting with small amounts, like a Systematic Investment Plan (SIP) in mutual funds, can be an effective way to begin building wealth early on.
Investing is generally better for long-term wealth creation, focusing on steady growth and minimizing risk. Trading, on the other hand, is suited for those seeking short-term profits and who can manage the higher risk and stress associated with market volatility. The choice between investing and trading depends on one’s financial goals, risk tolerance, and time commitment.
Beginners in India should start by setting clear financial goals, understanding different investment options, and creating a diversified portfolio. Starting with small investments in mutual funds or stocks through SIPs is advisable for gradual growth. It’s important to research and diversify investments to reduce risks and adapt as one gains more experience in the market.
To start trading in India, you need to open a Demat and Trading account with a broker. Educate yourself about the market, decide on a trading strategy, and start with small trades to understand market dynamics. As you gain confidence and knowledge, you can gradually increase your trading activities. It’s crucial to stay informed and make decisions based on thorough research and analysis.
Leave a Comment