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    Investing vs Trading

    • 5 min read
    • Last Modified Date: March 6, 2024
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    Investing vs Trading stocks

    Are you confused that you want to get into investing or trading? It’s important to get the basic concepts right when talking about investing for financial gain in the stock market. It’s necessary to clarify the common misunderstanding between trading and investing. 

    A trader is affected by the rise and fall of securities in the market, whereas an investor is a long-term player who holds a position or security for a longer period of time. The terms and the way that the meaning of money moves in the market are changing are very different from one another.

    What is Investing?

    The objective of investing, which is a long-term strategy, is to progressively increase wealth over time through investment plans like mutual funds, stock and bond portfolio purchases and sales, stock basket purchases, and much more.

    Unlike trading, investing has many benefits including interest, dividends, stock splits, and many more, and can be held for years or even decades. Additionally, since investing is a long-term endeavour, the investor need not be concerned about any particular downtrend because it will only last for a shorter amount of time. Consequently, there is no longer any chance of market volatility and downtrends.

    What is Trading?

    Trading is a short unstable process that involves a lot of transactions depending on market trends. In comparison to longer-term transactions like bonds or mutual funds, it is comparatively brief. Common trading examples include stocks, commodities, currencies [Forex], and other financial instruments. 

    More profit is the benefit of trading over investing. Assuming that long-term investors receive 10–15% of profits each year, a trader may receive the same 10–15% each month based on their individual choices and decisions.Furthermore, trading is extremely dynamic and risky; decisions made by traders can yield both large profits and losses depending on market trends.

    While buying low and selling high is the fundamental concept of trading, there are a variety of other tactics, such as reverse trading and short-selling, that only seasoned traders employ to make significant short-term gains. These strategies are dangerous, and beginners should avoid using them.

    Investing vs Trading

    Here is a comparison table for investing vs trading:

    FactorsInvestingTrading
    Time HorizonLong-term (usually years)Short-term (usually days, weeks, or months)
    GoalGenerate wealth over timeGenerate profits in the short term
    Frequency of TransactionsLow frequencyHigh frequency
    Risk LevelGenerally lower riskHigher risk
    Research and AnalysisTypically requires in-depth research and analysisRequires continuous monitoring and analysis
    Emotional ConsiderationsFocuses on long-term trends and goals, less influenced by short-term price fluctuationsMore susceptible to emotional trading decisions due to rapid and frequent price movements
    Asset class SelectionDiverse portfolio with long-term potentialFocus on short-term volatility and price movements
    Time and Effort RequiredRequires less time and effort once initial research and portfolio allocation decisions are madeRequires active monitoring and continuous analysis
    SkillsFundamental analysis and long-term perspectiveTechnical analysis and short-term trading strategies
    ReturnsPotential for higher, long-term returnsPotential for higher, short-term returns
    Tax ConsiderationsTypically subject to long-term capital gains tax ratesRates of short-term capital gains tax may apply.

    Why do investments tend to outperform trading profits?

    The best use of compounding power is in investing. Compounding indicates that the longer you own stocks, the higher the returns they generate, which in turn increases the returns on your investments. There is very little chance that the power of compounding will work to your advantage when trading because it involves quickly churning the funds and the portfolio.

    Trading involves transaction costs. Although this is a fairly small matter, transaction costs have a significant impact on your effective returns. The cost of trading is actually fairly high when you include in brokerage, statutory costs, and hidden costs like spread risks and illiquidity. When it comes to cost, investing is far more economical than trading.

    The effect of taxes on trading is one. When you trade, you report it as either short-term capital gains or as business income. In either case, you pay taxes at your maximum rate, which is typically approximately 34.5% after deducting the surcharge. Even after taking into account the recently imposed tax on long-term capital gains, long-term capital gains are still more cost-effective.

    Profits from trading are highly susceptible to black swan events. The chart above demonstrated how even a few trading day absences can have a significant impact on your trading results.

    Investing vs Trading Which is better?

    Trading is more complex than investing. While investing requires knowledge about the financial stability of the company before making a purchase. High market expertise, real-time analysis, and the ability to predict stock price movement in a split second are necessary for trading.

    Money can be invested by retail investors who are time-constrained and seek passive income. The likelihood of capital appreciation is higher. However, someone with the right information and a keen sense of the market can try their hand at trading. It is not advised, though. Since the likelihood of losing is fairly high. 

    A person may select one or both of these options, depending on their degree of risk tolerance, patience, knowledge, and experience. Trading is more risky and has a shorter time horizon than investing, which has a longer time horizon.

    Both also have the ability to turn a profit. While trading can be an exciting way to make quick money, it can also result in significant losses, much like gambling. Investing produces few significant losses but many long-term gains. 

    Investing vs Trading Which is more profitable?

    Since trading and investing have different time horizons and return capabilities based on stock market conditions and trading or investing strategies used when buying the stock, it is impossible to compare their profitability.

    Profitability in trading can occur within a day, several days, or even a week, whereas in investing you have to wait and monitor the stock until it starts to turn a profit. Investment returns can range from months to years, with additional benefits like stock splits and dividends.

    Trading involves a 50/50 chance of profit and loss, particularly in volatile markets where a poor choice could result in a loss. Investing does not carry a high level of risk because there is plenty of time for the market to recover and stocks move higher over time as a company’s revenue and profit increase and its valuation rises, increasing your investment.

    Fractional ownership: A lucrative real estate investment option

    In India, fractional ownership of real estate is quickly becoming a viable investment option for investors, especially high net-worth individuals (HNIs), and even end users, who may be able to generate consistent returns of 8–10% from the thriving commercial real estate market.

    Several investors can jointly own a piece of a property through fractional real estate investment, splitting the costs and rewards. Simply put, fractional ownership is the ownership of a portion of expensive commercial properties that are jointly managed by a number of investors using their combined capital.  A seasoned management company typically handles the property’s maintenance, leasing, and other operational aspects.

    The Indian fractional ownership market is expected to grow from Rs 1,500 crore in 2019 to Rs 4,000 crore in 2023, according to TruBoard Partners. A recent Times of India (TOI) report projects that the fractional real estate market in India will expand by 16% over the next few years. Bangalore, Mumbai, Delhi, Chennai, and other major Indian cities are the best places to invest in fractional ownership.

    Fractional ownership of real estate provides investors with benefits like affordability, diversification, and professional management of property.

    The ability to sell shares at any time makes fractional ownership an extremely liquid investment when compared to traditional real estate.

    How to Invest wisely?

    • Make an investment plan that outlines how you will purchase, sell, and adjust your holdings. For instance, aftermarket movements have thrown the portfolio out of balance, some people sell some holdings and purchase others to bring them back to initial objectives.
    • Understand your approach to investing. This includes being aware of your risk tolerance and your financial objectives (retirement, college expenses, etc.).
    • Get ready for a lengthy journey. To endure the ups and downs of the market, you’ll need perseverance and self-control.

    Top Investment options

    Traditional Stock Investing

    Traditional stock investing is focused on the long-term growth of wealth. Investors purchase company shares they believe will increase in value over time. This long-term approach often includes a more thorough analysis of company fundamentals, industry trends, and overall economic health, leading to lower risks than short-term strategies.

    It’s an excellent avenue for individuals seeking to build substantial wealth in the long term while avoiding the hefty stress associated with everyday market fluctuations.

    Fixed Deposits (FDs)

    Fixed deposits are a popular choice among risk-averse investors seeking a secure monthly income stream. Banks and other financial institutions offer fixed-rate bonds (FDs) with a fixed interest rate for a predefined duration. Compared to other investment options, their returns might not be as high, even though they offer capital protection. Moreover, FD interest income is subject to taxation.

    Fractional Ownership Real Estate

    Fractional ownership in real estate is a unique and innovative strategy that assists individuals in owning a share of a property rather than purchasing it outright. Unlike traditional real estate investment, where you purchase an entire property, fractional ownership allows you to acquire a “fraction” or share of a property. 

    An alternative investment platform called Assetmonk, for instance, provides a fractional ownership model with investments starting at just 25 lakhs.

    Put simply, you co-own the property with several other investors. This method significantly reduces the financial barrier to entry.

    Investors can enjoy the advantages of property ownership, such as profit from appreciation and rental income, depending on the proportion they own. Fractional ownership is especially popular with vacation homes, commercial properties, and other high-value real estate sectors.

    Real Estate Investment Trusts (REITs)

    Investors who do not directly own any real estate can still participate in the real estate market by using REITs. REITs, or real estate investment trusts, invest in properties that produce income, like retail establishments, office buildings, and apartment complexes. 

    They then use the rental income from these properties to distribute dividends to their shareholders. REITs provide the extra advantage of diversification along with the possibility of a monthly income stream. However, the money received from REITs is subject to taxes.

    Post Office Monthly Income Scheme (POMIS)

    Investors can receive a monthly income through the government-backed Post Office Monthly Income Scheme.  With a five-year lock-in period, POMIS is thought to be a fairly safe investment option and offers a fixed interest rate. The interest income is subject to taxes, though.

    Investing vs Trading: Which is better?

    The answer to:  Investing vs Trading: Which is better? is subjective, and depends on your financial goals, risk tolerance, and available time.

    Financial Goals: If your aim is to achieve growth over years or decades, investing is your best bet. If you aspire to make quick profits from the market’s volatility, trading aligns with your goals.

    Risk Tolerance: If you can handle high-risk and high-pressure situations, trading may suit you. But if you prefer less risk and stress, investing offers a more passive and steady approach.

    Time Commitment: If you’re ready to devote the significant time that trading demands, go ahead with it. Otherwise, investing is a better choice if you prefer to sit back and let your money grow over time.

    In summary, both investing and trading have specific advantages and potential drawbacks. Often, a mixed approach could be the best way to achieve your financial goals. A diversified portfolio containing long-term investments combined with some level of trading might provide the balance of growth and income you desire.

    Bottom Line

    Trading and investing differ primarily in their methods, associated risks, and durations. Choosing between the two options is up to the individual’s tolerance for risk and level of patience, but doing both is acceptable. Trading is high risk and has a short time horizon, whereas investing has a longer time horizon. Profits are made by both parties, but when traders make wise choices and the market moves as expected, they usually make more money than investors.

    Assetmonk, an alternate investment platform that brings lucrative commercial real estate investment options to investors, bridges the debate between investing and trading stocks. By unlocking access to curated, high-potential commercial properties, Assetmonk provides a complementary alternative to stock investments.

    The fractional ownership options offered by Assetmonk provide long-term retail investors wishing to increase their exposure to the CRE market with a high potential earning yield of 14 to 21% annually. 

    FAQs

    Q1. How does long-term investing compare to short-term trading?

    A. Long-term investing allows your investments more time to recover from market downturns and benefits from the power of compounding, while short-term trading seeks to capitalize on immediate price fluctuations.

    Q2. Investing vs Trading: Which is more profitable?

    A. The profitability of investing vs trading depends on numerous factors, including individual skill, knowledge, risk tolerance, time commitment, and market conditions. Both have the potential to be profitable, but the risk associated is proportionally higher for trading.

    Q3. How can I create a balanced investment portfolio incorporating both trading and investing?

    A. You can balance by allocating a portion of your portfolio for long-term investments in stable and growth-oriented assets, and another portion for short-term trading to take advantage of market volatility.

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