Investing and trading are two different ways to make money in the financial markets. Both have their own set of advantages and disadvantages, and it is important to understand the differences between them in order to make informed decisions about your own investment strategy.
Investing is the process of putting money into assets with the expectation of earning a return over a long period of time. In my view the basic difference is only of the horizon of time and the types of elements we choose to put money in. This can include buying stocks, bonds, real estate, or other types of assets.
Trading, on the other hand, is the process of buying and selling assets in the short-term in order to make a profit and create wealth day by day. This can include buying and selling stocks, currencies, commodities, or other types of Instruments. Trading is typically considered to be a short-term strategy, and traders are often looking to make quick profits depending upon the time horizon and Instrument.
There are many different types of investing and trading, each with its own set of risks and rewards. Some of the most common types include:
- Stock investing: Stock trading refers to the buying and selling of shares of publicly traded companies on a stock exchange. When an individual or institutional investor buys shares of a stock, they become a shareholder and own a small piece of the company. The value of the shares can increase or decrease depending on the company’s performance and the general market conditions.
- Day trading: buying and selling stocks or other assets within the same trading day in order to make a profit. For e.g.- There is a boy in the name of ‘’SHANKH’’ who wish to become a day trader and what he does is, he took 50,000 rupees from one of his friends CHINMAY and asked him that he would return 51,000 is 4 days. So what he does is, Shankh on Monday morning bought 500 Shares of a good in news company for say ‘’ KESHAV AGRO’’ at 100 and thought to sell them at 105 so that he could have a profit of 2500 rupees as 500 shares has a price hike of 5 rupees gives you 2500 profit and after deduction of the taxes and brokerage let him get a profit of 2300.Thus Shankh is already in profit even after returning the money to Chinmay with interest, But just give it a thought that what if on that same day the price would not had not shot up to 105 and gone down to 97.Thus shankh would have been in loss of 1500, of even more. Thus, Day trading can be profitable and risky on the same time and day trading can be done on a number of instruments like-futures, options, stocks, stock options etc
- Swing trading: holding assets for a few days to a few weeks in order to make a profit, this can be done in any of the instruments like- stocks, stock options, stock futures, or even currency and commodity as well. Thus, swing trading is basically done on a larger time frame depending upon the analysis and discretion of the investor where and how one wants to invest. Also swing trading can be profitable and loss making at the same time, and margin required here is a bit high in comparison to day trading as sometimes the broker is not very much comfortable in giving you a margin on 2x, 5x or 10x on swings.
- Position trading: holding assets for several months to a year in order to make a profit. For e.g.- As told in the definition of position trading, this is a type of trading where people invest in Equity and derivative both irrespective of positions to be hedged or not. Sometimes position trading can be stated as investing also, as for e.g.- suppose you have 10 Lakhs of rupees and you want to buy shares which can give you handsome returns and upon your research and analysis you found a stock name ‘’XYZLIMITED’’ which is trading at a price of 100 Rupees so you bought 10,000 shares of that company and left that to let it become the next multi-bagger so this is simple position trading , but the main aim is to generate more and more profit and what you did is while buying the stock you pledged that shareholding which gave you an authority to sell Out of the money call options at a particular premium price with that of a lot too and you can make profits out of it too , thus this is a scenario where option trading can be used for hedging and trading as well
- Options trading: buying and selling options contracts in order to profit from changes in the price of an underlying asset. For e.g.- Options is a very broader topic to be seen from a trading perspective as it may be helpful to you and dangerous at the same time, what actually happens is that options are used to hedge your positions to minimize the risk depending upon the trade. Strike price, Theta Element, Vega Element, Gama element, Lot size, Price and Premium with Open Contracts and the number of changes in Open interest one should see before buying or selling of options. Also, I will write a separate article on the Jargons of Options which will make it simple for you to understand.
- Futures trading: buying and selling futures contracts in order to profit from changes in the price of an underlying asset. For e.g.- suppose you either have a gut feeling or you have gone through the technical and fundamentals of a company like reliance and you think that by the end of next month the price of reliance is going to be 4 to 5% more of now so how you can benefit out of it. By simply Buying the Future contract of a company which is listed in the stock market let’s take it as ‘’ABCLIMITED’’’ i.e.- ‘’
- ABCLIMITED FEB FUT’’ This is the script you will bet for, also the future contracts are not even bothered about the theta decay or anything and also, we have to pay a hefty price as a premium in exchange of the lost size of the contract.
In summary, investing and trading are two different ways to make money in the financial markets. Each has its own set of advantages and disadvantages, and it is important to understand the differences between them in order to make informed decisions about your own investment strategy.
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