Introduction
People often confuse between trading and investment and use the term interchangeably. But in reality both are totally different. In a stock market trading a stock and investing in a stock has only one common thing i.e. you buy and sell stocks.
What is the difference between trading and Investment?
The major difference is in the time horizon. Trading involves buying and selling asset(e.g: stock) for short term gain. Duration between buy and sell is short. Where as investing involves letting your money grow over a period of time. For example if you invest your money in IDFC First bank stock, you are putting you money in the banks business assuming it will give you good return when the company grows, which will happen over a period of time e.g: 2 -10 years or even more.
What is the difference in approach?
For trading, your analysis is mostly focused on technical analysis. Studying the charts and price movements. In this the metrics used will be different. Some key metrices used are moving averages, trend charts, super trend, volumes, ADX, resistance and support levels, Pivot etc.
In contrast, for investment your analysis should be focused on fundamental. Some of the key things to know here are
how is the company doing its business?
How is the growth in revenue, profits, sales etc.?
Any differentiator when compared to its competitor?
How is the management?
What is good for me?
It will depend on how much risk you are ready to take, ability to do technical analysis and fundamental analysis. In general trading is more complex and riskier than investing for an average people. It requires consistent monitoring of market( stock trading). Also, you need to me emotionless.
Investing is more about fundamental analysis of a company. You need not be focused on market movements and let your money grow over a period of time. But for this also you need to know how to do fundamental analysis.
Long story short,
Trading – Technical analysis – greater risk
Investing – Fundamental analysis – less risk