The stock market seems to spook a good majority of people. If you are keeping a watch from the sidelines, tracking trade and investment updates daily or seeing the market news on TV, it is unlikely you will ever muster enough courage to get in on the great stock picking game. The highs, the lows, the bulls, the bears, the hourly variations, can be all too overwhelming for the average Joe looking for trade and investment in the capital markets without knowing the difference between trading and investing.
What most people sitting on the sidelines experience by watching this daily high strung sequence of trade and investment is only one part of what the stock market is all about. They are experiencing the life of a stock market trader. The other part of the stock market, which is all about investing, is something quite the opposite. The difference between trading and investing is as stark as night and day.
In this article we will tell you what is investment, assuming that you are a complete novice with regards to trade and investment. We will then get into what is trading vs investing in stocks, thus helping you understand the main difference between investor and trader. We will throw in a few terms that you would typically come across if you decided to take this up as a hobby, or even as a trade and investment career.
A Stock Is A Stock Whether You Are Trading vs Investing
To understand trade and investment, you must first understand stock and how a company raises money (or capital). Companies raise capital for a variety of reasons – to build a new product, to scale operations, to support a new division, etc. They can raise money either by going to a lender, like a bank, and borrowing money (debt), or they can offer ownership in the company (equity) in exchange for money.
To offer equity, the company sells what are called its “shares” in the capital markets (more popularly known as the stock market). Individuals who buy these shares become part owners of the company. Each share issued by the company gives the owner a right to cast one vote towards any decisions that are to be taken by the company. These decisions could be for e.g. “electing the board of directors of the company” or “selecting the company auditor”.
A company might decide to issue 10 lac shares, for example. In this case, if you own 1 share, your ownership will be 1⁄10,00,000=0.0001%. So, in reality, you are only a very small part-owner of the company. Even to be a 1% owner, you would need to own 10,000 shares, which might be a lot of money to spend.
You would have noticed the usage of both the words “share” and “stock” in the discussion above. These words are often used interchangeably. Company stock usually collectively refers to all the shares in the company. So when you “buy 1 share on the stock exchange” you are actually “buying 1 share of stock on the stock exchange”.
What Is Investment In A Stock?
As a person sitting on the outside, you might wonder what the fuss is all about when it comes to buying shares in a company. There must surely be something more to trade and investment than simply voting rights. There certainly is. When you buy company stock you are buying an opportunity to grow your wealth as the company grows – the price that you bought your shares for (the stock price) would most certainly rise over time as the company grows. So when you decide to sell your shares, you could profit from the sale. Additionally, as an owner of company stock, you can often cash in on the dividends that a company declares – dividends are part of the profits that the company decides to give to its shareholders as cash. So there are multiple advantages with trade and investment in company stock.
Trading vs Investing
At the beginning of this article, we indicated how variable the stock market could be (the stock market refers to the market where you can buy and sell shares of thousands of companies). There are two primary strategies to buy shares in the stock market – trading vs investing. The main difference between trading and investing is the timeframe for which the shares are held. Trading deals in very short timeframes, typically a day to a few days. Investing, on the other hand, involves holding shares over an extended period of time, most often several years or even decades. The difference between investor and trader is that the former seeks larger returns over time. In contrast, a trader is happy taking frequent profits by buying and selling shares of different companies more often.
Trading vs investing are actually two completely opposite paradigms of stock ownership. Investors take advantage of dividends and stock splits (when a company decides to give you 2-shares-for-1, or even 3-for-1) to grow their wealth. These events happen either periodically (dividends), or are undecided (stock splits). The only way to take advantage of them is by investing long term. Traders aim to beat the returns of investors by strategic buying and selling of shares in short timeframes. They can buy low and sell high or even buy high and sell low (short selling).
The other major difference between investor and trader is the techniques used by each. An investor thoroughly studies a company before investing. They look at P/E ratios, debt levels, management forecasts, and other such company fundamentals before investing. A trader uses technical tools like moving averages, candlesticks, Parabolic SAR, etc. to identify opportunities to make a profit.
Financial markets, combined with the plethora of information made available by the internet, present a tremendous opportunity for individuals to make money whilst sitting in the comfort of their chairs. It doesn’t matter whether you are trading vs investing. All you need is to decide on a strategy and learn some skills. There are numerous courses online that can help you with these skills like the one here. Sign up for it and start making money!
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