How is trading different from investing in the stock market?
Trading and Investing are completely two different things, but at the same time, they are the two sides of the same coin.
There are some factors that separate this two from each other.
This involves less risk as compared to trading. You will never lose money if you are going for a long-term investment.
Investing is more about value than money.
If you put your money in a company that provides value that is going to be in demand in the future, and at the same time its valuation is less than what it should be.
Then it is more likely that your money is going to grow without any risk. This is called fundamental analysis.
Investing in a company requires deep knowledge of that sector.
Investing is a long-term process and a growth rate of 20% annually or if you can overtake the index then is considered to be an ideal growth.
Compounding and reinvesting the dividends are going to grow your money exponentially after a specific period of time.
This involves very high-risk but at the same time, you can get unimaginable returns.
Trading doesn’t require knowledge of that company at all, but you need to have experience or else you are going to get wiped out of the game.
Traders do not aim for a specific return, you have to ride the waves and at the same time cut your losses small to make profits on most of the trade. You must always put a stop loss or else you might blow up your account if the trade goes against you.
Trading involves technical analysis which is studying charts.
Buying and selling stocks on the same day is called intraday. Buying and keeping stocks for more than one day is called delivery.
Trading stocks can last for seconds, minutes, hours, days or even weeks.
Different types of trading include:
- Position Trader – positions are held from months to years.
- Swing Trader – positions are held from days to weeks.
- Day Trader – positions are held throughout the day only with no overnight positions.
- Scalp Trader – positions are held for seconds to minutes with no overnight positions.
Is trading a gambling?
Trading is not gambling although most people think it like gambling as it involves a very high amount of risk. There is a fine line that separates trading from gambling.
Traders take a calculated risk and always uses a stop loss to cut the losses small this is called risk to reward ratio. A risk to reward ratio of 3:1 is considered to be an ideal ratio, but in gambling, you take a 50:50 chance of winning and losing.
If you are not using a stop loss and you have no experience in trading and you never got the exposure to stock market then, of course, you are gambling and for sure, you are going to lose money in stock market.
Day trading or intraday involves the highest amount of risk.
Neither trading nor investing is better, the real question is which suites you the best.
If you are new to the stock market, it is always recommended that you start with investing, Investing involves less risk as compared to trading.
But the problem is trading is a very lucrative business, and for a newbie, it is more like gambling than taking a calculated risk.
You can start trading in a demo account to gain experience.
If you can’t keep yourself away from real trading, then just remember never leverage your trade if you are a newbie.