Since January 2020, every month, Aditya has been depositing ₹2500 each to the Parag Parikh Flexi Cap fund and Axis Bank Blue Chip fund. 

He has also been depositing ₹1,50,000 every year to his PPF account for the last 10 years. 

He bought 10 shares of Bajaj Finance in 2011, which he still holds. Recently, he bought 5 shares each of Reliance and Tata Power, which he plans to hold for over a year. 

Apart from this, he bought 10 shares of Asian Paints 3 weeks ago, which he plans to hold for a few more days. He also bought 5 shares of Bajaj Finance around 4 weeks back and sold them recently.

People allocate a part of their income to bank deposits, mutual funds, and shares. There are people who buy and sell securities regularly, whereas another type includes those who continue to hold on to their investments for a longer duration.

A few others do both — invest in shares and earn dividends, along with buying and selling securities on a day-to-day basis. People dealing in securities listed in a stock market can be categorized as traders and investors. 

But which category Aditya fits into? Is Aditya an investor or a trader?

Let’s understand the difference between trading and investing in the first place.

Trading and investing are two very distinct techniques of trying to earn profit in the financial markets. Both traders and investors aim to profit through market participation. 

Generally, investors aspire to get larger returns over a long period through buying and holding. Traders, contrarily, leverage both rising and falling markets to enter and exit positions over a shorter period, taking out smaller profits more often.

Trading and Investing

Trading

Trading, or more specifically, stock trading, comprises buying and selling company shares. If you own some stocks and shares of a company, it means you own a portion of the company. Traders buy or sell stocks via a demat account. Some examples of stocks include Bajaj Finance, ICICI Bank Ltd, Adani Green Energy Ltd, Hindustan Unilever Ltd, etc.

Trading includes more frequent transactions, such as buying and selling stocks, commodities, or other instruments. The objective is to yield returns that surpass buy-and-hold investing. While investors may be satisfied with yearly returns of 10–15%, traders might look forward to a 10% return every month. 

Buying at a lower price and selling at a higher price in a fairly short period generates trading profits. Or trading profits can also be made by short selling, which means borrowing shares of the stock, selling them, buying them again at a lower price, and then returning them.

While buy-and-hold investors seek less profitable positions, traders aim to earn profits in a fixed period and mostly use a stop-loss order to close losing positions at a pre-decided price level automatically. Traders often use technical analysis tools, such as moving averages and stochastic oscillators, to get high-probability trading arrangements.

A trader’s technique is based on the timeframe or holding period in which stocks, commodities, or other trading instruments are bought and sold. Traders mainly fall into these four types.

1. Position Trading: Positional traders buy a stock and hold it for some months. They strive for the best selling opportunities within this duration to achieve profits.
2. Swing Trading: These traders buy a stock for some days or weeks to get benefitted from the expected upward movement.
3. Day Trading: Day traders purchase stocks in the morning and sell them before the market closes. The intention is to capitalize on a single-day rally provoked by market sentiment or some positive news.
4. Scalp Trading: Scalp trading uses high margins to gain from even the slightest possible price shifts. These traders purchase a stock for a few seconds or a few minutes. They make earnings out of the smallest opportunity.

Investing

Investing is the act of dispensing money with the objective of generating an income or profit. You can invest in various avenues, such as buying stocks or purchasing real estate with the goal of reselling it later at a greater price. 

Some investment avenues include stocks, mutual funds, National Pension Scheme, Public Provident Fund, Bank Fixed Deposit, real estate investments, etc.

The motive of investing is to slowly create wealth over a vast period through buying and holding a portfolio of stocks, mutual funds, bonds, and other investment instruments.

Investments often are held for years, or even decades, leveraging perks such as interest, dividends, and stock splits along the way. Although markets unavoidably fluctuate, investors go beyond the downtrends with the hope that prices will bounce back and any losses ultimately will be recovered. 

Investors generally are more apprehensive about market fundamentals, such as price-to-earnings ratios and management projections. There are mainly two types of investing:

1. Value Investing: This approach aims at decreasing the risk to maintain the value of the investment. Investors purchase shares of only well-established companies. In this approach, there is less growth.
2. Growth Investing: This approach emphasizes growing the value of investments. Investors purchase stocks that have a relatively higher potential for growth. This raises the risk quotient and growth prospects.

Differences between Trading & Investing

1. Period

In trading, stocks are held for a short period, such as for a week or, more often, even a day. In fact, intraday traders buy and sell shares within a single trading day. However, since investing works on the buy-and-hold principle, investors invest their money for years, decades, or even longer periods to generate capital gains. 

Short-term market fluctuations are trivial in the long-running investing approach.

2. Capital Growth

Traders observe the price movement of stocks in the market. When it goes higher, they prefer to sell the stocks. Therefore, trading is said to be the skill of timing the market. Nonetheless, investing is the art of creating wealth by compounding interest and dividends over the years through holding quality stocks in the market.

3. Risk

Although both trading and investing are risky, trading relatively comes with higher risk but also higher potential returns as traders face share price fluctuations in the short term, helping in developing a high-risk tolerance. 

On the other hand, investing takes some time to develop. It has lower risk but lower returns in the short run. Still, it might give higher returns by compounding interests and dividends if the investment is held for a considerably longer period. 

While investors are more risk-averse, short-term market fluctuations are trivial in the long-running investing approach.

4. Approach

Traders earn profits from stock price movements. They buy shares when prices are low and sell them when prices increase. For this reason, they observe and assess the market regularly to recognize the best opportunities to make a trade. 

However, as investors opt for longer periods when they invest in the share market, profits primarily come from the power of compounding interest.

5. Psychology

Traders are open to taking risks, perform extensive research, and follow a determined and meticulously analyzed trading plan. Frequent market fluctuations keep traders on their toes, who amend their trading decisions when the market moves against them. 

Contrarily, investors are patient enough to hold on to their long-term investments. Most of the time, investors have a low appetite for risk. 

6. Decision-making Process

Traders do consider the fundamentals; they also perform technical analysis through price charts and other supporting tools. Although their decision-making is quicker, they generally are always prepared with a strategy to guide them. 

Contrariwise, investors will likely take a lot of time before investing in shares. Since they tend to invest their money for a longer duration, they evaluate the fundamentals of various companies, analyzing their management practices, growth potential, and other factors. 

7. Capital Requirement

Traders seek short-term investment opportunities that provide profits through price movements. However, to earn considerably huge profits, they need to trade much vast quantities of stocks. One of the ways to do this is to use margin funds borrowed from a broker. 

But, investors have to arrange for funds on their own. Moreover, they may be locked into an investment for a longer duration, while traders can instantly liquidate positions as required.

Conclusion

Your decision to trade or invest depends on your financial needs, availability of funds, risk tolerance, decision-making skills, and approach to finances. Generally, investors aim to earn larger returns over a long period by buying and holding. 

Traders, on the other hand, take advantage of both rising and falling markets to enter and exit positions in a shorter duration, earning smaller profits frequently. Investing in the share market needs comprehensive market knowledge and recognizing the right shares. 

But, this process of learning is continual and evolves with time. In these ways, both trading and investing attract returns, but only if you are meticulous and analytical and act in a disciplined manner. Therefore, in some cases, such as the one cited in the beginning, a person could be a trader as well as an investor.