Confused between investing vs. trading? Clear your doubt here!
The most common debate in the equity space is ‘Investing vs. Trading’. Both terms – investing and trading – are often used interchangeably by individuals; however, they are two different concepts. While the ultimate goal is profit-making, time is the key factor differentiating investing and trading. But what exactly is investing, and who is an investor or a trader? Who makes more profit? Should I be a trader or an investor? Let us find out. What is investing? Investing can be traditionally defined as investing in asset classes where the goal is to build substantial wealth over a long period. Investors can build elaborate and diversified portfolios of stocks, mutual funds, bonds, and other investment vehicles to accumulate wealth. The benefit from the power of compounding is realised over longer investment horizons, but it sure is one that is worth the wait. Most investors do not concern themselves with short-term volatility or even bear markets. This is simply because they have a long-term growth vision and expect the markets to bounce back.
Investors also do not commit to frequent buying and selling of assets. This approach can be compared to holding on to equity assets for a very long time and selling only when required. Investors carefully assess their investment options and invest in those securities that are expected to grow in the long term. Investing often involves thorough research of the company, its strategies, the industry that it operates in, its growth prospects, and more. An aspect here is also to take complete advantage of components like interest, dividends, bonus payouts, etc, to generate passive income and create a corpus for the long term. Investing types or approaches to investing Majorly, there are two types of investing – value investing and growth investing. Value investing is an approach based on analysis of the investment options and finding the stocks of those companies that may be underpriced/undervalued in the market currently. These companies have excellent prospects but may or may not be known well enough– or are not trending in the market for many investors to notice them. That is what keeps the market price capped. Value investors hope that the market will recognize the true potential of these companies in the future, that will then lead to exponential rise in the stock price, thereby churning handsome profits for the investors. This approach has lower risk as compared to growth investing. Growth investing, on the other hand, involves purchasing stocks with high growth potential in the near-term. It focuses on those stocks that may be trending on the back of some current positive news that may possibly have a longer term effect on its fundamentals, or show a high possibility of revenue growth and above-average earnings. These are stocks that are on a bull run currently. The reason it is riskier than value investing is that market sentiment may change, but more importantly, it may require the investor to invest in high potential yet low-cap or bootstrapped companies that expand and grow rapidly but carry substantial risk. Read More About investing vs. trading