Trading, Investing and Speculating are as similar as engine, clutch and gear of a car. Simply put, all three are great for your car, extremely important to run it but none can be substituted by the other. They are very much different and here’s how:
Trading works on “Buy and Sell” approach. It is a short term activity in comparison to investing. It works on the principle of buying something at a low price and selling it for a gain. The main factor which differentiates trading from investing is the duration for which the stock is held. If you miss the right time, then it might lead to a loss. In trading, you have to look for the current performance of the company to hit the higher price and book profits in short term. But it mainly concentrates on a few stocks and its prices instead of diversifying and hence could be deceiving. Sometimes the holding period of stock is as short as a few hours. This kind of trading is known as Intra-day trading.
These short term fluctuations are caused by the variations in demand and supply of an asset. Traders mainly rely on technical analysis, which attempts to predict short-term price fluctuations using graphs, charts, and oscillators.
Investing is the purchase of an asset with the hope of getting returns. Investing works on “Buy and Hold” strategy. It is a long term investment which results in large profits. It is a proactive use of cash to generate wealth. The decision making while investing largely depends upon the fundamental factors such as the performance of the company, quality of management etc. It has moderate risk attached with it. Investment mostly lasts for long term. The main profit lies in the value of the assets. It has a stable kind of income which is less volatile. An investment is generally made by analyzing the primary trend.
Short term fluctuations remain insignificant in investing since it works on long term trends. In investing, dividends are paid more importance, thereby only quality stocks are held for years. Investors invest in value rather than trends and get paid off well via compounded interests in a longer term. Investment requires analytic approach towards the company’s past history, business model, performance, future prospects etc. without wasting efforts in analyzing short term goals.
Speculating is about short term profits gained in smaller trends. Decision making in speculating is based on tips, rumors, news, small trend analysis, and gut instincts. The risk involved in speculating is higher than that of investment. It is dependent up on the market psychology and its factors. It is quite volatile as it depends on secondary trends, which might lead to loss at times. The intent of profit in speculating is the higher price of a stock. Speculators focus on the potential of earning money on sudden price movements instead of looking for ownership of the company by holding the shares. They carefully analyze patterns, study past history of the stock prices to locate a trend and gain through it. Speculators are quite influenced by the short term price swings.
Trading, investing and speculating are three different activities of the stock market. The risk factors, methodologies, profit margins, the fundamental strategy behind them remains different. While one might be suitable for a person and help him gain profits other might not suit him and cause loss. Therefore, the above differentiation could be helpful in determining which mode of earning through the stock suits best for you and yields you better returns as per the convenience.