Difference between Trading, Investing and Speculating

Prasanth Menon

02 Sep 2017

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:

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:

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:

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.

Difference between trading investing and speculating

Conclusion:

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.

Have Referral Code?

Similar articles

  • Responses
  • Patidar Samaj

    - 2 hrs ago

    This article claims RJio was given a "Backdoor Entry" into the 4G Based Voice Routing. The peculiar aspect is without the Voice License, Rjio would have been a mere ISP. With the license, it is now a holistic communications service provider, with ability to exponentially scale the bouquet of products. The events indicate it was meticulously planned way before the auctions because the auctions were clear on the agenda: 4G for internet only.

Load More
mutual-fund

Why to Choose Mutual Funds Instead of Directly Investing Into Equities?

Whether to invest in equities or mutual funds is a question that has plagued every investor. As someone who needs the best value for his/her investment should you invest in equity directly or via mutual funds?

Let’s start by first understanding what these two terms ‘equities’ and ‘mutual funds’ stand for-

Equities- Equities generally represent ownership of a company. If you own any equity in a company, you are a part owner of the said company (depending on how much equity you own).

Mutual Funds – It is an investment scheme which is professionally managed by an asset management company. It pools together the resources of a group of people and invests their money in equities, debentures, bonds and other securities.

Why choose mutual funds over equities?

For people who’ve never invested in either stocks or mutual funds, it is hard to know which is better and where to start. Broadly speaking, if you are a novice investor, mutual funds are not only less risky but also way easier to manage. Here are some ways in which investing in mutual funds is beneficial as opposed to investing in equities -

Diversification

Mutual funds provide more diversification as compared to an individual equity stock. When you invest in equity, you are investing in a single company which has its inherent risk. For example, if you invest Rs.20,000 in buying equities of one company, you could face a total loss if that particular company performs poorly in the market.  

If you invest the same amount in mutual funds, it will be invested in different kinds of stocks and financial instruments, high-risk and low-risk both, so you might not face total loss even if one company does poorly.

Scale of Investment and Lower Costs

For an individual investor buying and selling stocks is a difficult task due to its high price. Thus, any gains made from stock appreciation are nullified if the overall trading costs are considered. Comparatively with mutual funds, as the money is pooled from a large number of investors, the cost per individual is lowered.  

Another advantage of mutual funds is that you don’t need to invest large sums of money. Buying equities for a profitable venture needs huge amounts of money, a minimum of few lakhs. With mutual funds, you can start with Rs.1000 and earn profits on that as well.

Convenience

Keeping an eye on the markets everyday is a time-consuming business, especially if you are investing as a side gig. There are people who spend their lives studying the market and still end up sustaining heavy losses. Though investing in mutual funds does not guarantee high returns, it is stress-free and needs less work as compared to investing in equities.

To sum it up

It is important to remember that mutual funds have their own disadvantages as well. Thus, as with any financial decision, educating yourself and understanding the suitability of all the available options is the ideal way to invest. 


Banner

Difference between Trading, Investing and Speculating

Prasanth Menon

02 Sep 2017

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:

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:

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:

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.

Difference between trading investing and speculating

Conclusion:

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.

Have Referral Code?