Trading vs Investing Which is Better in 2024?

Trading vs Investing Which Is Better? When seeking profit in the stock market, do you prefer the rise and fall of the securities where you can buy low and sell high, or do you want to see the compound returns of your stock over time? This choice matters because it defines your style of investment, whether you follow long-term or short-term profits.

Trading vs Investing What's the Difference?

Both Trading and Investing are important terms in the stock market. They indicate the style of investments, which address different targets, simply said, short-term gains vs long-term profits.

what is the difference between trading and investing in stocks — *Trading vs Investing Which is Better*?

What is Trading?

Trading is the activity of buying and selling financial assets, like individual stocks, ETFs (a basket of many stocks and other assets), bonds, commodities, and more, aiming to make a short-term profit. What matters to traders is which direction the stock will move next and how the trader can profit from that move.

What is Investing?

On the contrary, investing in the stock market aims to earn long-term profits, and buy and hold assets, like stocks, dividends, bonds, and other securities for years to decades. What matters to investors is an upward trend over time and stock market returns, which lead to exponential compounding.

Trading vs Investing Which is Better?

When talking about stock market investment, there are more factors to think of besides the movement of profits

Trading - Higher Risk, Higher Rewards

Trading often involves higher levels of risk, as traders are exposed to the short-term volatility of the market. Risk management is crucial, and traders may use leverage to amplify returns (which also increases risk). The bubble market happens frequently in stock trading. While bubbles can lead to substantial gains for some investors, they also pose significant risks, and when they burst, prices can plummet, resulting in significant losses.

A good example is John Paulson - He is an American hedge fund manager who made a fortune by betting against the US housing market in 2007. He earned $15 billion for his fund and $4 billion for himself in what is known as the greatest trade ever. However, he also suffered huge losses in subsequent years, especially in his investments in gold and emerging markets.

Investing - The Story of Warren Buffett

Long-term investing is generally considered less risky than trading. While the value of investments may fluctuate in the short term, the historical trend of the stock market has been upward over longer periods, providing a degree of stability. It's often seen as a fixed-income investment like dividend income, which seeks to generate a steady stream of returns from their portfolios.

Let's look at Buffett’s investing story, He began when he was a child, fascinated by numbers and business. He bought his first stock at the age of 11 and his first real estate investment at 14. Buffett’s investing style has earned him the nickname of “The Oracle of Omaha”, as he has consistently outperformed the market and made himself and his shareholders wealthy. He has also inspired many other investors and entrepreneurs to follow his example and learn from his wisdom.

He also ignores short-term fluctuations and focuses on the intrinsic value of the business. He once said, “Price is what you pay. Value is what you get.” He has shared his insights and advice through his annual letters to shareholders, his interviews, his speeches, and his books. Some of his famous quotes are:

“Rule No. 1: Never lose money. Rule No. 2: Never forget rule No. 1.”
“It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”
“Be fearful when others are greedy and greedy when others are fearful.”
“The most important quality for an investor is temperament, not intellect.”
“Someone’s sitting in the shade today because someone planted a tree a long time ago.”

Trading vs Investing Which is Better at Gaining Profits

Trading vs Investing Which is Better? Is trading harder than investing? Seeking profits is the destination of both traders and investors. Let's see the following examples to help you have better ideas on how trading and investing works

Trading example: Day Trading Stocks with Apple Inc (AAPL)

Buying: 50 shares of AAPL at $150 per share.

Selling: 50 shares of AAPL at $155 per share.

Earning:

Initial Investment: $150 x 50 = $7,500.
Sell Proceeds: $155 x 50 = $7,750.
Profit: $7,750 - $7,500 = $250 (fee and tax excluded)

ROI=(Sell Proceeds−Initial Investment/Initial Investment) = (7,750−7,500/7,500)×100%=3.33%. Again, In day trading, the only way to earn high profits is you buy a lot at the lowest price and sell it all at the highest price. Higher risk, higher rewards.

Investing example: Investment in Microsoft Corporation (MSFT)

Buying: 20 shares of MSFT at $200 per share.

Hold Period: 5 years.

Selling: 20 shares of MSFT at $300 per share.

Earning:

Initial Investment: $200 x 20 = $4,000.
Sell Proceeds: $300 x 20 = $6,000.
Profit: $6,000 - $4,000 = $2,000.

ROI=(6,000−4,000/4000)×100%=50%

Annualized Return=(Total Return/Number of Years)×100%= (2500/5)×100%=400%. It means if you have a small amount of money, investing is a better choice.

Opportunities for Compounding and Dividend Incomes

Trading vs Investing Which is Better at Compounding? If you prefer overall growth and compounding interest, Investing in stocks and dividends is a better choice. Dividend payments typically get paid quarterly and add up to 0.5% to 3% of the share value over the year.

For example, let’s say you want to invest $100 per month in a stock that pays a quarterly dividend of $0.25 per share, has a current share price of $50, and has a dividend growth rate of 5% annually. The total profits after 1 year would be approximately $1,230.93, and after 5 years, the total profits would be approximately $3,514.61 (Assuming 10% Annual Return).

Final Thoughts

Trading vs Investing Which is Better? Whatever you choose, beware of financial risk, and the values of the business that you invest on. Learn from famous traders and investors before investing your money in stocks.

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Frequently Asked Questions

What is better investment or trading?

Trading vs Investing Which is Better? Trading is short-term and involves higher risk than long-term investing. Both types earn profits, but traders often gain more profit compared to investors when they make the right decisions, and the market is performing accordingly.

Which is the best option trading or investing?

Trading vs Investing Which is Better? If you generally seek overall growth with larger returns over an extended period through buying and holding, you should investing. Trading, by contrast, takes advantage of both rising and falling markets on a day-to-day basis, entering and exiting positions quickly, and taking smaller, more frequent profits.

Why do most traders lose money?

One big reason traders end up losing money is because they don't handle risk well. To protect your investment when trading stocks, it's really critical to use tools like stop-loss orders and make sure the size of your trades matches your risk tolerance. If you don't manage risk properly, just one bad trade can take away a significant part of your earnings.

Ref: fidelity | Investopedia

Tags: Investing