When putting your money into the financial markets, you can take two main approaches: trading and investing. Both have distinct advantages and disadvantages, and which is suitable for you depends on your circumstances and goals. To help you decide which approach is correct, let’s take a closer look at the key differences between trading stocks and investing.
Stock trading generally refers to the buying and selling of shares in publicly-listed companies. The main aim of stock traders is to make profits from short-term price movements in the market rather than from the underlying performance of the companies themselves. Stock traders need to understand technical analysis well, which is the study of past price movements to predict future ones. They also need to be comfortable taking on more risk than investors, as they often aim for higher returns over shorter timeframes.
On the other hand, investing refers to buying and holding shares for the long term. The main aim of investors is to benefit from the underlying growth of the companies they invest in rather than from short-term price movements in the market.
Investors need to understand fundamental analysis, which studies a company’s financial health and prospects. They also need to be comfortable taking on less risk than traders, as they often aim for lower returns over longer timeframes. The critical difference, then, is that stock traders focus on making money from price movements while investors focus on making money from the underlying performance of companies.
So, which approach is right for you?
It depends on your circumstances and goals. Stock trading might be suitable if you want quick profits from short-term market movements. But investing might be a better option if you’re looking to benefit from companies’ long-term growth.
What are the benefits of stock trading?
Several benefits come with stock trading. First, making money can be more exciting than investing because you’re actively trying to beat the market by timing your trades correctly. If you’re successful, then the rewards can be significant.
Second, you don’t need to invest significant capital when trading stocks because you only need to put down a small amount of money (known as a margin) when opening a position, which allows you to take on more significant positions than would be possible if you were investing and thus potentially make more money.
Third, you can trade stocks using leverage, which means you can control a much more prominent position than the available capital, which can amplify your profits (or losses) but also comes with increased risk.
Fourth, stock trading can be a more tax-efficient way to make money than investing because capital gains tax only applies when you sell shares for a profit, and you can control when this happens. If you hold shares for more than a year before selling them, you may also be eligible for a lower capital gains tax rate.
What are the risks of stock trading?
While there are several potential benefits to stock trading, it’s also important to be aware of the risks involved in professional trading. First, it’s important to remember that stock prices can go up and down, which means you could risk losing money if your trades don’t go as planned.
Stock trading can be a more expensive way to make money than investing. You’ll need to pay commissions and other fees when buying and selling shares. These costs can eat into your profits (or worsen your losses) if you’re not careful.
Leverage can amplify your losses and profits because you’re essentially borrowing money to control a more significant position than possible with the amount of available capital. If the trade goes against you, you may owe more money than you originally invested.
Stock trading and investing are two different approaches to making money from the stock market. Which approach is right for you will depend on your circumstances and goals. Both come with risks and potential rewards, so understanding both is essential before making any decisions.