What
is Investing and Trading?
Understanding the meaning of Investing and
Trading is one of the top most important thing to do before and while you
become active in the markets. It is a pity and consequently misfortune that
many investors and traders do not know.
If you are not a professional in the
market, then your activity must be differentiated between either ‘investing’ or
‘trader’. You can be either ‘investor’ or ‘trader’. (However, you can be both
at same point of time, but you must be aware of it and know and live the
difference very well)
If you want to judge a person in his most
basic market skill and knowledge, simply ask him the meaning of investing and
trading and the difference. If the answer deviates from the one explained here,
then the person you questioned is simply an ‘ignorant’ in stock markets.
So, simply put, trading is speculation. It
is not investing. Anything which is done with an object with very short term
income generation target is trading. You trade in intraday, futures, options;
that is trading. (However, futures and options are used for hedging which is
not trading, this is explained separately.) Trading uses technical analysis
(some use technical analysis as a main basis for investing as well-beware of
them). Trading is done with a stop loss level, i.e. the maximum loss a trader
wants to bear. Investing is done mainly without stoploss (recently, some
experts have brought in investing with stoploss concept; we’ll give it a passé’).
So, this more or less clarifies the meaning and difference between investing
and trading. Take another example, if you buy gold futures on MCX you are
trading, but if you buy gold on spot exchange or etf then it is investing.
Now the only confusion arises, that we take
delivery of shares, what then? What is the criterion of determining which stock
delivery transaction is investing and what delivery transaction should be considered
as trading? If you buy a share and sell in 5 days that is obviously trading and
not investing. For eliminating this confusion, that what time duration of stock
delivery holding should be termed investing and which trading, we have a great
article on ‘Classification of Investment by duration of holding’. Please find
separate article about it. To serve purpose of this article we will summarize
that any stock delivery holding for (1) less than 1 year investment, and (2)
with stoploss is a trading transaction and not investing.