Trading or investing – Which one is better for you?

What is trading?

 

Trading means buying and selling an asset within a short time to earn a short-term return¹. For example, buying and selling equity shares within a day to profit from the share’s price movement. In this context, you do not hold the share for a long period. Instead, you sell it off to make a quick gain.

 

Features of trading

 

Some of the features of trading are as follows –

• Trading is usually done with a short-term perspective
• Common assets that are traded include equity shares⁷, commodities⁶, derivatives⁵, and currencies⁴
• The returns are usually not guaranteed and depend on the market performance

 

Pros and cons of trading

 

Here are some of the benefits and demerits of trading –

 

What is investing?

 

Investing means building your savings, over time, to create a fund for your financial goals¹. Investing usually involves buying different types of assets and holding them for a specific period to earn returns¹. For instance, when you invest in a fixed deposit, you aim to hold the deposit up to the chosen term to earn guaranteed returns on investment.

 

Features of investing

 

Some of the common features of investing are as follows –

• Investing includes different types of assets like stocks, fixed deposits, mutual funds, Public Provident Funds (PPF), bonds, etc.
• Investing is usually done to save and grow your savings
• The investing horizon can be short-term or long-term depending on your goals

 

Pros and cons of investing

 

Some of the benefits and drawbacks of investing include the following –

 

Difference between trading and investing

 

As mentioned earlier, trading and investing are two different terms with different connotations. Let’s understand what is the difference between trading and investing –

 

• Purpose

  The purpose of trading is short-term gains and benefiting from short-term price movements. Investment is more about gradually creating wealth over a period of time¹. It aims at creating funds for financial goals.

• Time horizon

  Trading is a short-term activity wherein the main aim is to make quick gains. Investing is more focused on the long-term aspect of creating funds with steady returns. 

• Risks

  Trading involves considerable risks as short-term market movements are volatile. While you can make a quick gain, there’s a possibility of quick loss too.

  Though investing also has risks, the risks are lower compared to trading¹. As you can choose a long-term horizon for investing, the risks smoothen out and can reduce. 

• Diversification

  With trading, there are limited types of assets that are available like stocks, currencies, commodities, etc. This limits the possibility of diversification. However, the products for investing are  wider. There are  avenues like fixed-income instruments, stocks, mutual funds, bonds, etc. that can be used to create a diversified portfolio.

• Tax benefits

  Since trading is usually a short-term activity, shares are usually sold within 12 months. Hence it is usually not tax-efficient. However, with investing, you can enjoy tax benefits as several avenues are tax-saving in nature as it usually is a long-term activity.

  For example, suppose you trade shares and sell them within 12 months. In that case, any profit you make is classified as a short-term capital gain and it is taxable at 20%⁸. However, for long-term investing in equity shares or equity mutual funds, the tax rate is 12.5% on the capital gain more than Rs. 1.25 lakhs per year².
  

  Also, if you invest in tax-saving avenues, like 5-year fixed deposits, PPF, ELSS schemes, life insurance  policies etc. you can save tax on the amount invested.

  Now that you know the main differences, let’s analyse trading vs investing in a quick table -

  Parameters	Trading	Investing
  Purpose	Short-term gains from fluctuating prices	Creating wealth steadily over time
  Time horizon	Short	Short, medium or long depending on your goals
  Risks	High risks	Risks might be high or low depending on the asset selected. However, even in the case of high-risk assets, the risks can smoothen out if you give your investments time9
  Tax benefits	Traders are taxed based on their  income from trading which is treated as business income10	Investors are taxed on their capital gains10.

 

Trading v/s investing – which is better

 

Both trading and investing have their respective pros and cons. Choosing between the two ultimately depends on your needs and preferences. Trading makes sense if –

• You want to earn quick returns
• You have a high risk appetite
• You have the flair for understanding and timing the market for earning higher profits

Investing is suitable if –

• You want to create a corpus for your financial goals
• You want to avail tax benefits
• You want a diversified portfolio
• You do not have the time and/or knowledge to track market movements and make the right trading choices

So, assess your needs and suitability and then make a choice between trading or investing.

 

FAQs

 

1. If I buy and hold shares for a long period, will it be called trading or investing?

   
   

   If you are buying and holding shares to create a corpus for your financial goals, it will be called investing. Trading is when you buy and hold shares with the intention of selling them at a higher price within a short period.

    

2. What are some tax-saving investment options?

   ¹¹
   

   Some of the tax-saving investment options are as follows –

   • Fixed deposits with a 5-year lock in period
   • PPF
   • Equity Linked Saving Schemes (ELSS)
   • Life insurance policies
   • Sukanya Samriddhi Yojana
   • National Savings Certificates
   • National Pension System, etc.

3. Is commodity market  different from stock market ?

   ³
   

   Commodity market  is place which involves buying and selling commodities like pulses, agricultural goods(soft commodities), metals(hard commodities), etc. Stock market  is a platform where buying and selling stocks listed on the stock exchange takes place.