Difference between Investing and Trading

Many people enter in to Stock Market to generate additional source of income but most of them are in dilemma that they want to be an Investor or Trading. In fact, many of them are not aware what is Investment and Trading.

Trading and Investing both will make to generate income from stock market and both involves significant risk of your capital. Therefore, before entering in to stock market one need to make it clear whether you want to be a trader or an investor.

Let’s understand in simple between these two terms:

Investment or Investing:

Investing is nothing but any individual who buys the shares of the company and holds it for the long-term viewpoint assuming that the business in which he/she are going to invest is a future oriented and in coming years that business can grow more and the amount what he/she invested will grow.

Investing in any Stock for less than a year will be considered as Short-Term Investment and if someone hold that stock for more than a year is Long Term Investment.

An investor before investing in any company will never think about the present but will think about the future and hence Investing is all about Fundamental analysis.

Fundamental Analysis includes deep research of the company with many factors but some of the important checks are Financial position of the company, Price to Earning Ratio, Management history, Business Model, Future Growth projections, Valuation, Cashflows, Economic conditions and government policies and much more to go through with.

The important part for any investor is the “PATIENCE” because investing in any stock need to hold for many years or decades with lots of Up’s and Down’s in the market. But holding for long term will give you more returns with many benefits like Dividend, Bonus, Stock Split, Buy Backs or any other Corporate Action by the company.

Benefits of Investment:

• Earn Maximum Return on Capital and build wealth.
• Low risk as compared to Trading.
• Receiving Dividend.
• Some Companies decide to issue Bonus shares to their shareholders for free.
• Stock Split: Some companies will split their shares into parts by reducing the share price. Capital invested will be same but the Number of shares you bought will increase.

Now, let’s understand what is Trading?

Trading is a short-term process where you buy and sell shares or securities, commodities, currency, bonds or other financial instruments for a specific period of time.

Risk involved in Trading is high when compared to Investing. Trading is done based on technical indicators rather than Fundamentals of the company. Traders like to take the advantage of price fluctuations, any news or events like company results, governments policies or any corporate actions.

Trading is more attractive and looks easy to earn profits within a small period of time but traders must understand that it is also easy to make losses in short time. Trading is all about practice, discipline, fast decision making, control your emotions and most important is proper risk and money management.

Hence, it is always recommended for the newcomers that, don’t directly jump into trading as it involves high risk of losing money.

Types of Trading:

• Intraday Trading or Day Trading: Intraday trading is where you buy and sell the shares in the same day before the market closes. Means if you buy any share when market opens then you have to exit from that trade before the market closes whatever may be your position i.e may be profit or loss you have to close your position. It is always suggested beginners to stay away from Intraday trading.
• Swing or Positional Trading: Is nothing but, traders buy the shares for few days may be 1-2 weeks. Swing traders usually trade based on technical indicators, chart patterns or any Events like Company results, News etc. Swing trading also gives you option to hold your position for long or short term if your analysis did not work and if the company is fundamentally strong.

DIVIDEND:

A dividend is a payment made from its net profit by a corporation or company to its shareholders as a reward. Dividends are typically distributed to shareholders from a portion of the company’s profits or earnings, and are usually paid out on a regular basis, such as quarterly or annually.

Profits are many times seen as a way for organizations to impart their financial accomplishment to investors and to give them a profit from their investment. Payment of Dividend can likewise be a sign of an organization’s monetary wellbeing and solidity, too oversaw organizations with solid monetary positions are frequently ready to deliver steady and expanding profits over the long haul.

Some companies may not deliver profits, and some might decide to reinvest their benefits once again into the business. Dividend are likewise not ensured and can be dependent upon future developments in light of an organization’s financial performance and different elements.

Types of Dividend

• Cash dividends: This is the most common type of dividend, where a company pays out cash to its shareholders as a part of its profits. Here the dividend amount will be directly credited into the shareholders bank account.
• Stock dividends: In this type of dividend, a company issues additional shares of its own stock to its shareholders as a way to distribute profits.
• Property or Asset dividends: Companies may choose to distribute physical assets, such as real estate or products, as a dividend. However, this type of dividend is rarely given by the companies.
• Scrip dividends: In this type of dividend, a company offers its shareholders the option to receive additional shares of stock instead of cash.
• Liquidating dividends: This type of dividend is paid out when a company is liquidating or closing down and distributes its remaining assets to its shareholders.
• Special dividends: These are one-time payments made by a company in addition to its regular dividend payments, usually when the company has excess cash or profits.
• Preferred dividends: This is a type of dividend paid to holders of preferred shares, which are a type of stock that gives shareholders certain rights, such as priority in receiving dividends over common stockholders.

Buy Backs of Shares:

A buyback, is also called a share repurchase, is a corporate activity where an organization repurchases its own shares from the market. The organization can repurchase shares either through a Tender Offer, where shareholders can decide to sell their portions at a predetermined cost, or through open market buys.

Buybacks can fill different needs for an organization. One is to restore cash-flow to investors, as repurchasing shares lessens the quantity of outstanding shares, successfully expanding the proprietorship level of remaining investors. Buybacks can likewise be utilized to improve an organization’s Earning Per Share by diminishing the denominator in the EPS computation.

Moreover, buybacks can be a way for an organization to indicate to the market that it accepts its shares are underestimated and that administration has confidence in the organization’s future possibilities. Nonetheless, a few analysts oppose that buybacks can be a temporary lift to an organization’s stock value that ultimately comes at the expense of long-term investments in things like research and development or capital expenditure.

Types of Buyback:

• Open Market Buyback: This is the most common type of buyback, where a company repurchases its shares on the open market. The company sets a price range at which it is willing to buy back shares and then purchases them as they become available.
• Tender Offer Buyback: In a tender offer buyback, the company makes an offer to buy back a specific number of shares at a fixed price. Shareholders have the option to sell their shares to the company at that price or hold onto them.

Stock Split

A stock split is a corporate activity that increases the number of shares while decreasing the cost of the share relatively. For instance, in a 2-for-1 stock split, a financial backer who recently holds 100 shares of an organization would wind up with 200 shares, yet the cost per share would be divided. The complete worth of the investor’s holding remains the same.

The reason for a stock split is to make the offers more affordable for individual or small retail investor and increase liquidity in the market. It can likewise make the stock more fascinating to investor’s who might be discouraged by a high cost of the share. Organizations may likewise involve stock split as a method that signal trust in their future prospects and to expand the visibility of their stock.

Please take note of that a stock split doesn’t change the principal worth of the organization or its financial position. It is just a reconfiguration of the shares outstanding.

Share Bonus

A Bonus share is an extra share given to existing shareholder of an company, at no cost, in relation to the quantity of shares they currently own. The reason for giving extra shares is to reward existing investors and increase the liquidity of the stock.

At the point when an organization issues extra shares, the total number of shares increases, however the proportionate ownership for investor continues as same. For example, if a company issues a bonus share for every 10 shares held by a shareholder, and the shareholder owns 100 shares, they will receive an additional 10 shares at no cost, increasing their total number of shares to 110.

Bonus shares do not have any immediate impact on the company’s financial performance, as they do not result in any inflow or outflow of cash. However, they can enhance the market value of the company’s shares by increasing the number of shares outstanding. Bonus shares also indicate that the company is doing well and has enough reserves to reward its shareholders.

Stock split vs Bonus

A stock split and a bonus issue are both corporate actions that can impact the number of shares outstanding for a company, but they differ in their purpose and mechanics.

A stock split is when a company increases the number of shares outstanding by issuing more shares to existing shareholders in proportion to their current holdings. For example, in a 2-for-1 stock split, shareholders would receive two shares for every one share they previously owned, effectively halving the price per share. The overall value of their holdings remains the same, but the number of shares they hold increases.

On the other hand, a bonus issue (also known as a stock dividend) is when a company issues additional shares to its existing shareholders as a reward for their investment. Unlike a stock split, the value of each share remains the same after a bonus issue, but the number of shares held by shareholders increases. For example, if a company declares a 10% bonus issue, shareholders will receive an additional 10 shares for every 100 shares they already own.

In summary, a stock split is a way to increase the number of shares outstanding and decrease the share price, while a bonus issue is a way to reward existing shareholders by issuing additional shares without affecting the share price.

FAQS:

Which is better, trading or investing?

Both trading and investing are popular approaches to participate in financial markets, but they have distinct characteristics and suit different objectives and preferences.

Which involves more risk, Trading or investing?

Trading generally involves higher levels of risk compared to investing.

Which method earns more profit, investors or traders?

The potential for earning profits can vary between investors and traders, and it depends on various factors.

Can profits be promised on long-term investments?

No, profits cannot be guaranteed or promised on long-term investments. Investing in financial markets inherently carries risk, and the future performance of investments is uncertain.