Investment and trading are two of the most widely used strategies of making money in the Indian stock market. Though both fulfill the very purpose of generating profits in common, they differ from each other in almost all aspects, like their objectives, time horizons, appetite for risk, and the way in which one analyses the market. You can hence take a proper decision as to which strategy would suit your financial goals, your appetite for risk, and your lifestyle the best.
Now, let’s dwell into this article discussing the difference between investing and trading in the Indian market, detailing their respective pros and cons, and guide you into choosing the right one for yourself.
1. What is Investing?
Investing means the investment into various kinds of securities, that is, equities, mutual funds, or bonds. The investor holds the same for a long period with the intention to create wealth. In common parlance, an investor looks out for those entities or resources which are likely to appreciate many folds and have good fundamentals such that he would be able to invest his money and subsequently reap benefits through its capital appreciation or by producing dividends in the long run.
Key Attributes of Investment
Long-term orientation:
Long-term orientation appears to be the holding period of investors in their investments-they are the owners of investment for almost quarter century or more. It is believed they would profit from the growth of company’s, economy’s or asset class long-run growth.
Elementary Analysis:
The investor infers through elementary analysis the inherent value of shares or other type of assets. It is going to deliberate on issues such as fiscal soundness, efficiency of earnings, soundness of management, industry position, and the growth prospects.
Low Activity:
Investment does not undertake high-activity buying and selling equity shares. Investors normally invest at the onset and review the portfolio at intervals.
More investors seek passive income through dividend yield, that share of profit companies re-route back to the shareholders.
Indian Market Investment Examples:
Equity Investments:
Equities in corporate businesses such as Reliance Industries, Infosys or HDFC Bank as a long-term investor
Equity or debt mutual fund wherein the collected money from multiple investors in a scheme looking forward to invest in an asset and diversified portfolio.
Invest your money in funds tracking the key indices like the Nifty 50 or Sensex, which would expose you to a broad cross-section of Indian companies
Benefits of Investment
LTCG: Investment in India attracts a tax of 10% on LTCG more than ₹1 lakh in LTCG, much better than the 20% surcharge for short-term capital gains.
Compounding: Long-term investment will allow you to benefit from the powers of compounding since your returns will work to generate more returns.
Less Stress: It consumes fewer hours than trading and is hence less stressful. You don’t need to open the markets all the time.
Investments Disadvantages:
Equity Market Volatility: Even after long-term investment, the same market volatility bites them, especially in industries or equities with very high beta.
Lagging Returns: Perhaps after a while the returns may come on investment, and the sure possibility is that impatient short-term investors may get bored of waiting for the market corrections.
Gains will only be realized in the long term with discipline on holding during the downtrend of the market.
Trading is the intra-day buy-selling strategy of securities, taken place very frequently, to make money from the movements in the price of the market. The traders mainly try to profit with the help of short-term movements of the markets by using technical tools of analysis and riding with the crowd of the market.
Trading is much more volatile, and hence, needs much more experience and also high alertness in the marketplace.
Features of Trading:
Short-term Orientation: The trading and selling parties are concerned with days, weeks, even hours. They do have an interest in making hay in short periods rather than a long-run appreciation.
Technical analysis: The traders depend mostly on the technical analysis and apply charts, indicators, and existing price data, be it historical or current to predict future price movement; therefore, fundamental analysis is not taken very seriously.
Higher Activity Level: In contrast to investing, the activity level of trading is very active. Traders trade multiple times a day or week.
Most use leverage for the purpose of getting better returns. That is, borrowing money to take positions bigger in size.
Types of Trading in the Indian Market:
Intraday Trading: It is a medium wherein the same stock is bought and sold on the same trading day. Traders do not stay overnight in one position.
Swing trading: Trade on for several days or even weeks in hopes that the position captures some of the medium-term price moves.
Futures and Options: Derivatives trading wherein futures and options are bought and sold based on an agreement to buy or sell an asset at a certain time in the future against a specific price is also one of the strategies adopted by the traders from India.
Advantages of Trading
Fast Profits: The main reason in this case is fast profits because a trader can make profits from little price movements.
There are also two negative effects of trading
Leverage: Margin trading enables a trader to leverage gains thus earning more through small price movements.
Active Engagement: Trading is very active and allows those who would love to be in the markets at all times, hence an opportunity to learn from real-time market data.
This is too speculative in nature and hence very risky. The risk of quick erosion of money with prevailing price movements where leverage is added becomes relatively high.
Emotional Stress: Tremendous pressure to take on real time decisions so the job can become extremely stressful to the trader’s emotions.
Transaction Costs: At such an incredible speed of acquiring and selling assets, the transactional cost in terms of brokerage and tax takes the toll from the profit.
Taxation: STCG is taxed at 15% in India. It is the tax paid on equity trades, which are considered to have taken place within less than a year. Relatively long-term capital gains are taxed much more lightly.
Dimension Investing Trading
Time Horizon Long-term: years or decades Short-term: days, weeks, or months
Target Capital appreciation, dividend income Income from price movement, short-term gains
Analytical approach Fundamentals-based approach Neutral towards fundaments
Risk Generally smaller market-dependent. Higher due to volatility and the use of leverage over the short term.
Activity Leve Low (buy and hold) High (multiple trades per day or week)
Market Interaction Passive-very rarely monitored Active-frequently monitored
Taxation 10% on LTCG (over ₹1 lakh in a year) 15% on STCG if held for less than a year
Transaction Costs Low(er) (Fewer trades) High(er) (Frequent trading, high costs)
4. Which One is Right for You?
Investing and trading in the Indian stock market depends largely on your financial goals, your appetite for risk, and time availed for it.
Invest If You:
You have long-term financial objectives, including retirement, accumulation of your wealth, or even saving for your children’s education.
You prefer a more passive approach that suits you better, imagining that you will have an investment and really be able to enjoy the ride through all the ups and downs of markets.
You do not have time, and even do not know how, to check on your markets day by day.
You will make returns slightly lesser for a long period but then understand what so pretty calls compounding.
Trade If You
You are liable to quick money-making through market fluctuations of the short-term market and can take more risk.
You enjoy watching the markets live on the screen and act on the basis of input coming through live data.
You can spend many precious hours and energies of your life trading without making a mess over market movement.
You know the technical-analysis process and are ready to accept the conditions of continuous learning.
Conclusion
There are merits and weaknesses in investment as well as trading, and it depends on different financial goals, personality, and lifestyle which one is most effective. There would be much steadier and less stressful creation of long-term wealth if investment rather than trading promises quick returns with great risk and demands to be actively involved in it.
This would mean understanding the risk appetite of a person who is about to enter the Indian Stock Market, the amount of time he wishes to invest in it, and what financial goals one is looking to achieve. Whether long-term investment or short-term trading; moot point is that you stay disciplined, well-informed, and aligned to your personal goals.