Thursday 19 may 2022The stock market, which is increasingly in demand, is not yet fully understood by the people who are involved in it. Not a few are sometimes still confused with the terms trading and investment when deciding to play stocks. If you look at the meaning, there are fundamental differences between trading and investing and you need to know so you don't make a wrong move.
Starting from the understanding of investment first. Investment is an investment with the aim of making a profit in the future. Generally, capital market investment options that also include stocks are intended for the long term. This investment can also be made by anyone, from individuals to companies.
Then what about trading?
Trading is an activity that takes place in the financial market with the aim of buying and selling in a short time and to achieve the maximum profit. Trading is not only limited to stocks. There are other types, namely forex or foreign currency trading, bitcoin trading, gold trading, to binary trading which has recently become a hot topic in the community.
Difference Trading and Investment
At first glance it looks similar from the meaning because they both trade shares or other instruments. In fact, they both have the same goal of maximizing profits. However, there are a number of other things that are fundamental and differentiate these two activities.
Here are the differences between trading and investing that you need to consider before making a decision:
1. Different Principles for Reaching Goals
For those who choose investments, as mentioned earlier, they have allocated a long period of time to obtain optimal returns. Usually those who decide to invest will play it safe by choosing to buy shares from companies that have good performance and must choose one type of investment such as: mutual fund investment, money market mutual fund investment, fixed income mutual fund investment, and mixed mutual fund investment. They will also hold it as savings to be used at a later date.
People who choose to invest also tend to relax. They are not bound every time to analyze or observe market value fluctuations. The principle is buy and hold. For those who trade, the principle used is the principle of buy and sell.
Generally, a trader already has a benchmark of a stock at a certain price range and will sell it back in the near term if the value of the stock has reached the number he wants. The count can be in hours, days, or weeks.
Here, you need commitment because you have to be patient in observing market value fluctuations and carry out in-depth analysis so as not to lose money because the transaction is below the target number. Even so, this trading activity can also be done at certain times which does not interfere with your main work.
2. Different risks
This is something to keep in mind between investing and trading. Another fundamental difference between investing and trading is related to risk. Investment has a lower risk because as an investor, you must avoid losses as much as possible.
Here, investors who really want to save and manage their finances in the long term will choose blue chip stocks with good company fundamentals. This good company is also believed by investors to have good performance in the long term.
The risk of trading is higher because they tend to choose third-class stocks. The selected stocks tend to have the potential to fluctuate quite high. For beginners, you should try an account that provides demo or guidance in the form of strategy and analysis in trading.
In addition, you need to be careful with brokers if you want to become a trader. You need to study and look for information or even research first so that you really understand the broker you choose. You also need to do research to choose a broker that really fits your criteria.
On the other hand, there are trading brokers that require you to deposit a very large amount. This can indeed make you get high profits. However, this is also what can plunge you into high losses as well. Also keep in mind that in this activity there is no institution that can provide you with a deposit guarantee.
3. Protective Element
In investing, investors enjoy facilities such as bonuses, dividends, stock splits, and others. This is the strategy of investors to create wealth with compound interest and dividends. Thus, investing in a fundamentally strong company will make it easier to bounce back to true value over time and losses will be recovered.
Whereas in trading, traders hold stocks only for short intervals. They do not enjoy facilities in the form of dividends, stock splits, and others. Here, the trader's protective element is a stop loss or an action to sell a stock at a certain price to limit losses. For this reason, traders depend on market time so they must be observant in finding the right time to enter and exit stocks.
4. Different Analysis Used
If you are interested in investing, fundamental analysis is the right thing. This fundamental analysis reviews everything that can move stock prices. You need to look at financial performance, industry potential, level of business competition, market analysis and macro and micro economics. This analysis is very suitable for analyzing long-term investments.
This is in line with the factors that influence the investment approach such as industry, economic conditions, market financial conditions, and competitors. Therefore, this analysis also has two approaches to analyze the performance of a company.
First, a top-down approach by looking at the general picture of a company that is used as an object. Second, the bottom-up approach is carried out by looking at the details of the companies that are used as objects, such as looking at the financial condition and competition with competitors.
If you are considering becoming a trader and trading, technical analysis is appropriate. This analysis focuses on the historical development of prices. Here, it is very important to pay attention to the pattern of price increases and decreases that have been experienced by a company. The visualization of this analysis is based on the pattern of price changes, namely by graphs or charts so that the person conducting the analysis must understand the movement of the price chart.
This analysis is very suitable for analyzing short-term investments. Indicators that are influential and often reviewed in technical analysis are technical indicators, market psychology, money management, and risk rewards.
Those are the basic differences between trading and investing that you need to know before deciding to invest or choose to trade.
By understanding the difference between trading and investing, you can determine which one suits your goals, your needs, and your readiness and don't forget to adjust it accordingly so you don't make the wrong choice.
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These two business words are different but related to each other. They are similar in terms of earning income but it differs in terms of risks, principles and even protection of money as what you have mentioned. For me, trading is more risky than investing because in investing we will wait only to receive share or income in a certain of time.