What Are The Fundamental Differences Between Trading and Investing?

 Many people mistake trading and investing for the same thing. As a result, many investors employ a variety of trading tactics in order to increase their wealth. However, when it comes to generating money from equity investments, traders and investors use two quite different methods.

To determine which type will work best for you, you must first understand the fundamental distinctions between trading and investing.

In this article, we'll look at the key distinctions between trading and investing in terms of holding duration, compounding effect, and return taxation.

Trading has a shorter holding period than investing

The holding period is the span of time between the purchase and sale of an investment. Stocks are held for short lengths of time in trading, ranging from a few hours to a few months. The objective is to take advantage of Equity Markets' short-term volatility by purchasing stocks at a low price and selling them for a profit when the stock price increases.

An investor, on the other hand, is someone who will invest for a long time, from a few years to decades. The goal is to allow assets time to mature, and even if there is short-term volatility, you simply ride it out.

When trading, you don't get the benefit of compounding

The secret to trading is to continuously buy and sell in order to identify the next winning move. You miss out on the potential of compounding because of the short holding time and frequent churn. Sure, trading might bring in money, but compounding isn't the cause.

On the other side, when you retain your assets for long periods of time, the force of compounding works for you as an investor. And, given enough time, compounding may raise your money dramatically, almost magically.

When you trade, your tax outlay on returns is higher

All equity-oriented investments are subject to the same capital gains taxation laws. However, because of the difference in how trading and investing create profits, the taxes you would pay in trading will normally be higher. This is why.

You will keep equities as a trader for short periods of time, ranging from a few days to a few weeks. Stocks are seldom held for longer than a year by dealers. As a result, the profits will be classed as Short-Term Capital Gains (STCG). The current capital gains tax rate on equity-oriented investments is 15%. So, regardless of how much money you make, you'll have to pay 15% tax on your earnings.

When it comes to investing, on the other hand, you'll want to focus on holding your investments for a long time. As a result, you will not be able to withdraw your money within a year of investing. As a result, your returns will be categorized as Long Term Capital Gains when you redeem (LTCG). On profits surpassing Rs. 1 lakh in a financial year, the LTCG tax rate on equity-oriented investments is now 10%.

So you don't have to pay any tax on LTCG up to Rs. 1 lakh in a financial year. Only refunds exceeding Rs. 1 lakh in a financial year are subject to a 10% tax rate.

Which Strategy Should You Choose Between Trading and Investing?

If you're unsure whether trading or investing is the best way to build money for you, start by answering the following four questions:

Are you a naturally impatient person who prefers to be actively involved in creating short-term profit trades?

Do you have the skills to do in-depth technical analysis of several equities in order to select the best trade?

Can you devote the time necessary to examine a range of real-time market data in order to make trading decisions?

Do you have the risk appetite to put your money in danger repeatedly in order to achieve a fast profit?

It's only logical that not all of your judgments will be right when you purchase and sell stocks several times in minutes or hours. This is why, in order to win large, traders take on substantially greater risk. Long-term investors, on the other hand, have the option of holding investments for longer periods of time in order to ride out short-term volatility, implement appropriate asset allocation strategies, and make periodic portfolio adjustments in order to reduce portfolio risk and maximize overall returns.

As a result, most people would like to be investors rather than traders. As a result, if you're a retail investor, you should focus on long-term investment.

Conclusion

The long-term benefits of staying invested considerably surpass the short-term gains earned by trading for the ordinary person. As a result, the long-term investment may appear to be a less enjoyable approach to developing your money than trading. However, if you choose to invest, you will need to commit substantially less time and effort, as well as incur fewer risks, in order to develop your wealth over time. To know all the benefits and prevent confusion you can always access a stock tips provider or financial advisory firm like Onepaper.