In the stock market, people use various methods to create wealth. The three different methods used by people are Stock Trading, Investing, and Speculation. These three terms may sound quite similar but are actually different and none can be substituted by the other. These three methods differ in terms of the core objectives, individual preferences, risk tolerance, time horizon, and on the basis of whether you are a conservative, moderate or aggressive investor.
Investing is buying stocks with the objective of earning secured returns in long term and is driven by the fundamentals of the company, which includes the performance of the company, the quality of the management, etc. It works on the strategy of “buy and hold”. The risk involved with investing is quite moderate, when compared to trading and speculating. It is said due to the long-term perspective the probability to suffer losses is rather less when compared to the other two methods.
Benefits of investing include the insignificance of short-term fluctuations since it works on long-term trends, fewer transaction costs, and good dividend yield from quality stocks held for years. On the other hand, a stock can drop due to market conditions or have periods of stagnant performance during these conditions an investor has to tolerate the correction.
Trading is buying stocks with the objective to gain profits by selling them in the short term based on technical analysis that helps in predicting short-term market fluctuations. Trading works on the strategy of “buy and sell”. The risk involved with trading is higher in comparison to investing, due to which this method is suitable for a person who is confident, disciplined, and has good risk-taking capabilities. If the holding period of stock is as short as a few hours, this type of trading is known as Intra-day trading.
The short-term fluctuations in the market are caused by variations in the demand and supply of an asset. Trading is mainly based on technical analysis, which helps to predict short-term price fluctuations with the help of graphs, charts, and oscillators. An experienced trader with good technical skills could be able to make quick money and is likely to capitalize on crowd psychology and market movements. However, trading involves more costs due to frequent transaction charges and short-term taxable gains.
Speculating is entering into a transaction with the aim to earn high returns depending on tips, rumors, news, individual behaviour, and market sentiments. The risk involved in speculating is highest among the three methods, due to which this method is suitable for a person who is aggressive and a risk-taker. In other words, speculating is also known as gambling. It may provide you with high returns but the chances of failure are also highest among all the three methods.
Investing, trading, and speculating in a nutshell are three different activities of the stock market. They differ on the basis of methodologies, risk factors, profit margins, time period, the behaviour of the participants, etc. Another major point of difference is that an investor makes decisions based on fundamental analysis, while, a speculator takes his decision based on news, tips, rumors, market sentiments, and individual opinion, whereas, a trader uses technical analysis using graphs, charts, and more along with risk management. As per above, you may take an informed decision that which type of method you may choose based on your goals and convenience to earn returns from the stock market. You may start your journey by opening a Demat account with Elite Wealth.