Is investing better than trading? This question has been in the minds of everyone in the stock market for decades. There are two styles which are commonly seen in the stock market – Trading and Investing. On one hand, we have the traders who use technical analysis to buy and sell stocks in the short term for a quick profit. And on the other hand, we have the investors who love to spend time in the market by holding onto their stocks for the long term. Traders look to get regular profits while investors look to create long term wealth in the market. But which style is better?
The short answer is this – investing and trading are just different and none is better than the other! There are some scenarios where trading is better than investing and other scenarios where investing is better than trading. However, this article will focus on the advantages which investing has over trading. Here are 9 reasons why investing is better than trading.
1. Everyone can (and should) invest
Unlike trading which requires very high skills to make consistent profits in the stock market, investing in the stock market for average returns is much more easier with a much higher chance of success. Index funds and mutual funds provide easy options which allow everyone (even people who have no knowledge about the stock market) to invest in the market and make decent returns. In fact, index funds are the best options for complete beginners to start their investment journey. To learn more about why index funds are the best for beginners, visit this article!
2. Investing creates long term wealth
Investors buy stocks because they want to become owners of a great business and reap the benefits of a business owner. Unlike traders who are looking for a quick profit, investors are looking to create long term wealth. Investors grow as the companies in which they have invested grow. Almost every single person who is in the list of the wealthiest person in the world are owners of a business (or multiple businesses) and have created their wealth when their company grew over the years. Investing creates long term wealth which can even be passed onto generations to come which is something that cannot be achieved by trading stocks.
3. Investing is much more passive than trading
A major benefit of investing is that the returns which the investor makes are passive. Trading is a business which requires the trader to be in front of the computer screen regularly in order to make returns. This means that most traders cannot have another job or cannot run another business because of the time constraints. Investments are much more passive which require the investor to make smart decisions based on his/her analysis rather than timing the market. This frees up an investor to work a job or run a business which can act as another source of income.
This is also crucial for retired employees who are just looking for a safe way to make good returns on their money without going through the cutthroat game of trading. These retired employees are only looking to make passive returns using the stock market and are not interested in dedicating their time to the day-to-day action of the stock market. If you are new to the stock market and want to buy your first stock, visit this article!
4. Investors enjoy the complete profit
A trader takes up a trade when a stock shows a favourable trading setup. They have a buy price, a stop-loss and a target. The trader is only able to enjoy the profit up to their target price in a favourable trade. There are many scenarios where the stock might give good returns even when the stock is not in a good trading position. Investors take advantage of all the returns which the stock has to offer by simply holding onto the stock for the long term.
If a trader buys a stock for Rs. 100 and exits at Rs. 150, he/she just made 50% returns on their investments. But that stock could keep on providing returns way past Rs. 150 which is all the returns that the traders miss out on. A stock such as Titan was trading at Rs. 2 in 2002 which is currently trading at around Rs. 2500 at the time of writing. A trader who entered that stock at Rs. 2 and exited at Rs. 4 would have made 100% returns on his/her money but missed out on a huge profit which the investor was able to gain. This brings us to the next point – the power of compound interest.
5. Investors make use of compounding
Albert Einstein considered compound interest to be the most powerful force in the universe. Compound interest is the reason why a stock such as Titan has gone from Rs. 2 in 2002 to Rs. 2500 in 2021. This insane growth is the result of a CAGR (compounded annual growth rate) of 43%. It might not seem like a lot when a stock has gone up 43% a year but a continuous 43% growth year on year for 20 years caused the price of Titan to increase 1250 times!
Investors stay invested in the company and keep on compounding their money year after year to create huge wealth. This is in contrast to the trader who exits after 10-15% profits in the stock and can sometimes miss out on the huge returns which the stock can offer.
6. Investment is not a zero sum game
Investment is the art of growing wealth over a long term. Unlike trading which is a zero sum game, investment is a positive sum game. Let’s explain it in a simpler way. Trading is called a zero sum game because the total amount of money is finite, it just gets transferred from losers to winners. If you made good profits in trading, there are people who must have lost money on the same trading day! Not everybody can win in the game of trading which is why it is an extremely difficult business. Every single day, some people win while others lose money.
Investment is a positive sum game because it is about the growth of the company (and countries) over a long period of time. Let’s suppose that Ram invested Rs. 20,000 in a stock in the year 2000. He turned his Rs. 20,000 to Rs. 50,000 and exited the stock in the year 2010 after holding the stock for 10 years. At the same time, Shyam invested Rs. 50,000 in the same stock in the year 2010 and turned his Rs. 50,000 to Rs. 90,000 in the next 10 years. Shyam sold the stocks for Rs. 90,000 in the year 2020 which might be bought by somebody else. Notice how both Ram and Shyam made money in the stock market. One person’s gain didn’t result in another person’s loss!
7. Benefits on dividends
Dividends are the sums of money which are paid to the shareholders of a company from the profits or the reserves of the company. These are essentially extra profits which investors make for being invested in the company. Dividends tend to be a significant portion of the returns which an investor makes in the stock market. Traders completely miss out on the dividends because these are only given out to investors who have been holding onto the stock till the record date. Since traders move in and out of stocks quickly, they are generally not eligible to get dividends from stocks.
Investors can invest these dividends back into the stock market to compound their wealth. This compounding happens on top of the compound interest which an investor gets by staying invested in stocks for a long term. The reinvestment of dividends can propel an investor much further ahead than a trader!
8. Investment pay less brokerage & fees
Investment doesn’t require a lot of transactions because the entire concept of investment is to buy and hold stocks for a long term. Traders on the other hand, regularly buy and sell stocks which leads to much higher transactions than an investor. Stock brokers charge brokerage and SEBI charges a fee for every transaction which is made in the stock market. More transactions mean more charges. This leads to traders paying more brokerage and fees because of the higher number of transactions. Investors become much more efficient and keep a higher percentage of their profits because they pay much less brokerage and fees.
9. Investment is more tax efficient
This is a huge advantage which most people don’t notice. Short term capital gains (holding the investment for less than 1 year) are taxed at 15% whereas long term capital gains (holding the investment for more than 1 year) are taxed at 10%. Also, there is an exemption of Rs. 1 Lakh on the long term capital gains which makes it even more tax efficient. Intraday trading and F&O trading are treated as speculative investments which are taxed differently. Overall, investors enjoy a much more favourable tax rate because their gains are generally long term capital gains.
Even though there are many advantages of investing over trading, it doesn’t mean that investing is better than trading. Both have their own advantages and disadvantages. Here are 9 reasons why trading is better than investing. It is up to the reader to decide which style suits them better!
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DISCLAIMER : I am not a financial advisor. I am not for or against any company which I have mentioned in this article. All the information provided here is for education purposes. Please consult a financial advisor before investing.
Contact me at investmentabshuru@gmail.com
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Investment can turn into revenue and trading can turn into profit. Investors can create opportunity for others. Traders can create opportunity for themselves.