Is trading better than investing? 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 or Investing. Traders or investors differ in their styles of investments in terms of the time duration as well as the type of analysis. Traders generally enter a trade for a shorter duration whereas investors invest in a company for a long term. Traders generally use technical analysis whereas investors generally use fundamental analysis for their study of stocks. If you don’t know about technical and fundamental analysis, visit this article! Whenever there is a clash of styles, a comparison is inevitable between the two different styles. So, which one 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 trading has over investing. Here are 9 reasons why trading is better than investing.
1. Regular profits (or losses)
This is the biggest reason why people who solely depend on the stock market are mostly active traders. Trading is the art of buying/selling stocks for a shorter duration which allows traders to regularly book profits. Short term trading allows traders to regularly make profits (or losses) in the stock market. This is not the case with investing where investors leave their investments to passively work for them for a long term to produce good return for them.
It is very difficult to depend on investing for your livelihood because there are no quick returns in investing. On the other hand, there are many full time traders who completely depend on their trading income to support their livelihood. One thing to note is that there is no guarantee of making a “salary” from the stock market. To read more, visit this article!
2. Not restricted to long position
Investors buy assets for the long term and make money when the price of those assets goes up. This is a brilliant strategy to build up your wealth but it has a very significant flaw! Investors can only make money when the price of the assets (stocks, gold, real estate, etc.) goes up. There is no option to make any money when the markets are not in a bull run. Even though the stock market tends to go up in the long term, many fluctuations can occur in the short term.
Unlike investors who can only make money in the long position, traders can make money in both long and short positions in the stock market. If you are not aware of long and short positions, visit this article! Traders don’t really care about the underlying asset and are only looking at the price action of the stocks. In fact, much faster returns are made by traders by shorting the market because market crashes are very quick. This allows traders to play the market in the long position as well as in the short position.
3. Works in most market conditions
Since traders can make money in both short and long positions, this makes them well equipped to make money in most market conditions. If a raging bull market is on-going, traders can go for long positions and if a bear market is on-going, traders can go for short positions. Most investors do not have this flexibility.
There are times when the stock market is stuck in a year long (or even longer) bear market where investors have no other option than to hold onto their stocks for the eventual bull market to return. Traders, on the other hand can build short positions and take advantage of the falling market to make money. This makes them more efficient in making money in the market because they work in both scenarios.
However, there is a market condition where even trading fails! This market condition is called “choppy market”. Choppy market are market scenarios where the index (or most stocks) are range bound and are not moving in a clear up or down trend. Traders absolutely hate choppy market because they do not provide good trading opportunities. It is better to avoid overtrading in a choppy market. To learn more about mistakes which traders make, visit this article.
4. Low analysis time requirement
Trading works on the principles of technical analysis which is based on the study of price action of the stock. This is based on the fundamental concept of supply and demand. Learning technical analysis requires a lot of time and effort just like any other skill. However, once perfected, the time required to analyze any stock is actually really low. Just looking at the stock chart for a short duration (minutes or even seconds) is enough for a trader to decide whether a stock would be a good candidate for a trade or not!
On the other hand, fundamental analysis is a very rigorous and time-consuming process which requires the understanding of the entire business model of the company, reading the company’s quarterly results, studying about the company management, etc. This can be a very tedious job which is very difficult for an individual to perform for multiple stocks.
Low analysis time means that a trader is able to scan through multiple stocks easily to find out the stocks best suited for trading much quicker than a fundamental analyst.
5. Availability of more ‘options’
A trader has more ‘options’ (pun intended) available other than simply buying and selling stocks. These alternatives are futures and options (called F&O) which are financial derivatives which many traders use instead of stocks. This provides a trader with more flexibility to go long or short on the stock market. These alternatives (F&O) are much more volatile when compared to stocks which can provide traders with much higher returns than simply trading stocks. These options also allow a trader to use leverage which can amplify their profits even higher. However, every upside has a downside as well. F&O trading, if done incorrectly is the fastest way to lose your money in the stock market. They provide a much higher return compared to stocks but this comes at a much higher risk as well! A new trader needs to stay away from F&O trading unless he/she is comfortable in trading stocks. But keep a note of these tools which can be extremely useful when used in the right conditions.
6. Not restricted to any country or asset class
Stock trading is simply based on supply and demand of the stocks. This is analyzed by studying stock charts using technical analysis. One major advantage is that this technique can be used to analyze any asset in the world – stock markets, forex, gold, crypto, etc. This is an incredible advantage which traders have which allow them to switch from one market to another with relative ease. A stock chart, crypto chart or a forex chart are simply charts where price action of the asset is plotted against time. Ability to analyze charts means you are already well equipped to trade in almost any market.
This cannot be further from the truth for investors who use fundamental analysis. Fundamental analysis requires a complete understanding of the business model of the company as well as requires the understanding of the behaviour of the people in the country. The auto market of India might be entirely different compared to the USA. There is a difference in the rate of inflation, interest rate, acceptable P/E ratios, growth rates, etc. between different countries which makes it very difficult (if not impossible) for an individual to analyze different assets in different countries using fundamental analysis. There are some assets such as gold or cryptocurrencies which do not have any inherent value making it impossible to analyze them using fundamental analysis!
A stock trader who trades Nifty futures can easily trade Dow futures because technical analysis applies to both charts regardless of the difference in markets!
7. Protection against market corrections & crashes
Market corrections refers to a 5-10% drop in the major indexes of the stock market which generally occur once or twice a year. Long term investors tend to ignore such short term corrections and see them as opportunities to accumulate more stocks. However, in the short term the investors lose out a significant percentage of their portfolio based on market sentiments. Imagine losing out 10% of your entire portfolio within a week!
Traders can protect themselves against these massive losses using a stop-loss. Stop-loss is a pre-determined price at which a trade is considered a failed trade and the trader decides to square off the position. If you want to learn more about stop-loss, visit “Why Stop-loss is very important in Stock trading?”
Stop-loss protects traders against heavy losses which investors can suffer during market crashes. Market crashes are very rare (generally once in a decade) events where markets correct more than 25-30% from their highest point. This can suddenly erode the wealth of an investor by 25-30% in a few weeks which makes it a very scary event for investors! However, a trader who religiously uses stop-loss would exit way earlier than the market crash, thereby protecting the trader from massive losses.
8. Safer margin usage
Margin refers to the usage of leverage for stock trading. Leverage acts as a double edged sword because it amplifies the profits as well as losses which the trader can make in the stock market. Many seasoned investors and traders use leverage to build their portfolio. But it is a lot safer for traders to use margin than an investor.
Many traders use intra-day trading which means that they are in complete control over their trading positions. They are in front of their computer screen during the market hours and square off their position before the trading day ends. This removes any chance of a gap up or gap down opening of the market due to change in market sentiments because of any on-going world events. Even traders who trade in a longer time frame use stop-loss to protect themselves against any events which can lead to market volatility. Holding your stocks as an investor during a market crash is bad. But holding your stocks as an investor with a high leverage is financial suicide!
The swift entry and exit by traders make them better suited to use margin much more safely compared to investors.
9. Easily re-test strategies
Trading gives a quick feedback of your strategies due to the small time frame. Unlike investing where it may take a few months (or even years) to realize that your investment strategies don’t work, outcomes in trading happen in a few weeks or days. You don’t want to be in a situation where you realize years after your investment that your strategy was wrong!
Trading can quickly provide you with good feedback on your trading strategies and the effectiveness of your strategies. You will be able to test multiple strategies and choose the ones which are working most effectively in a few months. Testing multiple strategies is not possible in investing due to the long time horizon.
Even though there are many advantages of trading over investing, it doesn’t mean that trading is better than investing. Both have their own advantages and disadvantages. 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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