Investing

Investing vs. Trading in Stocks

Investing in stocks refers to deploying cash in stocks for Long-Term expecting the company to perform well and generate good returns which in turn also appreciates the price of the stock, Investing involves analysing the economy as well as the company’s fundamentals.

Whereas Trading refers to buying the stocks and holding it for a very short period of time where one tries to make profit out of the variations in the stock prices due to market sentiments.

How investing turns out to be more profitable?

Either people trade in stock market where they buy stocks and hold for a short term or invest in stock market where they hold stocks for long term. Investing in stock market is generally risk free unless for few systematic risks, whereas trading is nothing but speculation or gambling.

We all know that the stock price usually retraces the growth in the company's earnings. For example, if the earnings of company 'X' increases by 20% this year then the stock price is expected to rise by 20% over a period of a year. For a stock to grow 20%, the price should go up or compound by 0.050% each day. Which rarely will happen in stock market. Each day the prices either move up by 2-3% or go down 2-3% and finally at the end of the year one can find them trading at a price much higher compared to the year before, as the stock would have retraced the growth in earning to maintain a fairly valued P/E as well as a PEG Ratio.
Therefore, when people bet on long term they very rarely lose money in market until and unless they invest in a price competitive business or in businesses with bad fundamentals. Whereas if one trades, no matter whether the fundamentals of the company is good or bad, the trader is no better off than a gambler as the course of the stock price will be unknown in the short term and will be driven by the sentiments.

Divi’s Lab

Earnings Per Share

2011	2012	2013	2014	2015
32.41	40.19	45.58	58.26	69.49

Total (%) 214.409

MindTree Software

Earnings Per Share

2011	2012	2013	2014	2015
12.43	27.07	40.88	53.3	63.85

Total (%) 513.67%

The stock prices in the long term usually retrace the earnings growth; therefore, betting on stocks for long-term will very rarely makes it risky.

Since trading does not involve considering any of the fundamentals, assumption of the future trends is hard to make using the historical data and analyzing the sentiments.

The stock market in spite of a 65%+ crash in 2008-09 has managed to compound at a rate of 14.9% over a period of 10 years which is much higher than all other asset classes as well as interest on bank deposits.