The difference between investing and trading

The difference between investing and trading

In present day's context, the processes of wealth accumulation and wealth creation centre primarily around two fundamental concepts - Investing and Trading.

For an individual to create and accumulate wealth effectively and efficiently, it is of vital importance that the individual understands and grasps these two concepts very well.

In this case, the first question that the individual may possibly ask would be as follows:

What is investing and trading respectively?

In essence, investing refers to the act of purchasing a stock or other financial instrument and holding them for a long period of time before disposing them off for a profit.

It primarily concerns the identification and assessment of attractive investment opportunities and allocating financial resources into these opportunities with an expectation of favourable future returns over a certain period of time.

To identify and assess investment opportunities, investors typically adopt fundamental analysis to carry out their assessment (Equities context).

By definition, fundamental analysis involves analysing a particular business/company's financial statements and health, its management and competitive advantages.

An investor will pay special attention with regard to the sustainability of the company's revenue (sales) generators as well as the economic moats (if any) that the company current enjoys before determining whether to invest or not.

At the same time, some investors may also utilise fundamental valuation methods to evaluate the intrinsic or fair value of the business/company or asset class.

Here, investors look at some valuation indicators and will tend to invest into businesses/companies or asset classes which are undervalued and may have upside potential in the near future.

Some of these valuation indicators include Price/Earnings ratio, Price/Book ratio, Price/Sales ratio etc.

Hence, an investor often makes use of fundamental information, such as earnings to evaluate investment opportunities, but can also use technical analysis to detect long- term trends.

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