When it comes to the stock market there are multiple ways to add your money to the stocks. Trading and investing are the two major ways by which you can add your money to the stock market.
In this article, we will cover the difference between trading and mutual funds. It is worth noting here that Mutual Funds are a type of investment.
While trading is all about adding your money at the start of the day into the stock market and withdrawing it by the end of the day.
The traders make use of the fluctuation in the price of a stock during the day. Some traders will sell the stock at the end of the day even when they are making a loss. This is because every day they will pick a stock and do trading on it.
On the other hand, mutual funds are a way to invest money in the stock market for the long term. The mutual fund industry is very organized and regulated.
Some companies have launched mutual fund schemes in the market. The customer can and purchase a particular Mutual Fund. After that, the company will have a fund manager who will then invest the money of the customer in the stock market for the long term.
A customer can also withdraw his money from the mutual fund at any time. But usually, mutual fund investments are made for the long term.
Trading vs Mutual Fund
The main difference between trading and mutual funds is that a person will sell his shares at the end of the day in case of trading whereas, in the case of mutual funds, the person will hold onto his investment for the long-term until he needs some money in his life.
Comparison Table Between Trading and Mutual Fund (in Tabular Form)
| Parameter of Comparison | Trading | Mutual Funds |
|---|---|---|
| Definition | Trading is the activity of purchasing shares in the share market at the start of day and selling by the end of the day. | Mutual funds are an investment instrument for retail investors who don’t know the share market. |
| Manager | The person himself will do the intraday trading in the stock market. | The mutual fund company hires a fund manager for the management of the portfolio of shares. |
| Strategy | The idea is to do buy and sell in the stocks with large volumes and more price fluctuations. | The idea is to invest in shares with good fundamentals for the long term. |
| Risk | The trader is willing to make losses in his/her intraday trade on many days. | The mutual fund investor is adding his monthly savings into the share market via mutual fund for the long term. Long term investment results in less risk. |
| Account | Trading can be done by opening a share market account with a stockbroker. | Mutual funds can be purchase directly on the mutual fund company’s website or via a mutual fund broker. |
What is Trading?
Trading is a way to earn money from the stock market choosing a stock at the start of the day and selling it by the end of the day. The trader will earn money due to the fluctuation in the price of a stock. The stock markets also allow the traders to sell a stock at the start of the day and buy it by the end of the day.
Usually, trading is done in the stocks that have large volumes of trade during the day. When there is a lot of people in purchasing and selling a stock then the stock is bound to have a lot of price fluctuations.
The trader will smartly choose a stock based on current news and the financial situation of a company.
There are TV channels who give days on which stocks to pick up before the stock market opens. Even during the day, TV channels will advise on whether to carry forward trading investment to the next day or not.
What is Mutual Fund?
A mutual fund is a collection of shares that are purchased by the company after collecting money from the public. This means that ultimately a lot of people are collectively purchasing a portfolio of shares in the stock market.
The mutual fund company will hire a fund manager who will see the daily operations of the fund. He will use his analytical skills to decide share to buy and which one to sell
The benefit for the customer here is that he does not need to track the market daily or weekly basis. The benefit for the mutual fund company is that they take a commission cut from the investment done by the customer.
There is a central agency in every country to regulate the operation of mutual fund companies. The regulatory agency will lay down the rules that have to be followed by mutual fund companies.
Most of the mutual funds allow investments to be made as a lump sum or every month. The Investments made on monthly basis are known as a systematic investment plan. Even legendary people like Warren Buffet consider systematic Investments is a fantastic way to invest money in the stock market.
Main Differences Between Trading and Mutual Fund
- The trading of stocks is done by purchasing and selling the stock on the same day. Mutual fund investments are done for the long term in the hope of earning money when a company does well during the financial year.
- The traders will purchase hundreds and thousands of shares of a particular stock and sell them immediately when they see a price fluctuation. The idea of trading is to earn money from price fluctuations daily. Mutual fund investors can invest a small amount of their savings in the mutual fund and hence can participate in the stock market.
- The trading session is handled by the individual himself whereas the investment in mutual funds is handled by a fund Manager which is hired by the mutual fund company.
- There is more risk in case of trading and less risk in case of mutual funds. This is because stroke can change its price based on particular news during the day whereas the stocks are bound to perform well speed of time as their earnings improve.
- To do trading in the stock market need to open an account with a stockbroker. Whereas to participate in the mutual fund, you need to open an account with the mutual fund company.
Conclusion
Both trading and mutual funds are ways to heat in the stock market and both have their pros and cons. Whether you want to be a trader or invest in a mutual fund depends on your risk appetite.
There are people around the world who make money from trading and there are also people around the world who make money by investing their savings in the mutual fund.
The mutual fund will have some commission rate as regulated by the central agency of the country. Mutual Funds also have two types of ways to invest money which are direct and regular.
Direct investment in mutual fund happens when the investor directly goes to the mutual fund company and invest his money. Investment in mutual funds happens when the investor goes to a broker who further invests that money into the mutual fund.
References
- https://pubs.aeaweb.org/doi/pdf/10.1257/000282806777211892
- https://www.nber.org/papers/w7855.pdf