Trading & Investing Fundamentals

To create and enhance wealth opportunities, people and institutions either trade or invest. Trading emphasizes short-term profits. Traders monitor the markets closely. They buy and sell the shares within seconds, days, and even weeks to make higher profits.  Investing, on the other side, is about buying and holding. Investors purchase shares or commodities for a long time, sometimes more than a decade. They follow a long-term approach rather than the intraday changes. The primary target of an investor is to generate wealth over a longer period.

Trading and investing both involve a certain amount of risk. Trading has higher risk because prices go up and down in a short period of time. Hence a trader may not get the expected profit in that time period. Investment has relatively lower risk as compared to trading as small events or daily ups and downs do not make a significant impact on the value of assets in the long run. But it does not mean that investing is risk-free. Investors may not get desired returns if they sell their assets after a short time. The risk depends on the market you are investing in and generally, the risks are changes in interest rates, exchange rates, downfall in the company’s financial health, the economic conditions of the country to name a few. 

• Bond: Similar to a loan, a bond buyer approves to lend capital to a corporation or government. In return, they will get an interest rate on the amount they are lending. 
• Mutual Funds: Mutual Funds are made up of a group of individual securities such as stocks, bonds etcetera. These funds are managed by professional portfolio managers who divide the assets to generate more wealth on the behalf of an investor. Mutual Funds charge a fee for managing the portfolio.
• Exchange Traded Funds (ETF): Funds (like Mutual Funds), which are traded in an exchange are called Exchange Traded Funds. The advantage of an ETF over a Mutual Fund is the immediate liquidity to buy and sell the funds.
• Hedge Funds: These funds are created to lower the risk of market uncertainty. In these funds, investors generate good results in up as well as down markets. 
• Options: Option is a type of contract in which a trader (who buys the Option) has the right to purchase or sell the assets, but not the obligation, at a fixed price until the expiration of the contract.
• Bond Rating: Bonds are generally rated by various rating agencies to indicate the overall quality of the Bond. These ratings depend upon credit rating or the issuer, business type, risks involved, type of Bond and historical performance. The ratings vary from AAA to D, based on the rating agency. Some of the major rating agencies are Moody’s, S&P, Morningstar etc.
• Management Expense Ratio: In a Mutual Fund, the management of the fund charges a fee to manage the funds in terms of their allocation, deployment, accounting, legal and other obligations. This fee is generally called Management Expense Ratio (MER) or Mutual Fund Fee or Management Fee. Exchange Traded Funds (ETF) also charge a management fee, which is generally smaller compared to the Mutual Fund MER. 
• Capital Gain: The profit obtained from trading or investing in financial securities is generally termed as Capital Gain. The inclusion and exclusion of instruments into Capital Gain varies widely from country to country. Also, some countries distinguish between short term capital gain and long term capital gain. There are different tax benefits and tax treatments for each of these, which also varies by countries.