Investment Blog

Why should you invest? While there are many reasons, we think Warren Buffet’s famous words sum it up nicely: “Someone is sitting in the shade today because someone planted a tree a long time ago”. Yes, this is exactly why we think you should invest. A single seed planted today, may eventually grow into a tree and provide you countless benefits. Similarly, any amount of financial investment made today will most probably grow over time and accumulate. There is every chance that $100 invested today may equal more than $100 after 10 years. On the contrary, a $100 bill stored in your wallet for ten years will definitely stay a $100 bill, unless you possess some magical powers to change it. You might also be wondering if my investment is guaranteed to grow and accumulate. Well, to address this, is not so simple.

Experts usually use sophisticated financial tools, market research and many years of personal experience to identify where and how to invest. Even after this entire process, there is still no guarantee. But wait, do not leave, the best part is still to come. When we look at the historical data of the financial markets, we see that on average, most investments grow in the long term. Do you now see where we are headed? While it is very common for any investment to shrink and grow from time to time, over an extended period of time, say 10 years, it is very likely for your financial investment to have ultimately grown. We are aware that there are many questions still unanswered. Keep an eye out for our future posts, you will definitely find very interesting material on those questions. This is just the beginning.

Trading and investing are two different approaches that have their risks and advantages in the stock market.

Among the many factors that decide whether you should lean towards either investing or trading, the most basic is knowing your long-term financial goals, your instinct for quick decision making, your commitment to providing the time and research required, and your ability to cope with the drastic fluctuations in price.

So, what exactly is the difference between trading and investing?

In the simplest words, trading is the action where you assess the stock market, have a knack for fast thinking and crucially buy and sell stocks in a short period of time to gain quick returns.

On the other hand, while investing also requires assessing the stock market, its functions are almost entirely different. In investing, you buy an asset with the belief in its long-term growth and value with the hope to achieve long term gains.

While making money from money and having ample savings is a concern for many smart individuals, for whatever reason it may be for, it is essential to know what is the right approach once you’ve decided to play with the stock market. 

Before delving into the pros and cons of investing and trading, let’s assess the major differences.

Trading:

• Trading is generating returns that require quick buying and selling.
• Traders believe that the share price will move in their expected direction to achieve the target.
• The profit is earned by buying and selling shares at a higher price.
• Trading requires a very short time buying and selling. Sometimes as little as minutes!
• Technical analysis is required by traders.

Investing:

• Investors believe that the company will grow in value over time and provide returns in the form of dividends.
• The profits are earned by gaining dividends on stocks and reinvesting them.
• Investing requires holding an asset or stock for long periods of time.
• It is important to know all market fundamentals for investing.
• Investing is the process of building wealth over a long time by buying an asset and holding it.

Both trading and investing comprise characteristics that bring benefits along with their fair share of risks, however, one might be more fruitful to a specific type of individual. 

While trading comes with high returns in a short period of time, it requires more time and capabilities to analyze market situations frequently, along with making educated guesses – or just plain speculation. It is also frequented by individuals in their prime, who can take big risks and is not suited for people who would rather have a slow, but constant, increase in their wealth.

Investment, inversely, might have low short-term returns, but after investing in a well-diversified portfolio, it allows you to relax for months or even years. Making long term investment requires adequate knowledge of finance and its technicalities. For the companies you invest in, you must be able to assess the financial ratios, the valuation by PE or PBV ratio, or free cash flows. Investment has seemingly been the go-to option as it requires less speculation, fewer risks, and a gradual build of wealth.

People who want to make money while avoiding huge losses usually lean towards investing where they reinvest the dividends they earn as well. But individuals who are risk-takers and look to gain huge profits in a short time, lean towards trading.

What should be the best option for you?

The very first question you must be able to answer is timing. If you have time to spend hours daily on market research or reading graphs, then perhaps trading is better for you. If you don’t, then investing is better. The second is to understand your size as an investor and your goals for it. If you are a small investor then it is not a wise decision to take risks and trade. However, if you are a comparatively large investor with short term goals, you could potentially play the stock market and trade if you believe you can handle the risks. 

For the many reasons mentioned here, it is impossible to name either approach the best. And it is important to know that both trading and investing don’t have to be mutually exclusive. You may invest the majority of your money in a diversified portfolio for the long term, and employ the rest in short term trading.

To conclude, while trading might seem exciting to some individuals with its high gains in a short period, it is mindless to negate the amount of daily time, research, and speculation that comes with it. One sell/buy that is too early – or too late – can lead to major losses. Ergo, when making smart decisions about the money we have spent so much effort earning, it is wise to not take many risks. Constant worry about your money during trading takes away from the purpose of investment of gradually growing over time in value to give you peace of mind later on in life. Investment, with its sustainable and gradual growth over a period, remains the – competitively – better option in this case.

When it comes to investing in the stock market when you start to invest plays a crucial part in how successful you may become in it. However, managing a well-timed investment is easier said than done. Aside from your financial situation, the market’s condition and your tolerance for risks, all play a major role.

Investing typically takes time to see returns, making early investments that much valuable. However, while investing, you must be prepared for the money you invest to be tied up for some time to gain maximum returns in the long run. (Here’s our post on the differences between investing and trading)

Cutting to the chase, investing as early as possible is the best time to invest. That is if you qualify the following three points:

• You have no major debts
• You have an emergency fund of at least 3 months basic income in case you lose your job
• You have enough money to cover essential expenses

One thing to remember when initiating to invest is that saving is a habit. It is a habit that has only benefits and no drawbacks. Ergo, it is better to save as early as possible so that you have sufficient funds to invest later on. For adults who are salaried, this can be achieved by setting aside 10-15% of your monthly basic income however small the amount may feel because a little goes a long way. Another important thing to note for parents is to have their kids learn the habit of saving as soon as they are mature enough. This can be achieved by providing money for chores and making them responsible for their extra expenses from that amount. This not only makes them have an understanding about saving from a young age but allows them to make smarter decisions when they’re older.

Whether you are 12, 20, 03 52, investing today is always better than investing tomorrow as investing early ensures solid returns in the long run.

At Zeal, we not only provide you with technical tools to make the right decision at the right time but also allow you to invest in various Halal and ethical asset classes to achieve your investment goals. Read more about our Shariah-compliant services here.

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