Stock Trading vs Stock Investing
Stock Trading vs Stock Investing
People who buy sell shares in Stock exchange like NSE and BSE can be categorized as
- Stock Traders
- Stock Investors
- Index Investors
Speculators : Speculators have no defined rules or patterns of investment. They mostly work on guess work ! Most novice investors or share market beginners can be put in this category.
Index Investors : Index investors believe that it is not possible to beat the market. They simply invest in Index fund and forget it for years. In very long run, Share market has given a CAGR return of around 11 to 13 % and these investors are happy about it !
Index investors are also called Passive investors and avoid actively participating in Share market !
Whenever the market crashes and I am afraid to invest actively, I just shift to Index funds for investment !
Below Table compares Stock traders vs Stock Investors
|Stock Trader||Stock Investor|
|Believes they can beat the market||Believes they can beat the market|
|Traders Use Charts or Technical analysis for Trading||Investors use quality or fundamental analysis for Investing|
|BUY / SELL frequently specially for short duration||BUY / SELL less frequently with shares held for longer duration|
|Traders try to time the market e.g. WHEN to enter and WHEN to exit !||Investors try to find undervalued stocks and are patient for price to rise. They rarely know WHEN !|
|Traders use stop loss||Investors avoid stop loss and keep averaging|
|Traders talk of support and chart patterns||Investors talk of Company business and valuation|
|Stock Traders actively participate in Intra-day and Future & Options||Stock Investors takes delivery of shares and wait for price to correct to sell the share|
|Stock Traders boast of thousands / lakhs earned per month||Stock Investors boasts of thousands / lakhs earnings without time frame|
Which is more profitable Stock trading or Investing
Like with all things in life "IT DEPENDS" ! There are popular traders as well as popular Investors however richest man Warren Buffett boasts of Investing and not of trading !
This share market course tutorial is all about Stock Investment and does not detail anything about Technical analysis ! In fact I suggest to avoid stop loss and also believe that Stock traders follow stock investors.
Risks involved in Trading ?
I admit that this course is
In Investment you use your money and in intra-day trading or Future & Options you use someone else ! In trading it is called margin money and you are committing that you will square up (read BUY / SELL) within the time frame agreed. This makes you trade on large volume with less money ! Many B-School graduates use terms like "Leverage" for such things which in simple terms means using others money for your benefit !
However, If you mess up with Stop loss, or do not understand the risk, trust me, the amount may soon become too large for you to recover back !
Why is Stock trading so popular ?
To me following reasons make trading popular
- People do not believe in delayed gratification.
Tell anyone that you can earn millions in Stock investment in 10 to 20 years and they will yawn. Boast of thousands per month and they will start dreaming of vacation, if only getting rich was simple !
Many do not have patience to wait for Investment opportunity, most are just looking for best stocks to buy TODAY !
- Media, PMS and brokers all promote trading.
Media needs content everyday, Trading is their favorite !
PMS and brokers make more brokerage when you BUY / SELL regularly, you obviously paying them, for both transaction ! In-fact even the government, the exchange and other Financial intermediaries of stock market everyone makes money ! On the other hand if you just buy and hold for long, while company does good, only you make money !
- People love complications over simplicity
Tell some one just buy and hold x shares for 10 years, it is boring !
Tell them buy x-share at 100.2 and
target price of 124.78 with
stop loss at 98.3 !
It looks so cool !
It looks intelligent and informed !
All covered up !
It actually explains itself, we all enjoy boasting our intellect. Simple things are never considered intellectual ! I have described this in detail at If share investing is so simple.
There seems to be some perverse human characteristic that likes to make easy things difficult.Mr. Warren Buffett
Kashyap have you traded in stocks ?
Yes I have detailed why I do not like stock trading !
Defining long term (Investing) and Short term (Trading)
Every stock in my Stock Portfolio has MY NOTES written.
I categorize each company as Bad, Average, good and great (plz refer Small Cap vs Mid Cap vs Large Cap Stocks).
I also define the "HOLDING DURATION" expected for every purchase and modify this as the company results are declared.
In India any Stock investment which is held for 12 months (1 Year) or more is Long Term Investment, if less than 1 Year it is short term investment. Since 2008 to 2018 I followed this definition only to realize that some good companies take longer time to get recognized by the Share Market.
I changed my definition in 2019 to
SHORT TERM INVESTMENT (Trading) - Less than or equals 3 years
LONG TERM INVESTMENT (Investing) - More than 3 years
You may have your own definition and are free to set your investment style, but I highly recommend you to make and edit notes regularly so that after few months or years it reminds you about your vision and reason of that Stock Investment !
As a value investor you should know whether the investment is for Short Term or Long Term and whether you are Stock Trading or Stock Investing !
VALUE INVESTING STOCK INVESTMENT FUNDAMENTAL ANALYSIS STOCK MARKET COURSE VALUING STOCKS
Of the various methods, financial ratios, chart analysis which people use for share investment analysis can be categorized as Fundamental Analysis and Technical analysis.
Fundamental Analysis involves financial statement analysis, checking management, financial ratios that are core to the business. Fundamental analysis helps in stock valuation so that we can identify whether the stock is overpriced or under-priced. This method has nothing to do with what others are doing, in fact this methods boasts of contrarian behaviour !
Technical analysis considers historical stock price and volume data of the share to determine when to buy and sell the stock. It uses Price Chart patterns, trends to predict stocks future price movements. Technical analysis does not care what the company does or is it good company or bad company (plz read Small Cap vs Mid Cap vs Large Cap Stocks). In simple terms, it is trying to find what others are doing and going with the mob considering them to be more informed !
Below Table compares Fundamental Analysis vs Technical Analysis
|Fundamental Analysis||Technical Analysis|
|Involves stock company fundamental valuation||Involves Stock price and volume Charts for Technical analysis|
|Trying to find undervalued stocks and buying them for future price correction||Trying to time the market e.g. when to enter and when to exit !|
|Involves Financial statement analysis, Balance sheet analysis and Financial ratio analysis||Involves stop loss, support levels, trends and Chart related patterns|
|Fundamental analysis have long term views||Technical analysis have short term views|
|Fundamental analysis involves delivery of shares and wait for price to rise||Technical analysis involves Intra-day tradings and Future & Option trading|
VALUE INVESTING STOCK INVESTMENT FUNDAMENTAL ANALYSIS FINANCIAL RATIOS STOCK MARKET COURSE
FUNDAMENTAL ANALYSIS STOCK INVESTMENT STOCK MARKET COURSE VALUE INVESTING VALUING STOCKS