Trading vs Investment
We are hearing from people saying they are making good money in the share market. Making money in the share market is an art coupled with some techniques. We can classify the income from share market in two ways – Trading
shares and Investing in shares.
Trading is just buying and selling the shares in a short span of time. Trading profit can be made in a day, in a week or even in two to three months. The objective of trading is to buy the shares at the lower price and selling at a higher price or vice versa. It is very difficult to buy exactly at the low price and selling exactly at the higher price. Trading mostly depends on the technical analysis and chart analysis. These analysis will give indication of whether the share price will move up or down. People involved in trading may sometime book profit in same day i.e., intraday trading without taking actual possession or delivery of the stock. Another way of making profit from trading is to take delivery of the share and hold it for 3 to 5 trading session i.e., delivery based trading. Sometime holding the delivered shares for even three to six months to make profit in the share’s directional movement i.e., swing trading. Each of this has its own method of technical analysis.
Investing is buying the shares and holding it for a good period of time. The shares can be held for an year, two or sometimes five to ten years or even more. There are stories we read in financial newspapers saying if you had invested 100 shares @ Rs.95/- in Infosys IPO during the year 1993, your investment value will be more
than Seven Crore now. How did this happen? Infosys regularly issuing bonus shares and the share price also having steady growth due to remarkable profit, good corporate governance, etc. Hence the investment of Rs.9,500 during the year 1993 becomes more than Rs.7,00,00,000 during 2018 is the result of buying shares and not selling but staying “Invested” . This is the magic of investment.
But can we expect this kind of return in all shares? Will all the shares become Multibagger like Infosys in the coming years? The answer is not all shares but still there are shares available in market. The toughest job is to find which will become a Multibagger. Buying a share and staying invested for years is called investment. To invest in a share, someone needs the skill of Fundamental Analysis, must be able to predict the company’s future. Trading needs Technical Analysis and Investing needs Fundamental Analysis.
Trading vs Investing
- Even though the motive of both trading and investing is making profit, Trading is making profit in the very short time by buying and selling shares often whereas investing is building wealth over a period of time by buying
and holding the invested security for long term.
- Traders believe that the price of the share moves in a desired direction (expecting an increase – long position, expecting a price fall – short position) whereas investors believe that the company will do well in future and the returns will be in the form of dividend and the share price increase.
- Profit for the traders will be in the form of difference in buying & selling price whereas the profit for the investors is reinvesting dividends in the same stock and accumulating more stocks so that the value of the portfolio will increase.
- Traders make profit in very short period sometimes in a day or even an hour or less than an hour whereas the investors are investing and holding the shares for long period of time.
- Traders are using technical analysis and the investors using the fundamental analysis using industry analysis, Earning ratios and business growth expectations.
- Strategy of Traders is “buy to sell” but the strategy of investors is “buy to hold”.
- Traders will close the trade when the share price is moving against their expectation (share price moving downwards when in long and moving upwards when in short position) but the investor will stay invested even in a cyclical down trend.
- Trading needs more time to watch the price movements and taking a decision to close the trade but in investing, one should select a share and buying it and then relaxing for months and years. Investing does not need watching the share price movement every minute.
Trading or Investing: which suits whom?
- If someone has enough time to reading charts and graphs on a daily basis then trading will be suitable. If time is a constraint, then investing is the best option.
- Trading or investing is also related to the risk bearing capacity of the person. If someone can take high risk then trading will be best suitable because people are doing trading to make profit but lose is also unavoidable. Out of ten trades, some trades might be loss. So risk bearing capacity also plays major role. If someone can’t take high risk, then investing is the best option.
To conclude, we can say traders are buying and selling shares to make profit based on the market conditions, making smaller profits but doing many trades. Investors are striving for larger profits in the form of dividends and share price increase waiting with patience for long period of time.