Are You a Trader or an Investor?

Finance Guru Speaks: This article will throw some light on the differences between Trading and Investing.

Share Markets around the world are considered to be places where you can get rich quickly! It is presumed to be like a Casino where one can take chances to earn quick money.

If you have participated in the Share Market, then do you agree with the above assumptions or thoughts? 

If you agree, then you are in the very lucky 5% club of the overall Stock Market participants who are really earning money from the Market. Rest 95% are the ones who are constantly on the losing side.

So, coming back to the article topic -

How Trading and Investing are different?

I will cover the differences based on some of the areas so that they can be easily understood.

1. What is their Market View?

Trading: Traders have a short term view of the market. Meaning, they have entered the market to make quick money. Mostly they book the profits or loss within the same day. Such Traders are known as Intraday Traders. 

Some Traders can carry their position for a few days to weeks. They are known as Swing or Positional Traders.

Investing: Investors have a longer-term view of the market. Their aim is to generate wealth by the power of compounding. Normally, they invest in blue-chip or large-cap companies and they are not in a hurry to book profits or loss. Whenever the market goes into a correction, they try to buy such Shares at low prices.

2. Fundamental or Technical Analysis?

Trading: Traders rely more on Technical Analysis. Meaning, they just check the Price actions on the Chart and Volume. They are least worried about the fundamental aspects of the Company as they just want to catch the momentum of buying or selling the Share to catch quick profits.

Investing: Investors make more use of Fundamental Analysis for the selection of the Stocks. Before buying, they check the fundamentals of the Company like current debt, Book Value, Net Sales per Share, Profitability, Debt to Equity ratio, Promoters Holding, FIIs/DIIs Holding, Management focus, PE ratio, etc.

They put their money only when they are satisfied with the growth potential of the Company.

Having said that, some wise investors use Technical Analysis for making Entry decisions. If the Stock is in the Overbought zone, they tend to avoid buying such overvalues Stock even though they have good fundamentals.

3. How do they Earn?

Trading: Traders can earn in both Bull and Bear Markets. If Share looks strong, they go LONG (Buy). Else, they SHORT (Sell) the Share if it is weak. Seasoned traders who play with strict Stop-loss can earn from both sides of the market. 

Investing: Investors can earn only when the Share price goes up. So, they have to rely on Buying the Stock at a lower price, wait till the price goes up to sell at a higher price.

4. How much efforts are required?

Trading: Trading requires fast decision making because you want to catch some trend, breakdown or breakouts with strict Stop-loss. Trades need to be highly active and engrossed in the Trading terminal or laptop throughout the day. Intraday or Day Trading is very demanding.

Investing: Investors have a long term view of a year or more. So they are considered to be Passive participants in the market. They don't worry about the day to day movements in the market. Also, they normally select blue-chip or large-cap companies to invest in. This way, they avoid taking unnecessary risks. They can check their position once a day or even a week. 

People who are in regular jobs or business use Investing for the wealth-generation from the market. They also rely on income from dividends. 

Conclusion:

The list can be never-ending...Before you decide to be a Trader or an Investor, think about your Style. If you are very active in the market and can take fast decisions based on the Charts, then Day Trading is more suitable for you. Or, you can hold your position for a few days to be a Swing Trader.

If you are salaried or busy in your business, then you can become an Investor and invest some money at every fall in the market. You will not be bothered about daily market news or rumours. Your aim will be to Buy Low, Sell High.

In future articles, I will cover additional aspects of Trading and Investing. Keep Reading!

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