Why Traders Are Not Investors

Mar 23, 2017 | 06:25 PM IST

What is a difference between investing and trading? That's a fair question, as many people confuse trading with short-term investment. This misconception has become so prevalent that the line between trading and investing has blurred over the years.

Just to set the records straight - there is a sea difference between trading and investing. Though the end objective of both is the same (to get maximum profit), the methods and expectations are diametrically opposite to each other.

Trading Is Not Short-term Investment

There is a fundamental difference between these two school of thoughts. Investment is essentially a long-term concept. In investment, you are putting your money on the company which you think has the potential to grow in future. Investment is more like you becoming a stakeholder of the company's success. On the other hand, trading is merely holding a position for short term gains. The period of holding may vary from as short as 1 day to few months or sometimes years.

Trading In Equity

Trading is simply chancing upon on the movements of the securities (stocks). In this format, frequent buying and selling takes place as to maximise the profits and to roll it over to next trade.

Trading is a risky business as most traders don't do adequate research and rely heavily on the support-resistance pattern of the stock. There are two types of traders: Position Traders & Intraday Traders

Position Traders - These are the type of traders who hold the stock for few days, months, and in some rare cases for a year or two. However, despite holding a stock for long period they would still be termed as traders simply because they are just holding the position. In a way, they are apathetic towards aspects like the growth potential of the company, its expansion plans, management, etc. It's strictly about numbers.

Intraday Traders - Intraday traders aka day traders are those who buy and sell securities in the same trading session. These traders trade on the margin provided by their brokers. In this type, traders don't take the delivery of the stock. The basic idea of intraday trading is to buy a considerably big quantity of stocks on minimum margin and sell it once it reaches its target (usually a few points above buying price). As these trades are executed on margin, trader have to bear extremely high risk.

Investment

Investment is a broad concept. It's more evolved and profound than trading. Though the path of investing goes parallel to trading to some extent, but the objectives of investment are entirely different. Basically, investing is creating wealth with a long-term perspective. Unlike traders, investors do intensive research before entering any stock. This research assesses potential stocks on its fundamentals like P/E ratio, EPS ratio, free cash flow, profit and loss statements, etc. The basic idea of investing is to identify undervalued stocks with strong fundamentals and to hold them for a long period of time, as the assumption is that a good stock realises its value sooner or later.

Advantages Of Investing

The Long-term investment makes investors immune to the volatility of the market. It is a given that markets are going to fluctuate, but taking an investor's approach puts you in a commanding position as market downturn too becomes an opportunity to build your portfolio. How Warren Buffett made billions in the economic slowdown of 2008 through Goldman Sachs shares is a case study of how to capitalise on market downturns.

The biggest takeaway of long-term investment , however, is that you get more multibaggers opportunities.

Live A Calmer, Peaceful Life

Just like the stock market, traders lives too are extremely volatile. They have to stay glued to the computer screen every day while every downward curve gives them a fit of anxiety. The uncertain behaviour of market and high stakes always keep traders on their toes.

On the other hand, investors lead a fairly peaceful life. As investors do all the reviews and research before entering the stock, they don't have to keep a tab on the day-to-day developments of their stocks, which not only saves them a lot of hassle but also gives them a plenty of quality time to pursue good things in life. Isn't that a better deal?

So, if wealth creation is your ultimate objective then long-term equity investment is your best bet.

 

ABOUT AUTHOR

Niveza Editorial Desk : We are a team of stock market nerds trying to stay ahead of the herd. We spend our grey cells everyday to pave a smooth road for our clients in the shaky world of stock market. While...
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