#3 What do you do in the stock market?
Just two things — buying and selling.
If you think that the share of a company will go up in the future then you buy it and after buying when you think the share will not grow more than this, you sell that share and the difference between selling price and buying price is your profit.
But there’s one important factor you should remember, time which means in how much time the share will grow.
So keeping the time factor in mind, you can do two things on the stock market :
1. Investing
2. Trading.
Both are carried out in the same manner i.e. by buying and selling of shares but the time frame being considered is different for trading and investing.
If you want to hold shares for a long time, let’s say one year, this is called investing.
If you hold shares for a short time let’s say one minute, one hour, one day or one month. This is called stock trading.
Investing and trading are like test cricket and ODI or T20. The origin and rules of all these formats are the same but the time factor’s importance varies with format.
For example, scoring runs faster in T20 is more important than defending wickets but in test cricket it is reverse. Same applies for investing, the safety of funds is more important than returns but in trading the returns are important.
For investment generally large capital is required because of the low returns. In trading, returns are more important because of low capital and high skill set.
And the key difference between investors and traders lies in the fact that the tools and information they require are different.
If someone wants to invest in a company’s share, he will analyse the company’s performance( profits, assets, vision, CAGR etc ) more rather than analysing the stock market’s sentiment. Because in the long term company’s performance is important while on the other hand stock market’s sentiment changes daily.
But if you are a trader you have to focus on stock market’s sentiment i.e. demand and supply analysis or technical analysis rather than focus on long term vision of a company.
Both are equally important. One is skill and one is art and art is nothing but pushing your skill to the limit that it will become a part of your body.
As a beginner in the stock market, should you be a trader or an investor?
It totally depends on the individual. Big investment firms, rich people and others who have money generally do both investing and trading to maintain the risk to reward ratio. They invest larger chunks in very low return government bonds and other securities and trade daily, weekly or monthly with smaller chunks which give bigger returns in a short time frame.
So, you need a large amount for investing if you are thinking of good returns monthly. That’s what people generally do, they invest in mutual funds, FDs, government securities etc. You can’t expect much returns from long term investing.
For trading you don’t need large capital but skill sets for higher returns monthly. Because the time frame is very short, you have to act fast by understanding the sentiment of the stock market for that time.
For example, you know the price of onion will go up in 2–3 hours, So you buy onions from a seller and wait for 3 hours. Now prices of onions are higher so you become a seller and sell them and the difference between the onions’ selling price and buying price is your profit.
This is what all traders do in any market.
Generally, people start with trading because of the low capital required and the high returns earned. When they become profitable and start earning from trading, they start to invest their amount in low risk stocks and other securities and this is how smart people make a perfect blend of trading and investing on the stock market to save and grow their money in the long term.
