TRADING Vs INVESTING - PART 1
A follower asked me what is the basic difference between the two and whether people with a smaller capital base should invest than trade. So I thought of sharing my thoughts on the subject which may vary from what the reader has in mind. It is a matter of perspective and beliefs and views are more likely to be diverse than alike.
I propose to share my thoughts over the next few weekly articles which you would read during the weekend. Whenever possible, the article would also have a YouTube video link that shows how things work in the real world. This approach would help you understand the concepts well.
Prerequisites to commence Trading as a Beginner--
Demat and Trading account.
Capital.
Basic knowledge of Technical Analysis or similar trading approach.
Trading Methodology
Trading Plan.
These are the basic things to be put in place.
Prerequisites to become an Investor--
Demat Account [Trading Account is not necessary].
Capital.
Investment Approach.
These are the basic things to be put in place.
What is the Key Differentiator between Trading & Investing?
A trader wants to capture the short-term movement in prices of one or many instruments that get traded on the exchange/s.
An Investor wants to deploy his capital to build wealth by compounding the returns over a long period of time.
Should I become a Trader or an Investor?
In my view, there is no right answer for this. However, I believe that to become an investor, one needs to have a good amount of capital base as investing is more of a waiting game. It is a marathon and not a sprint. If I invest say, 3L today, I cannot expect the investment to double in the next 6 months unless, of course, I end up investing in some scrips that end up witnessing a dream run.
Whenever people talk about investing, by default, they take examples of Warren Buffet, Rakesh Jhunjhunwala, and R K Damani. It is a general perception that these people are investors and not traders. However, if you dig deeper you will realize that Warren Buffet is one of the biggest traders in Options. RJ and RKD have publicly shared that they have been able to become investors only because of their consistent profits as traders. In trading, thanks to the power of leveraging, it is possible to gain good amounts of money when the trade works in your favor. Monies so gained once invested back in the market start compounding as you take another set of trades with your trading capital and let the gains get invested and like that the series goes on.
I am aware that there are many “investors' ' who look down on trading as gambling and time consuming and addictive. More likely or not they too were once a trader as unless a person is born with Silver and Golden spoon in mouth, s/he cannot become an investor from base Zero especially in the current situations. This is universally true and you may dig deep in case you find my lines to be biased towards trading.
Should I worry about the fact whether I am a Trader / Investor?
I believe that I am in the stock market to make money. Now if someone fashionably wants to state that I am here to create wealth it is stating the same thing in a different way. To create wealth, one needs to make money, and does it really matter whether you make money by trading or investing? Similarly, does it really matter whether you make money by trading in Equities / Options / Futures / Commodities and the like? Money is money and the instrument you use should not decide whether it is good or bad - of course, the manner in which you make money should be legit.
But then What Should I do?
In case you are still not clear, in my view, the following should be your approach --
If your capital is less than 5L and you are not able to save enough on a regular basis, you should focus on trading - it can be intraday/swing / positional.
If your capital is more than 5L and you are able to add to your capital on a monthly basis, investing should be pursued along with positional trading.
Remember, there is no right answer as situations change from person to person and even for the same person from time to time. Things have become more difficult and dynamic for an average person in the last 1.5 years so please do not get guided by everything that you hear, read and watch. Gather all the information, study what you can on your own and then decide your Money Making Goals, and then proceed on the journey that you think fits your way of leading life.
Your money should be your concern and your joy and there is no one better than you to decide about what should be or what should not be done with it.
In the next part, I will write more about “Investing”.
In case you have any thoughts/queries, please share and I will be happy to respond to the extent I can.
Happy Money Making,
Umesh
I propose to share my thoughts over the next few weekly articles which you would read during the weekend. Whenever possible, the article would also have a YouTube video link that shows how things work in the real world. This approach would help you understand the concepts well.
Prerequisites to commence Trading as a Beginner--
Demat and Trading account.
Capital.
Basic knowledge of Technical Analysis or similar trading approach.
Trading Methodology
Trading Plan.
These are the basic things to be put in place.
Prerequisites to become an Investor--
Demat Account [Trading Account is not necessary].
Capital.
Investment Approach.
These are the basic things to be put in place.
What is the Key Differentiator between Trading & Investing?
A trader wants to capture the short-term movement in prices of one or many instruments that get traded on the exchange/s.
An Investor wants to deploy his capital to build wealth by compounding the returns over a long period of time.
Should I become a Trader or an Investor?
In my view, there is no right answer for this. However, I believe that to become an investor, one needs to have a good amount of capital base as investing is more of a waiting game. It is a marathon and not a sprint. If I invest say, 3L today, I cannot expect the investment to double in the next 6 months unless, of course, I end up investing in some scrips that end up witnessing a dream run.
Whenever people talk about investing, by default, they take examples of Warren Buffet, Rakesh Jhunjhunwala, and R K Damani. It is a general perception that these people are investors and not traders. However, if you dig deeper you will realize that Warren Buffet is one of the biggest traders in Options. RJ and RKD have publicly shared that they have been able to become investors only because of their consistent profits as traders. In trading, thanks to the power of leveraging, it is possible to gain good amounts of money when the trade works in your favor. Monies so gained once invested back in the market start compounding as you take another set of trades with your trading capital and let the gains get invested and like that the series goes on.
I am aware that there are many “investors' ' who look down on trading as gambling and time consuming and addictive. More likely or not they too were once a trader as unless a person is born with Silver and Golden spoon in mouth, s/he cannot become an investor from base Zero especially in the current situations. This is universally true and you may dig deep in case you find my lines to be biased towards trading.
Should I worry about the fact whether I am a Trader / Investor?
I believe that I am in the stock market to make money. Now if someone fashionably wants to state that I am here to create wealth it is stating the same thing in a different way. To create wealth, one needs to make money, and does it really matter whether you make money by trading or investing? Similarly, does it really matter whether you make money by trading in Equities / Options / Futures / Commodities and the like? Money is money and the instrument you use should not decide whether it is good or bad - of course, the manner in which you make money should be legit.
But then What Should I do?
In case you are still not clear, in my view, the following should be your approach --
If your capital is less than 5L and you are not able to save enough on a regular basis, you should focus on trading - it can be intraday/swing / positional.
If your capital is more than 5L and you are able to add to your capital on a monthly basis, investing should be pursued along with positional trading.
Remember, there is no right answer as situations change from person to person and even for the same person from time to time. Things have become more difficult and dynamic for an average person in the last 1.5 years so please do not get guided by everything that you hear, read and watch. Gather all the information, study what you can on your own and then decide your Money Making Goals, and then proceed on the journey that you think fits your way of leading life.
Your money should be your concern and your joy and there is no one better than you to decide about what should be or what should not be done with it.
In the next part, I will write more about “Investing”.
In case you have any thoughts/queries, please share and I will be happy to respond to the extent I can.
Happy Money Making,
Umesh
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