Class-8: What is the difference between investing and trading?

Trading vs. Investing, which is better for me

For a novice, it looks like both investing and trading are very similar. For people who are familiar with the stock market start deciding on whether they want to be an investor or a trader. 

 This is one of the debatable topics. I encountered many queries on this while creating my course like, is investing better or trading? 

 In this class, I am not going to promote or demote anything or say which is better. Its more to do with what is comfortable for you. What path do you want to choose? There is a good amount of risk involved in both. You can make money in both and similarly lose money as well. 

It's you who have to identify whether you want to be a trader or investor in the stock market. And that has to be backed up with your skillset. 

In this course, we learn fundamental analysis where we explore how to do investment and how to manage your risk. Since investing in the equity market is about creating a portfolio, you should also learn how to rebalance your portfolio. 

So risk management, portfolio management, and fundamental studies are about investing in the stock market. However, we will learn about technical analysis, option writing strategies in the trading part. But if you do not want to be a trader you need not learn those technical analyses and options. 

In the risk management module, I will be covering futures and options which is the base of option writing strategy. You need to know the options. So this is one overlapping thing. Futures and options can be used to hedge your portfolio, which means to protect the shares by applying a kind of risk management to your portfolio. 

 These instruments can also be used for trading purposes. They are part of trading. Now I had briefed you on how we will be covering both the areas so that it helps people who want to become traders as well as investors. Moreover, it will give you an exposure that you can decide whether you have more of a trading mindset or the investing mindset. 

                                    INVESTING 

 Think you make 100rs per month and you spend 50rs for basic things. Then you are left with 50rs. As we believe in saving, you will go and invest in real estate, FD, gold, or equity. And when we invest, it does not matter where we invest. 

You never buy anything and sell it soon. We give a time of 5 to 15 years. For example, the house which you buy for 50 lakhs may become 2 crores in value within the next few years. Similarly, if your parents have bought gold before 10 years, the price was 12000Rs/10g, and right now the cost is around 40000Rs/10g. In a time frame of 10 to 12 years, the return in gold is around 4 times the initial value. The point here is they brought it and allowed it to grow and did not sell immediately. 

When it comes to FD, there is a constant return promised from the bank side irrespective of the time frame. So you need not worry. 

But investing is something done for a long term perspective. You should have heard of Warren Buffet, who is a stock market investor. He is a value investor. He invests looking at the value of the company and he understands that the value of the company that he is buying is much lower than the value that the company deserves. And he also knows that such companies are going to grow multiple folds from here and make money for the investors. 

                                      TRADING 

When it comes to trading, you don’t look for longterm and try to find short-term benefits. Let me tell you a few examples to make you understand trading in the right perspective.

There is a vegetable vendor, who sells you potatoes in your locality. But he must be getting it in bulk from somewhere else right? He would have researched and had the data like where he can purchase at a cheap cost. Now he knows if he purchases 100kg of potatoes for 10rs/kg, he would be able to sell it in his shop for 20rs/kg. so he is quite confident that he can make money by selling potatoes. What is he doing? It’s a trade, right? Buying from one market and selling at another market. On every 100kg potatoes purchased, he makes 1000Rs profit by selling it. He will manage his other expenses as well as transportation charges, rental, labour charges, etc. 

This potato seller, he keeps a watch on the market every day. He keeps a watch on the sentiments of his consumers every day. He knows that he should get good potatoes not to lose his customers and also build a good consumer base. 

So trading is more like a business. The moment you start thinking that you are going to make money on a monthly, weekly, daily, or quarterly basis, you start getting the mindset of a trader. Trading is a fulltime activity. 

Trading in the stock market is more to do with this only. Traders identify an opportunity where they know that within a short period they can make profits. These days there are algorithmic trading, wherein within a fraction of second, multiple trades are executed. 

Trader's perspective is always a small time frame. The Trading techniques have evolved, similar to the value investing techniques that had evolved as per various sectors. But the fundamental aspects always remains the same. 

Investing is all about identifying those companies which are going to cater to large customers and have a big market size. 

Also which has the potential to reach a place where they can serve to that large customer class. If they are going to cater to a very small segment of people, then they have to work in a niche business area, where they have good pricing and profits on their services and products. Identifying those companies with such potential and investing in them in the early stage is all about value investing. 

People have different approaches even in investing. There can be two kinds of investors. An active investor and a passive investor. 

An active investor always keeps doing the relative valuation and will buy the undervalued stocks when compared to its competitors. Let's say there is an active investor. He will try to stay market neutral and he would have taken the risk management measures. He thought like 15% of his portfolio will be into IT companies and he will just pick up the bluechip companies.

Think he has five options like TCS, Infosys, Wipro, Tech Mahindra, and L&T infotech. At this point, he may feel Infosys is more valuable and try to invest in it. But he will keep a watch on the other 4 stocks as well. 

Then he comes to know that Infosys has given a good return of 40% and now he feels that out of 5 companies tech Mahindra is more valuable. He will sell the Infosys shares and buys Tech Mahindra. This is a strategy every active investor follows. They keep on checking the relative valuation of the companies and try to buy only those companies which he thinks is still valuable and keep on selling the companies where they think they have made enough money. 

Then there is this passive investor who thinks that if there is one company doing well, he will stay invested in it for long like 5 to 10 years without checking its competition. 

Some investors can simply go and invest in the index ETF and become the passive investor of the entire market. Because he believes that in the next 10 years the market is going to give 10% to 15% CAGR. 

Similarly, you have different kinds of traders. Traders these days have a lot of advantages. Today’s world is going around algorithmic trading, where people work on the order book, work on the information which they can catch faster than anybody else, and where they can send their orders faster than others. 

NSE and BSE have started giving facilities like co-location, where they are happily ready to place the servers of these traders within the exchange which will be connected to the stock trading system. 

Trading is something where you have to acquire new skills by which you should be able to beat others in the market and stay competitive. You should be good at maths and computing. And there are certain strategies like technical analysis, where people believe the chart patterns work. Those charts are based on certain data. Stock prices trade in a range. So they know that at a certain point maximum selling happens and vice versa. So they keep tracking these data points and trade using technical analysis. 

Then we have options traders. An option is an instrument that is more like insurance. People either become insurance buyers or sellers in terms of option writing. They can get an arbitrage within two to three different options and make some profit. 

 People do options trading strategy when they know that, there is a certain premium that is at high risk but equally has a huge benefit when the trade turns in their favour. 

 There are different kinds of traders. Some people do one-minute trade, they are called scalpers. Then there are intraday traders who work on certain strategies and finish the trade within a day. 

So my suggestion is don’t be both a trader and an investor. It's up to you to decide. If you want to become an investor it's very easy in terms of deciding which stocks to buy if you know the fundamentals. Don’t do the classical mistakes that other people do. 

If you are a working-class person and learning through the course, you will learn to safely invest in this course. If you want to be a trader I will be giving you the tools in the coming classes. But you have to learn it and practice it full time, which will require a lot of patience and discipline. 

So the point here is you should define yourself whether you want to be a trader or investor. The stock market is good for both of them. Both can lose money as well as make money. Not everyone who learns technical analysis or fundamental analysis will make money. 

You have to be among the people who can out beat others. I hope now you understood that investing and trading are two different areas altogether. From day one in the stock market, you should decide on your behaviour and emotional skills whether you want to be a trader or an investor. 

I suggest you become an investor. People have made huge money in the past decades by investing in good companies. Identify 5 to 6 good companies and keep investing in them and stay for the long term. I am sure you will make good profits. Investing is something you can do parttime but trading needs a lot of focus and wholesome approach. Not everyone will like the stock market. There are doctors, engineers, and others who are into their profession and contributing to the economy. They can be investors. 

                                    CONCLUSION 

  Many keep debating with me whether trading is good or investing? I always tell them one thing and continue saying in future too that, it is you, who have to master both the skills by defining your way of approaching the market.