No matter you are trading or investing. The ultimate objective is to make money. What does differ trading and investing? The main difference is timing. The period of holding differs from each other.
We will start with what is investing; investing is holding on to an asset for a long period of time, it can be 3 years or 5 years or more than that. Once you invest in you forget it for 5 years and do not look at its prices daily. Big companies that are going to stay for years like reliance, Infosys, Wipro, Bajaj, etc. all these companies are going to be for the long haul. Investing is holding for time and you “don’t care”; it means you will not check its price every day, you are going to hold it for multiple years.
Trading is something that lasts less than 5 years. Some people would say that it is a day or a week, but trading has its own type. The first is swing trading, which means that you are in the action due to the event, you are sure. An event that increases the value of an accrued stock makes a profit immediately when the event occurs and then you are out of it.
You are waiting for an event that may happen in the next week, month, or year, and you are isolated from that deal, you check regularly whether that event happened or not, it doesn't seem like you don’t care.
The next type of trading is intraday trading, which means that the events you expect to happen on the same day, you think that certain events will happen 20 minutes later or two hours later or anytime. Then go to sell it that day.
The crisp difference is understanding. Let us see it with an example if any stocks of the company are downtrend, the investor would study the financial of the company, carry the fundamental analysis, study the ratios and understand its internal management, will try to find the reason for downtrend with the help of stock screener because they will have a longer-term game plan, whereas trader would only see there is a downtrend, they do not want to know why there is downtrend because traders are trading in price movement and in volume, till the time they find out maybe it is an uptrend.
So, investors will find why it is happening and traders would only find what is happening.
• Knowledge- little knowledge is a dangerous thing not only in the stock market but any field you belong to. As a trader, you must gain knowledge about technical analysis, different types of trends, different types of patterns, different charts, and more.
• Virtual trading- As a trader, you gain knowledge before trading, conduct virtual trading, or practice paper trading without funds, because you intend to buy stocks at this price, determine the target price and stop loss and it feels that your operation is smooth, then you can invest real money and start a real transaction. So, this is a learning journey and then a possible profit.
• Strategy- Develop your strategy you have different paper trades, you try to formulate strategies to see what works when to enter, and when to exit if you want to follow a swing trading strategy or a day trading strategy. Do it yourself and write it down on a piece of paper. Try to develop a strategy and stick with it. Many times, you develop a strategy but don't use it. So go ahead and use it.
• Manage emotions- Emotions are your worst enemy in the stock market. You strategize, but fear in a downtrend, sell the trade you bought a few minutes ago, and end up making a loss. Entering another trade and seeing 2 red candles, sold the trade at loss, so manage your emotions and let your strategy take decision and emotions.
• Train yourself- as an investor train yourself in finding good companies means those companies which are fundamentally strong, analyze the balance sheet, cash flow statements, different ratios, and many more.
• Investment goals- set your goals, it may be long term or short term, and based on your goals you make your investment decision.
• Know your risk- investor must know which type of risk appetite he has whether he is risk-taker or risk-averse, your risk decides your portfolio.
• Companies with a moat- As Warren Buffett said, companies with moats are looking for companies with a competitive advantage, whose competitive advantage can be a brand image, any size, patents, anything other companies don't own.
As a trader you invested in stocks, and the stock hits the stop loss that you had on your mind, you waited for the stock to give upward movement but it is breaking the stop loss that you have on the mind and you haven’t actually set the same in your trade, gradually you turn an investor thinking off the company to be fundamentally strong. This is the wrong strategy as a trader. So always set a stop loss so that you avoid losses and do not become an investor.
This is the mistake that a trader does, so keep the above points in mind before being a trader or investor.
This is an important issue that affects everyone before embarking on the investment journey. If the transaction is good or investment. Trading and investment have the same status. Your goal and your time determine whether you want to become an investor or a trader. You can invest in stocks with good fundamentals for retirement purposes, or you can trade stocks for daily income.
The fight between investing and trading is there because, the meaning of the same is not clear, if you understand the meaning and purpose of your investment, you will answer the question yourself. So, begin your investment journey by opening Demat account and remember the rules by Rule no. 1 Never lose money and Rule no. 2 do not forget rule no.1.
S. Vishwa is a web marketing analyst at Finology Ventures. With 6+ years of web marketing experience, joined a Fintech company to help people to learn and earn more.