16 March 2019 AnkitChadha

Trading in Stocks v/s Investing in Stocks

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Trading in stocks refers to buying and selling stocks for a short duration of time, for example, few weeks or few days or few minutes while investing refers to buying and holding stocks for a longer period of time (few months to few years). The ultimate goal of trading and investing is the same i.e. making profits however the two are completely different from each other.

Investing revolves around buying good businesses which have a strong moat, fast rate of growth and high quality management and business. An investor makes money by buying shares or part ownership of such businesses and then holding on to these shares/stocks. If the company or business continues to do well, the investor’s wealth keeps compounding and he keeps making profits and money.

Examples of great investors include people like Warren Buffet whose net worth is close to 90 billion dollars currently. Another great investor is Rakesh Jhunjhunwala who is a chartered accountant, and started investing in Indian stock markets in 1987 with a measly sum of Rs 5000. Over the last 32 years, he has bought and held stocks of companies like Titan, Lupin and Crisil, and has amassed a net worth in excess of 20,000 crores.

Trading revolves around timing the market--One needs to be razor focused and try and catch fluctuations in prices of the stock, in order to be successful. Since stock prices are extremely volatile and stocks behave irrationally in the short term, there are very few successful traders in the world. One needs to get their entry, exit, direction of trend and risk management absolutely spot-on; else you face the perils of losing your entire capital.

Since trading is a zero sum game, and there are only 1-5% traders who are consistently profitable, rest of the 95-99% of the traders end up losing money. The great part however is that this 95-99% of the money goes into the hands of these 1-5% of the traders who become millionaires. Hence, traders who are able to make it, become really wealthy although we must remember that the probability of success is less than 5% for all traders. So, if you thought about quitting your job and becoming a full time trader due to the sheer thrill involved in trading, then it’s time that you think again and work out your priorities and probability of success

Bottom-line is that investing and trading is not meant for everybody. Both require different set of skills and temperament. It is up to each individual who comes in to the stock market, to figure out what suits him and then decide on becoming either a trader or an investor.