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How does Trading and investing differ from each other?
An investor is someone who invests in the stock market for an extended period (5-7 years). They invest in sound stocks after researching the fundamental aspects of the stocks. They hold onto these stocks until they become good performers before selling them.
On the other hand, a trader invests in the stock market for a very short period, sometimes buying and selling within minutes. Traders focus on short-term price movements without delving deep into the fundamental aspects of stocks and engage in active trading.
Between these two approaches, which one is better for any type of investment?
Which one tends to generate more consistent profits?
Table Of Contents
1.)Stock Investment vs Stock Trading
(i) Capital Appreciation vs Profit-taking
(ii) Taxation Method
(iii) Risk and Patience
2.)Are you an Investor or a Trader?
3.)Which is more Profitable?
4.)CONCLUSION
1. Stock Investment vs Stock Trading
(i) Capital Appreciation vs Profit-taking
Stock Trading:
When it comes to the world of stocks, there are two main approaches: stock trading and stock investment. While they both involve buying and selling shares, the way they generate profit is quite different. Let’s take a closer look.
In stock trading, money changes hands through speculative transactions. It’s all about analyzing the short-term price movements of a particular stock. Imagine two traders looking at the stock price of ITC, currently sitting at ₹460. One trader believes that the price will drop to Rs. 450 soon, so they engage in short selling. They sell 100 shares at ₹460 and plan to buy them back later at ₹450, pocketing the difference as profit.
Meanwhile, another trader has a hunch that ITC shares will rise from ₹460 to ₹470. They place an order to buy 100 shares at ₹460 and wait for the price to climb. Once it hits ₹470, they sell their shares and make a profit. So here we have one trader profiting from short selling and another from buying low and selling high.
However, it’s important to note that in stock trading, one person’s gain is another person’s loss. Money simply moves from one pocket to another without any capital appreciation.
Stock Investment:
Now let’s shift our focus to stock investment, where things work a bit differently. In this approach, investors aim for long-term growth and capital appreciation while also taking profits along the way. Let me explain.
Imagine an investor who believes in the long-term potential of ITC as a solid company. They carefully evaluate its fundamental aspects and decide it’s worth investing in. Instead of being swayed by short-term fluctuations in the stock price, they hold onto their shares as the value gradually appreciates over time.
For instance, let’s say our investor initially buys 100 shares of ITC at ₹460. Fast forward five years, and the stock’s value has climbed to ₹900. Now, our investor can sell those shares on the stock market, realizing a capital gain and reaping the rewards of their patience and foresight.
Stock trading and stock investment differ in profit strategies. Trading focuses on short-term price movements, while investment aims for long-term growth. Understanding these differences is crucial for navigating the stock market.
(ii) Taxation Method
When it comes to taxes, there are different rules based on whether you’re a long-term investor or a stock trader. Here’s a breakdown of how taxation works for each:
For Long-Term Investors:
When making long-term investments, the investor will only have to pay a 10% tax on the capital appreciation of shares and equity mutual funds.
For Stock Traders:
- Stock traders, who make their money from short-term gains, have to deal with higher tax rates.
- They are required to pay a 15% tax on their short-term gains.
- In some cases, such as when they’re involved in business-like activities through stock trading, the tax rate can go up even further to 30%.
Overall, income tax on stock trading is generally higher compared to income tax on stock investments. This is because stock investments are considered long-term and usually come with lower and more favorable tax rates.
(iii) Risk and Patience
Risk and patience go hand in hand, like two inseparable siblings. When we rush into something without giving it proper thought, we’re more likely to make mistakes and increase the level of risk involved. And let’s be honest, we’ve all been there – making hasty decisions, only to regret them later.
Take stock trading, for example. It’s a fast-paced world where decisions need to be made within days or even minutes. The constant fluctuations in trends can mess with our heads and push us into impulsive actions. Our emotions get tangled up in the mix, making it hard to think straight.
But here’s the thing – those impulsive decisions can lead to significant losses. We might end up making the wrong choices and miss out on opportunities to make things right. It’s like a never-ending cycle of bad news stories about people taking desperate measures because they lost everything.
On the flip side, stock investment is a whole different ballgame. It’s about playing the long game and making decisions that stand the test of time. There’s more space for careful consideration and fewer chances of making rash moves. So instead of being driven by impulse, we need to take a step back, analyze our options, and make well-thought-out choices.
When it comes to risk and patience,
it’s all about finding that balance – a balance that keeps us from falling into the trap of hasty decisions and helps us navigate the unpredictable world of stock trading with confidence.
2. Are you an Investor or a Trader?
Whether in stock investment or trading, are you facing risks associated with market fluctuations?
Are you investing in shares for the long term, holding onto the basic stability and characteristics of the stock, or are you trading for short-term gains?
Many investors face significant losses due to hasty decisions made during market fluctuations. When the market is rising, traders may turn into investors, and when the market is falling, investors may transform into traders. This constant shift often results in losses.
Traders believe they make more money during market upturns and that all their trades work. They start investing all their other money, but then the trend reverses, and the market falls. They may have lost up to 50% of their investment.
Even then, the traders fail to realize their mistake and think, “Those stocks are all good. The price will go up someday; so I’m not going to sell them now.” They convince themselves that they will “make a profit in the long run.”
Similarly, an investor may buy good stocks and hold them for the long term. The price of the stock, which has not gone up for a long time, is now up 25% in profit. He immediately looks at the stock’s speculation and decides, “The stock price is going to go down in a few days. So I’m going to sell it now and buy it back when the price goes down.”
The main reason for this decision is the fear of “losing the 25% profit that I waited so long for.” After selling in fear, the stock price keeps going up. If he had held the stock for a few more years, he would have made a 200% profit. However, he lost the opportunity for a further 175% profit due to the fear of losing 25% profit. This mistake happened because an investor suddenly turned into a trader thinking “I’ll sell now and buy back later.”
Therefore, it is crucial to be clear about whether you are an investor or a trader.
Changing roles frequently, especially driven by fear, can be dangerous. Therefore, whether you are an investor or a trader, have a clear strategy and be cautious of the risks involved.
3. Which is more Profitable?
Are stock investors making a profit in stock investments or stock trading? What do the statistics say?
Nikhil Kamath, the founder of Zerodha, a stock trading company, sheds some light on this in a tweet on his Twitter page. He mentions that after analyzing traders over three years, only 1% of traders make more profit than bank FDs.
In simpler terms, he’s saying that while some trades may bring in profits, many others may result in losses. When you look at the bigger picture, these losses can outweigh the profits.
So why is it that there’s currently a lack of significant profit in stock trading?
Well, there could be several reasons for this:
- Stock trading inherently comes with risks and volatility.
- The market is constantly fluctuating, making it difficult to predict outcomes.
- Not all trades are guaranteed to be profitable.
According to the tweet, it seems like most traders experience more losses or lower profits than they anticipated. This aligns with the general understanding that successful and consistently profitable trading requires a deep understanding of the market, strategic decision-making, and effective risk management.
An investor who makes a long-term investment can assess the profit gained over an extended period. For example, over the past 10 years, the Nifty 500 Index has shown a return of 15.92% annually. If an investor had invested ₹1 lakh in this index 10 years ago, the current value of that investment would be ₹4.38 lakh.
Similarly, the Quantum Flexi Cap Fund has provided an annual return of 23.92% over the last 10 years. If an investor had invested ₹1 lakh in this fund a decade ago, the current value of the investment would be ₹8.5 lakh.
CONCLUSION
Investors don’t need to actively manage their investments like traders do. Holding onto investments for the long term, especially in funds like Nifty 500 or Quantum Flexi Cap Fund, often leads to substantial gains. Compared to trading, long-term investment in a stable market is more favorable due to lower taxes and transaction costs.
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