There are two people who open up the same application on their phones. One wishes to build wealth over decades, and the other, to time the market within days or even hours. Both have valid reasons to pursue their chosen paths – one requires a certain mindset for long term gains and the other allows the same to make profits, albeit lesser, in a far shorter time frame. Additionally, there are certain traders who also indulge in option trading, on the sidelines and we will talk about that shortly.
What Does it Mean to Invest?
Also called investing, an investor purchases an instrument and sits on it for long, studying financial statements, debt, etc, before selling to book profits. This is where patience plays a critical role as one overlooks minor fluctuations in the hope of booking larger gains over time. It is enough to make regular monthly contributions to a mutual fund and examine its performance every week.
What Does it Mean to Trade?
Unlike investors, traders operate on a much shorter time frame; buying and selling in hours or even minutes, relying on a variety of tools and indicators. They too can reap big gains, or suffer steep losses due to the same. Unlike speculation, where traders jump onto a bandwagon of a stock based on some information, a trading system is designed to take profits as well as cut losses – based on a stop loss. Once again, consistency is the name of the game here.
How Can They Follow the Markets Everyday?
While they both need updated data, a nifty 50 live show does not replace a newspaper, although the latter may provide some context for investors of the stocks of interest to them in contrast, the former permits traders to make selections throughout the day. However, a single reliable source is far better rather than following multiple websites which can leave you with more confusion than clarity.
Where Does Options Fit Into the Equation?
An option is actually a contract between a buyer and seller wherein the former pays the latter a premium for the right but not the obligation to buy or sell once the contract expires. As options tend to decay as the strike date approaches, knowledge of the expiry date is critical. Traders who prefer to hedge rather than speculate, or simply want to take advantage of short term opportunities often indulge in options trading; using some borrowed funds, and plenty of caution.
Does it Fit Your Needs?
One must ask oneself a set of questions; What is the amount of spare time one has during the day? How would I react if my investments drop 10% within a week? Lastly, what do I hope to gain out of this exercise? A low maintenance, long term, steady but reliable goal will fit perfectly under the category ‘investing’. However, if one has the time and can be at peace with an uncertain but higher reward, trading can be equally enticing. Many choose to do both – without taking too much risk.
Avoid these Common Pitfalls
As newcomers, we all tend to be spooked by ‘tips’ provided by friends or family, go all in on a hunch, invest everything into a single stock, and even go for leverage without fully understanding it. It is far better to document one’s requirements; investment objective, available amount as well as what one will do should the going gets steeper (have a monthly stop loss in place) rather than panic and sell at a big loss.
Conclusion
Summing it all up, trading and investing are two different approaches to the market which require different actions from an individual and their respective reward. Anyone can do either as long as they are patient, disciplined, and persistent; they may start small and grow better as they acquire experience. But one must always remember that these are only the beginning and all that glitters is not gold in the stock market.
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