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in.investing.com/analysis/why-is-investment-opportunity-different-from-trading-opportunity-with-examples-200205350
There are a several ways to make money in the financial markets; we have two broad classifications of stock market activities- Trading
(who believe in reading charts/news daily) and Investing (who believe in fundamentals of valuation over a long term period). Lot of novice
people use these words ‘investment opportunity’ and ‘trading opportunity’ to represent the same thing; however in the real world, these two
are quite different except for the ultimate fact that is, both of them are part of the same market and have a common objective of making a
profit. There are some basic differences between both that set them miles apart and hence here we are discussing investing vs trading
opportunity.
One should know the importance of each, as you need to find which one is the right one for you based on your SMART financial goals.
In order to explain this difference we shall use the two most influential people in the world of wealth creation as reference, one is known for
his long term investments and the other is a renowned trader. If you are a follower of the stock market you might have already guessed the
names, they are- Warren Buffet and George Soros. Both have made huge piles of money over their lifetime in the stock market, surprisingly
in contradicting methods to each other.
- Warren Buffet is worth about approx. US$67 billion; as he made his money off long-term investments in companies whose stocks he has
held for decades. Let’s look at one of his famous quotes.
“I will tell you how to become rich. Close the doors. Be fearful when others are greedy. Be greedy when others are fearful.” – Warren Buffett
- George Soros on the other hand, net worth is about approx. US$24.2 billion; as he made money from countless number of trades. Let’s
look at one of his famous quotes.
“Markets are constantly in a state of uncertainty and flux and money is made by discounting the obvious and betting on the unexpected”.-
George Soros
Through this article on investing v/s trading, we will try to understand the following;
- Trading vs investing insights
- What should you focus on Investing or Trading?
- Why investor and traders do exist in same market?
- Problem in doing both Investing and Trading without prior planning is recipe for disaster.
- Why Knee Jerk Correction was necessary for long term Investors and a welcome opportunity for traders in short term.
- Why is Investment opportunity different from trading opportunity.
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Below graphical representation discusses the characteristic differences of trading vs investing (the image has been sourced from
Investopedia)
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Trading stocks is much more time consuming and hectic compared to making investments. In case of investments, once you have made
sound investments you can simply relax without buying or selling for months/years. A nice quote by Paul Samuelson that signifies the
difference so beautifully, “Investing should be more like watching paint dry or watching grass grow; If you want excitement, take $800 and
go to Las Vegas.”
Please note: - Making long-term investments also requires knowledge of companies overall financial status; Government policies in force
and in making; global market insights due to its uncertainty impacting the local markets,
Investing and trading are interdependent wherein without the existence of traders, investors will have no liquidity to buy and sell stock and
without investors traders shall have no origin from which to buy and sell. Hence, it is difficult to decide which one is superior. If everyone
was an investor, then no one would be willing to sell or buy in the short-term, leading to an unhealthy market scenario. At the end it is
liquidity that tends to smooth out market prices.
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Problem in doing both Investing and Trading without prior planning is recipe for disaster.
This is when some of the biggest errors happen. People tend to confuse the investing approach with the trading one and head towards
dangerously panic situation. When the stock price is doing well neither the investor or the trader has any problem. But what happens when
it does not?
Let’s say the stock price starts falling. Here as a trader you would have an escape in order to avert the small losses becoming big ones.
Since as a trader you are not emotionally attached to the stock you will get rid of it at the correct point of time. This is rightly what a trader
should do.
But there is a problem in case if you decide to keep the stock and not want to give upon it. So here the trader has become an alleged
investor who does not have enough information on the company to make a decision of holding the stock or letting it go. As an investor you
would be working on guess.
Similarly being an investor you are not supposed to sell off the stock when the prices go down but believe on the fundamentals and hold on
to the stock. Regardless of which one of them is a better strategy, you should plan in advance and stick to it.
Why Knee Jerk Correction was necessary for long term Investors and a welcome opportunity for traders in short term.
If we have to summarize the entire discussion we are had on trading vs investing, traders are the ones that take advantage of the market
conditions to enter or exit their positions on stocks over a short period of time, taking smaller but much more returns, thus the current knee
jerk correction below 10900 levels was important for the traders and they made worthy profit.
Whereas investors like us to love to learn from market and have the necessary patience to wait for the price to drop will strive for larger
returns over a long-drawn-out period by buying and holding stocks. Hence buying after RBI policy in the last 1 hour was critical as most of
the stock kept in radar as per our last post we were able to identify the entry levels that will be suitable for long term investment.
Please note we had trading opportunity within our price range and uncertainty of RBI policy was enough for panic so let’s understand how it
was done.
Example 1:
Example 2
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Example 3:
Learn n earn team led by analyst J2k mainly follows investment opportunity present in market.
Following stocks mentioned below were kept in radar from 28th September also present both trading as well as investment opportunity but
are overall objective was to find valuation for long term hence 5th Oct post RBI we started building long positions in last 60 mins but in
small qty; market will re-open on 8th Oct; we would be ready for the long term opportunity buying based on the action plan jotted down post
RBI policy and EOD daily charts.
OIL&GAS
ONGC; GAIL; IOC; MRPL; Petronet; Reliance
Information Technology (IT):
Tech Mahindra (NS: TEML ) (NS:TEML); Infosys (NS:NS: INFY ) (NS:NS:INFY); KPIT; HCL Tech; NIIT (NS:NS: NIIT ) (NS:NS:NIIT);
Metals:
JSW Steel (NS:NS: JSTL ) (NS:NS:JSTL); NALCO; NMDC (NS:NS: NMDC ) (NS:NS:NMDC); Hind copper; SAIL
Pharmaceuticals:
Granules India Ltd; Wockhardt Ltd (NS:NS: WCKH ) (NS:NS:WCKH); Marksans Pharma; STAR
Auto & Auto Ancillaries Exide; Escorts (NS:NS: ESCO ) (NS:NS:ESCO); JK Tyres; Apollo Tyres (NS:NS: APLO ) (NS:NS:APLO); Lumax
Auto Technologies Ltd;
Data rectification for post RBI policy due to last 60 mins exponential volumes
NIFTY 50 (Futures)
Support levels @ 10220 and below that 10008/9988
Resistance level @ 10740 and 10980/11040
Conclusion
It is not much of a concern that you are investor or trader; whenever knee jerk correction happens trading opportunity will always generate
more profit due to uncertainty and panic but the irony is once the knee jerk correction is over, the Investment opportunity is embraced with
open hands.
Please do let me know what you like – Investing vs trading and why?
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