Understanding 'Investing' and 'Trading'
Grow Your Business, Not Your Inbox
You're reading Entrepreneur India, an international franchise of Entrepreneur Media.
Words such as investing, trading and stock market are constant buzzwords and people often get attracted by the lucrative monetary returns guaranteed. However, quite often people end up losing their hard-earned money as they do not have complete understanding of the platform they are using. Millennials out of the lot seem to be very inclined towards making quick money in no time, but unfortunately limited knowledge and shallow understanding results in failure.
To begin with, you first need to understand the difference between the types and patterns of investing. In the game of cricket, there are formats of five-day test, 50 overs and 20 overs matches. Similarly, ‘investing’ can be described as a test match wherein sustainability on the pitch is very important. It doesn’t matter whether you make runs on a ball-to-ball basis or runs per over, it is crucial to play a long innings. You may not necessarily score from every ball but being there is the key. This is what investing is all about wherein you have to stay in the market, rather than being ‘out’ in the haste of making quick money. You have to consider investing a full-term process where there are no shortcuts to make quick money. You have to stay there all the time, startegize as per the situation, and act accordingly; the way you would do while batting and strategizing for each ball you get to hit. Cricket veteran such as Rahul Dravid can make a good example in this case wherein his style of playing is calm and steady and he would often just hit one ball to make run when its utmost safe rather than trying to earn runs on each and every ball he plays. You can exactly replicate the same in while investing; there are so many choices and 5,000 scrips but it’s not advised to go each of them. Out of the 5,000, you should select 5-10 or a maximum of 20 scrips in your lifetime and you need to make a sizeable investment in each since here your opportunity shrinks as you are not playing every ‘ball’ in the game and you need to make the maximum from the ones that you are playing or investing in.
Whereas, ‘trading’ is just like a 50 overs match. Here, along with sustainability it is also important to make frequent runs on every possible ball considering the time limit. This pattern in stock market is often referred to as ‘short-term investing’. The success rate over here is quite less compared with long-term investing as it is time bound and you cannot rectify your mistakes or change your strategy immediately, if required. The success rate here is lower than that of long-term investing with only 20 per cent cases being successful.
The last and the most unsafe one is a 20:20 match. Here sustainability on the pitch is important but what even matters more is how fast you make runs. This can be directly related to ‘future trading’ wherein you would like to make money on a daily basis, but there are much bigger risks involved as you have to be swift enough to plan well in advance and be prompt in your decision making. The success rate here is as minimal as 1 per cent. Future trading is injurious to your wealth. If you are smoking you may die in 20-30 years whereas in trading, this may happen the very next day.
Hence, after looking at all the three scenarios, it is highly advised that if you would like to make money in the stock market and create wealth, it has to be long-term investment. The saying ‘Rome was not built in a day’ perfectly describes the importance and relevance of long-term investing whereas trading can be very well related to the incident of ‘Hiroshima and Nagasaki were destroyed in a day’.
In the business of stock investing you need to ‘buy like a bull, sit like a bear and watch like an eagle’. You should buy a sizeable amount as per your worth that would make a significant difference in your investment portfolio, have patience and wait as markets tend to undergo turmoil and keep watching your portfolio apart from constantly learning from what is happening around the world and how it may affect your investments. Hence, never buy and forget, rather keep an eye on each and every development that may directly or indirectly affect your investments.