Chasing two rabbits and catching both?
This is a question stuck in the mind of every retail investor and trader alike. Should I buy good quality shares and hold them for long term? Or should I trade on a regular basis with a proper stop loss and target? To learn how professional traders do stock trading, visit the article – New trader’s guide to a profitable trading system!
Since trading and investing can have different meanings for different people, I want to clarify what I mean by each term –
Investor – A person who buys shares for long term and is willing to spend time in the Stock Market. This person doesn’t believe in regular profit booking and wants to compound his/her wealth over a long time.
Trader – A person who buys shares for the sole purpose of selling them within a pre-determined time (e.g. intraday trade, weekly trade, monthly trade etc.). This person works with a strict stop loss and target in mind and is looking to exit as soon as the pre-determined levels are achieved.
Trading and Investing seem like two very different worlds. Traders find the idea of holding stocks for long as a weird concept since the stock market is a very volatile place where things can quickly go wrong. Profit booking seems like a logical answer to them. On the other hand, investors find the idea of regularly buying and selling stocks as foolish. Wealth is created only in the long-term, they say. So what should YOU do?
The simple answer is – do both! Investing and trading might seem like two very different concepts but at the end of the day, they are just two sides of the same coin. Here are the reason why both investing and trading is the ideal choice –
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Both teach you very different things
Trading teaches you about quick decision making, ability to book losses (using stoploss), technicalities of the stock market (such as short selling or options) and risk management. A trader needs to prepare in advance for the next trading day to find out stocks which have good opportunities to make money. Markets have different phases and trading in each phase requires sharpening your trading skills regularly. There are times when a trader is facing continuous losses in which the risk management skills and the discipline to stick to the stoploss are tested. Not sticking to your discipline can easily result to a trading account losing big sums of money. A trader always keeps some cash in hand to find out golden opportunities in the market.
Investing teaches you about patience, understanding business models of good companies, having faith on those good companies, buying stocks when everything is on sale and having the guts to hold onto your stocks even when it seems the world is going to end. An investor’s greed is regularly tested whenever he/she resists profit booking in any share. Delaying any gratification to get that sweet rewards at the end requires a long term vision which only investors can understand. Investor also enjoys regular dividends for being a shareholder which might seem like a small amount of money at first but re-investing your dividends can easily compound the growth of the portfolio.
Both trading and investing teach valuable lessons about the stock market. While trading is like T20 cricket where you have to win within 20 overs, investing is like test cricket which provides ample opportunities to win over the long term. Do you know which of these lessons are important to be successful in the Stock Market? All of them! This is the reason why most of the successful investors have also been successful traders in their careers and vice versa.
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Staying up to date with the market conditions
Most retail investors start investing in the Stock Market with a lot of enthusiasm. They read financial news, analyze quarterly results, try to understand business models and analyze stock charts. But when it becomes clear to them that the Stock Market is not a get rich quick scheme and takes a lot of time to build wealth, their enthusiasm starts to wane. They slowly stop reading about the Stock Market and become passive investors who have no knowledge about the current market conditions. Even though there is nothing wrong with being a passive investor, you cannot expect great returns by just being passive and uninformed about the Stock Market. This is where trading comes in! Trading forces you to find new good companies. Trading forces you to re-look into company stocks and see if there are signs of weakness. Simply put, trading forces you to stay connected with the market.
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Bring in cash from time to time
The ultimate goal of Stock Market investment is not to have the biggest portfolio in the world. The biggest goal is to create wealth so that you do not have to worry about buying whatever it is that you want (whether it is materialistic or buying your own freedom). Trading brings in money directly to your account which gives you the ability to take it back to your banking account and spend it as you wish which is the point of making money in the first place!
This is especially important for people whose livelihood depends on the Stock Market. If you want to be completely dependent on the Stock Market, you NEED to trade and have some sort of regular cash flow coming in for your daily needs. Even though nothing is guaranteed, trading will bring in money a lot more frequently than investing (including dividends).
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Back test your strategies
Let’s say you invest in a company for long term and you hold the stock for 10 years. You later figure out that you have invested in a fraudulent company or maybe the company isn’t growing at all. Guess what? You just WASTED 10 years! Investing for a very long time has a disadvantage of not providing quick feedback to your investment strategy.
Trading, on the other hand is much faster than investing. You will get to see the results much faster (sometimes on the same day). This gives a lot of good feedback directly from the Market (which is SUPREME). Trading with a portion of capital can provide you good strategies which you can use to improve your investment skills.
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Investment is boring, trading is not!
Investing for long term is the most important strategy for wealth creation but there is a big problem with this strategy.
It is VERY boring. There is nothing more boring than watching your stock stuck at the same rate for months. It is almost like watching paint dry! Having a small portion of your portfolio dedicated towards trading can provide you the thrill which you see in every movie about the stock market. This gives you a stable, steady return of the investor along with the adventure of a trader. Again this point is especially important for people who are solely dependent on the Stock Market for their livelihood.
Now that you know that a combination of investing and trading has a lot of benefits, I know what you must be thinking. How should I divide my capital between investing and trading? You might have noticed me using words like “small portion of capital for trading”. I would recommend that you have 75-85% of your capital allocated towards investments and the remaining 15-25% of your capital towards trading. This is by no means a hard and fast rule. This is up to the reader to decide!
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Contact me at investmentabshuru@gmail.com
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