Investing vs Trading

In the last blog, we were talking about different asset classes and their importance in portfolio formation. Just to recap equity, debt, gold, real estate are different asset classes.

In this blog, we will dig inside the equity as an asset class. Out of the different asset classes equity is considered the riskiest asset class.

But what risk means?

In simple terms risk means volatility.

To understand volatility let take an example. 

Suppose you have 100K out of this you bought shares worth 50k and purchase gold of reaming 50k. Now the value of 50k of which you bought shares is changing every moment as the share price is changing every second on the stock exchange. On the other hand, the price of gold is not changing as fast as equity or we can say that gold is not that volatile as equity.

If you are buying a share of a company there are only two purposes for which you bought the share one is Trading (Overrated) and the other is Investing (Underrated)

Many people get confused or they don’t understand the difference between trading and investing. Let understand this with the help of Cricket

We will be going to consider two formats T20 and Test match

Both are the same?

Not at all. In the same way trading and Investing are not at all same except the fact that it involves equity.

Now next question how they differ from one another

No of Overs

T20 is a one-day affair on the other hand Test is a 5-day affair. In market terminology, we call it Horizon. If your horizon is long then you are investing and if your horizon is short it is trading. But here is another catch people don’t understand the term ‘long term’ as they understand the short term. In the stock market, everything with a horizon less than three years is short-term. 

Money can be earned in short term (Trading) but wealth is created in long term(Investing) only

Runs and Inning 

In T20 more the run you score greater the probability of your winning but in Test-playing till the last session of the 5th day is what matters. The same rule applies to the stock market the Trader (the person who trades) is one who tries to time the market he follows the trend. He does not think about the company he just looks at the charts and does the trade just like wicket does not matter, but run matter in t20. While Investing is not about timing the market it is about time in the market same as the time you spend on-pitch matters in the test. In investing we look after many factors like company, promoters, profit margins, etc.

Volatility

T20 is more volatile as the probability of winning or losing changes with every ball and still we can’t predict the winning team. The same happens with trading it changes every second and you can’t predict whether your trade will be successful or not as it depends on the market moment. But as you increase your horizon things become less volatile. Let understand this with an example

If I ask you how India’s economy will do in the coming 7 to 8 years?

Even though you’re not an economist and not even a baba who can predict the future but I am sure that you can predict this. In long run, it doesn’t matter which government will get elected, what are the current problems because no matter what happens India will going to do best in the upcoming 7 to 8 years from now and so as the stock market. The simple equation is If the economy does well, so as the company will going to do well and companies are listed on the stock market.

Thrill Vs patience

Every moment match changes in T20 and so as in trading but on the other hand test is the game of patience so as Investing. Investing doesn’t require any qualification it just 4th standards basic math which is compounding ( Naam to suna hi hoga) and it requires lots and lots of patience which makes it even boring.

Hope you understand the basic difference between the trading and investing