Investing and Trading in Stock Markets: A Comprehensive Guide

What is Investing?

Investing in stock markets is buying or holding an underlying asset for a longer period of time to let it grow at a compounded rate. Investing doesn’t require more capital; instead, it requires time and patience. Investing is not about looking at the price of underlying assets at any point in time. A true investor doesn’t check the price of the asset lifelong.

An investment always helps to build generational wealth or adds up to your net worth. Investment gains are not for one’s everyday expenses, but in the long run, it will always help to improve the financial condition. It is very important to understand that we don’t have to look for the percentage of appreciation often while making investments in the stock market or any other underlying asset.

Example of Long-Term Investing

Let’s take an example:

A person named ‘John’ bought a house for a particular amount. As we understand, property is an investment that will definitely increase by a standard percentage annually. Let’s say its CAGR (Compounded Annual Growth Rate) is 10% annually.

Now think, will John go to a property consultant every year to know the price of the house he is residing in? My answer is NO. Why?

Because he bought that asset/property/house to live in, not to sell with the appreciation in price. Similarly, investments are subject to grow over a longer period of time, so we are not supposed to track their prices every day, month, quarter, or year.

For investments in stock markets, we don’t need large amounts. A little amount of capital can also create a huge portfolio of wealth because shares don’t appreciate in percentages, they grow in multiples.

Real Life Examples of Investment Growth

Share	Date	Share Price	Growth
Bajaj Finance Ltd	5 July 2002	Rs 5.96
	24 Sept 2021	Rs 7800	1308 times in less than 20 years
Microsoft Corp	14 March 1986	$0.10
	7 June 2024	$424	4240 times in 38 years

Explanation:

• Bajaj Finance Ltd
  • Date: 5 July 2002
  • Share Price (Rs): 5.96
  • Date: 24 Sept 2021
  • Share Price (Rs): 7800
  • This share gave returns of 1308 times in less than 20 years.
  Supposedly, if the shareholder kept on tracking the price of the share frequently, he could not have held the share until its all-time high date. He would have exited the stock holding when this investment doubled and never been able to enjoy 1308x returns.
• Microsoft Corp
  
  • Date: 14 March 1986
  • Share Price ($): 0.10
  • Date: 7 June 2024
  • Share Price ($): 424
  • The share gave exceptional returns of 4240 times in 38 years.

This is the real power of investing in stock markets. For these types of investments, we don’t need much money to invest; only a small portion of your money will do wonders if invested right.

An investment for a long time with compounding is the real 8th wonder of the world. As per my suggestion, if you think you don’t have enough money to invest, start small but do it regularly. In this case, I recommend skipping a party once a month, skipping an expensive date with your partner, or whatever you feel can be compromised so it won’t affect you. Skip and invest that money regularly.

What is Trading?

Trading in stock markets is buying an underlying asset and selling it for profits in a shorter period of time. For trading, we don’t prioritize capital as the first thing; we consider that it can be done with the ‘RIGHT APPROACH’ only.

Trading is not meant for holding the underlying asset for a long time. It simply means selling it for profit at your target price or time. It is very important to understand that discipline plays a vital role in this process because without the mindset of discipline, one can’t earn a single penny from stock trading consistently. The end result will always be the loss of capital.

In stock markets, trading has nothing to do with a company’s fundamentals, performance, and growth. It has a direct relation with price impact based on news, events, technical factors, price movements, demand, supply, etc. You can learn more about the technical aspects of trading on Investopedia.

Additionally, trading should be done on specific targets, not on greed. Greed will always cause disasters if not managed correctly.

Also Read: What is the P/E Ratio?

Example of Short-Term Trading

For example, a share named ABC Ltd is trading at $7. A trader bought it at $7 and, before buying, set selling targets, i.e., selling all the stake at $8. Let’s assume the share has reached $8 in one hour. Now the trader is supposed to sell his stake as decided. He doesn’t have to worry if the share reaches $10 after the exit. Instead, he should look for the next opportunity. This is the real trait of a true trader in the market. Below is the demonstration of the example:

Share	Time	Price	Profit %	Outcome
ABC Ltd	10:00 AM	$7	0	Entry
ABC Ltd	11:00 AM	$8	14.97	Exit
ABC Ltd	2:00 PM	$10	0	Looking for next opportunity

Difference between Trading & Investing

Investing and trading in stock markets have different approaches. Investors don’t check prices lifelong as mentioned above. Traders are of different types:

• They believe they are traders.
• They don’t declare themselves as traders but they are.

Some investors invest money in the equity market for the long term but they check prices regularly and when they see the prices rising, they simply sell and move to another stock for more profit. When the stock goes down, they hold the stock thinking that they have invested for the long run. This means the person is not an investor, he/she is a trader.

Basically, money can’t be earned from the stock market. Markets give us earnings; we can’t control the stock price movement. Our job is to save the capital which is called capital preservation.

A trader who is able to preserve his/her capital in the equity market regardless of market sentiments is the real king in the share market. An untold fact of the stock market is “Price is the God”, we can’t control share prices. More about this can be found on the video by Mr Pushkar Raj Thakur.

Conclusion

To become an investor or a trader in stock markets, we should always gain knowledge first before taking the first step. In life, we need knowledge and wisdom only, money is a byproduct. Once we start running behind money, it becomes more difficult to get. So we actually don’t need to focus on money; we should learn more every day and acquire the most knowledge, and money will automatically follow.

Prior to entering the money market as a trader or an investor, we should really look up to like-minded people. Our income is the average of the total number of people we associate with.

Now tell me in the comments, Who are you? A Trader or an Investor?

FAQ(Frequently Asked Questions)