The working of a stock market-
Price movements is the principle on the basis of which a stock market works. Investors buy or sell stock according to the fluctuations going on in the market. The trading of the stocks happens through an exchange or through over the counter market. The selling and buying of public stock happens on a listed stock exchanged like NSE or BSE, while the private stock exchanging occurs over-the-counter markets or through certain dealers. The listing of the company happens through IPO after which stocks are issued in the primary market. These issued stocks are then traded in the secondary market. Investors can buy or sell these stocks through firms or stockbrokers. After placing an order for the stocks, the order is processed at the exchange by the broker. The stock prices and the details are then forwarded to the investor, who gets the shares after 2 days. Portfolios are managed based on the rise or fall of the stock prices.
Investing and trading are two genres of this field which are different approaches to generating profits in the financial market.
Stock market investment and trading-
Stock market trading involves holding stocks for a short period of time. This time could range anywhere from a week to even a day. It deals with high performance in a short amount of time whereas stock market investment works on the principle of buying and holding the stock for a longer time. Investors invest their money for years or sometimes even for decades. When you go for stock market investment, short-term market fluctuations become insignificant as you need to think about the long-term approach. Traders often sell the stocks if the price goes higher. Trading basically involves a skill of timing and judgment. Investing involves creating wealth by compounding interest and dividend over years by investing in high-quality stocks.
While stock market itself is a risky business, but stock market trading is comparatively at a higher risk factor than investing. But, there is no doubt that trading would give higher returns as short-term fluctuations can make the price go higher or lower. Investments involve lower risks and lower returns, but investing for a long time would deliver high returns due to compounding interests. The short-term fluctuations and the daily market cycles won’t affect your returns much if you have invested in quality stocks.
You can imagine trading as a one-day cricket match while investing would be a test match. You would want skilful players for a one-day match who would score sixes and fours, whereas a test match involves analysis and deeper philosophies. Likewise, traders are skilled people who know the right timing of the market and have knowledge about the market trends. They know when the market is going to hit a high. They have a complete psychological analysis of the market. Investors are people who analyse the stocks they want to invest in. They have a deeply rooted knowledge of business fundamentals and have a lot of commitment to stay invested in a project for a longer time. With stock market investments, it is more about understanding the philosophy.
So, what thought process really goes behind trading or investing?
A trader who puts in money for a short-term looks for buying and selling fast to hit the right profits in the market. One wrong timing and the trader might end up losing a lot of his money. Timing is the most critical fact when it comes to stock market trading. Traders often look at performances of companies and book profits for a short time. Traders look for market trends and observation is what helps them to achieve the maximum profits.
Investors, on the other hand, stay away from short-term market trends. Their goal lies in investing in value. Their main aim is to keep an eye on companies which promise significant growth. Investors invest for a long time and wait till the stock reaches its potential.
Let us see an example. If you and your friend are given seeds to sow, but you decide to sell the seeds at a higher price to someone else in a day to earn quick money. While your friend decided to sow the seeds and let it grow until he gets new seeds. He continued this and sold a lot more seeds than you did. His initial profit by investing was less than what you got by trading, but over the time he did end up getting more profits.
Investing or trading is a personal choice and depends on one’s personal understanding and learning about business. Growth and longevity are the factors which come into picture while deciding one’s financial goals. You can make a right plan by learning your financial goals, the period of investment and understanding of the business situation.