Should you invest or trade in stocks?

by J Victor on August 2nd, 2010

THATS AN ENTIRELY PERSONAL QUESTION !

Should you invest or trade in stocks? The answer to this question is entirely personal and it would depend on lot of factors.

However, we will not recommend trading to anyone. In our opinion, shares should be considered as a long term investment.

The reason why we don’t recommend trading is that, in our experience, most of the traders ( especially beginners) feel that it’s quite easy to buy at lows and sell at highs. But, it’s not so. Trading is a highly technical activity. Newbies tend to underestimate the difficulties of day trading and overestimate their ability as a beginner. 90% of them lose money and get out of the markets in the first 2 years.It would be better to study the fundamentals and try to invest ( at least for a short term) rather than doing day trading. However, Its your money and the decision is yours. What we can do is, we’ll list out some suggestions based on which you can take a decision whether to trade or invest or do both.

• 1. People who cannot monitor the market regularly should not get into share trading. Share trading requires constant monitoring of price, volume, trend etc. Most of us may not have the tools to analyze all these factors on a real time basis.
• 2. Young guns out there who cannot actively take part in share markets should start investing small amounts in shares. The idea is to accumulate small amounts of shares that will eventually grow into millions. Young investors can also consider trading in shares for short term profits to build up their capital initially.
• 3. Those who are planning to be active in share markets should allocate their available funds into two categories- one part for investing and the other part for trading.
• 4. If you are nearing retirement and haven’t started saving, heavily investing in the stock market is probably not a good idea. However, if you have enough funds to meet your financial requirements for next five years, you may enter into stock markets.
• 5. Markets are always risky in the short term.  Hence trading involves more risk than investing. Markets will keep moving up and down and it’s easy to get emotionally disturbed when you keep watching those price fluctuations.
• 6. Investing, if done right, would result in huge results in the way of capital appreciation, dividends, bonus shares, rights issue etc. trading does not have such advantages. Trading results depends on the price movements and how well you time the market.
• 7. Short term profits or trading profits are taxable income in India. Where as profits from long term investments are tax free.
• 8. Trading tends to become more speculative as you try to make profits from every price movement. Some of these price movements may be due to rumors or manipulations and it’s easy to get trapped in such situations. When you invest, you take a lot of time to study the fundamentals and about what’s happening around. Hence it’s highly ulikely that you get into such traps.

To trade or to invest in stock markets would depend on one’s age, nature of income and attitude. In any case, you should go by the fundamentals supported by the technical factors. Technical analysis and fundamental analysis are seen by many as polar opposites but many market participants have experienced great success by combining the two. Having both the fundamentals and technicals on your side would only have advantages. We will be discussing in detail about fundamental analysis and technical analysis later on.

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