What is the Difference Between Trading & Investment?
Undoubtedly, both trading in the stock market and investing imply risk on your money. However, trading comparatively involves higher risk and better potential returns because the price might go high or low during a moment. Since investing is an art, it takes a short time to develop. Investment is a long-term process. Most people things Investing means to go stock market and buy & sell the shares this knowledge as trading. But according to the warren buffet, there is too much difference between Trading & Investing. Trading is just for one day it is known as an intraday and for more than one or less than a year it is known as swing Trading or short trading. But in the investment case you don’t have to invest money for 1 day or 1 month this will be more than a month you have to hold your capital. There is an enormous difference between investing and trading. Investing entails building wealth gradually over an extended period of time through the buying and holding of stocks. Trading, on the opposite hand, involves more frequent buying and selling of stocks, with the goal of generating faster returns.
For trading, you need to have the technical knowledge or psychological control of your brain. Why I am saying psychological control? because when we do the trade for 1 day or more then you can see your money is increasing or loose. When you can see the profits at that time you feel good. But you see a small amount of loss or red numbers. Then our brain play with us, wait for a min, you will go in profit, but most of the cases opposite scenario happen and instead of growing stock it goes down and we will wait for the up move but this kind of scenario some time no happen in that case you can able to lose your total capital. After that, you never think again to invest in any stocks. That why I wanted to tell you without technical knowledge investing or trading in stocks this will be really too dangerous for our money.
Trading is divided into two-part first part is Intraday means buy shares for one and sell In that trading you will get most of the advantage Like you will get some margin.
Intraday Trading:
Let’s understand what is the margin, margin depends on share price and company volatility when a company is less volatility then you get more margin like x10 or x20 but in case the company is too volatile and most of the people are not able to make profits then Brokering company like Zerodha, Upstox is providing less margin on the shares. Let’s take an example to understand better what margin is if we have $100 and we have to buy some share in the stock market if we have $100 then we can able to buy share worth of $100, But in the case of Intraday trading if we have $ 100 then we can able to buy more than $100 share in a market. Then the question is our mind How? there is a simple answer to the question is Which platform we will buy the shares like Zerodha, Upstox, 5 paisa, and many more this all is brokering company they have to provide some margin on your worth. Then we can able to make more profits on that, in that this all brokering company charges some money on what they are providing leverage on our money to buy more shares in the stock market. What they will charge will not be more than RS 20 per order. So, we don’t have to worry about it. This is the advantage of intraday but there is some Disadvantage of using leverage by company, if we are taking share by using leverage then we have to sell our share before 3.20 PM in Zerodha and 3.10 PM in Up stock. This is all about intraday advantages & disadvantages.
We can do Intraday without using leverage also and I see most of the big traders are using their money and they try to use as much as less margin to trades. Because of the disadvantage is selling shares within 3.20 PM. One more thing in Intraday You can SELL share first & BUY after showing a profit or BUY Share first & SELL after shown profit. This is the best advantage of Intraday, it means you can make money in the market on both sides, when the market is falling or when the market is gaining you can make money both time in Intraday Trading.
In intraday, before you invest you have to know how to read candlesticks charts, various indicators you have to know before you invest in any stocks.
That is the reason most of the traders make our profession for the stock market, and they make more money daily this will more than that we can’t imagine. That is the biggest advantage of the stock market.
Swing Trading:
Swing trading is also known as “short trading”, Take a share and hold that shares for more than one day this also known as Swing trading, most of the trader take profits from swing trading, because do swing trading you don’t need to sell shares in a one day, you can hold our share more than one day this scenario of buying a share and selling this will depend on You If your target achieved on 2nd day then you can also sell your share in 2nd Day or You can hold your share until your capital not show profit and until you achieve your target, this will be 1month or 2month or more this WILL depend on you. But Swing trading is different from Intraday, But the advantage of swing trading is, it is not compulsory to sell shares within 3.20 PM. That is the reason most of the pro-traders buy shares on CNC. CNC means CASH N CARRY. CNC is also known as swing trading. In swing trading, the Broker does not have to provide leverage on a swing trade. If you want to trade as a swing then you have to take shares on your full capital. If the share price is $ 100 then you will get a share in $100 only, you will not able to buy a share on $10 like intraday. Swing trading is the most profitable trading than intraday.
The probability of losses in swing trading is lesser than Intraday. In intraday, if you in the loss until 3.20 PM then you cannot able to wait for profit or hold a share for the next day but in swing trading, if you will be in the loss but you know this trade will give me profit tomorrow then you can hold your share until and unless your trade will be not in profit. Aftershow profit or achieved your target you can sell your share. In swing trading, there is two disadvantage 1. You will not get margin or leverage on share price & 2. You can’t able to sell shares first and then after showing profit, you can buy.
But in intraday, you can do both, like sell first & buy after or buy first & sell after. Swing trading is short-term trading means you can get profits in serval weeks or days. This all about swing trading.
1. Bollinger Band:
Bollinger band is an important indicator for intraday & swing trading. Bolling band shows the support and resistance of candles. It shows whether prices are higher or lower on a relative basis. It is used in pairs, both upper and lower bands, and with moving average. Bollinger band uses the pair to confirm the signal given with the help of the Bollinger band indicator. You can you Bollinger band in various time frames.
The best time frames for intraday are 5min, 15min & 30 min are the best time frames take trades. There is 1 min time frame also, this time frames mostly used by pro trader because they have a lot amount of volume & they can take our profits within a min.
Example of the impotence of volume:
If someone takes 100 shares and his target takes $100 profit on trade for this he needs to wait for a minimum of 30 min. But when he will increase volume like 1000 share for one trade so he can able to take our profit within a minute. This is the importance of volume. Pro traders work on volumes and make profits within a minute.
2. MACD
MACD is the moving average convergence / Divergence indicator. This indicator is basically used to predict share prices in the coming time. MACD Indicator was deeded MACD there are two colors of lines that are present red & Black. Blackline shows where the price of a share will go in the coming time. In MACD you can able to see the volume of shares are buy or sell according to MACD Move and gives us an indication which time is good for buy & market is on the Bullish side or bearish side. MACD is a leading indicator of correct indication when we have to buy or sell our stocks.
When the black line crosses the red line at the upward side, it shows the market goes bullish side, But when the black line crosses the download side it shows the market goes bearish side. I tell you What is mean buy Bullish & Bearish, Bullish means the market is on the Buyer side, people are buying this share & When the market is on the Bearish side then we can see selling has been started, people are selling our share. The main thing in that when the black line crosses the red line at more than a 30-degree angle then it’s a clear indication of buying or selling, But most of the time people see the black line cross the red line then they decide to BUY or sell the share, They placed the order then they see market goes the opposite direction, This thing is to happen when MACD does not cross the red line more than a 30-degree angle. When MACD is parallel with the black line then is buying and selling both happen at some amount, it’s known as the market is holding our position.
3. Money Flow Index
Money Flow Index (MFI) is a momentum indicator, it indicates the flow of money in a specific period of time. The money flow index is different from the RSI indicator. RSI is not including Volume in our indication but in the money flow index, we can see MFI moves According to Volume changes in the market. It is including with Price of share is overbought or oversold & Volume of Buy or sell. That is a reason the money flow index is a leading indicator for predict correct Price action.
Money Flow Index wok in between 80 to 20. When MFI Touch 80 or more it shows you can sell your share as soon as possible. When MFI moving in between 65 to 35 then it’s moving near the middle line and we have to wait to understand the future moment. When MFI touches 80 and makes a triangle then it is an accurate indication to SELL you share because the share price is overbought for this time. & Vice versa when the money flow index near 20 then it is a clear indication for Buy share because that timeshare price is too oversold. Money Flow Index will change when you change your timeframe. The best timeframe for INTRADAY is 5min, 15min, 30min. join MFI Indicator and you can do correct predictions.
4. Relative Strength Index (RSI)
The relative strength index (RSI) is a momentum indicator, it is developed by J. Welles Wilder, is a momentum oscillator that measures the speed and change of price movements. It is generally used for intraday to understand price is overbought or oversold. Relative Strength Index is the same as MFI, There is only a minor difference in RSI & MFI. MFI includes volume & Price of share. But in RSI is included with the only price of the share. You can set RSI between 80 to 20 or according to your comfort. But ideally, RSI set between 80 to 20. When RSI touches 80 it clearly shows the price is overbought and a clear indication of selling. Vice versa When RSI touches 20 then it’s a clear indication of BUYING in the market. When you Join Bollinger Band & RSI then this will good forget proper prediction of future price.
Investing
Investing and trading both are different things I already told about what is trading? And which factors are including in trading? Let’s talk about investing, investing means to hold our capital within a specific company for more than 1 year. This is known as investing. Before you invest you should be sure about this share price will increase within a year, for that, you have to fundamental analysis. Fundamental analysis means you have to know about all factors of the company in which you want to invest know about management and many more factors are includes. Rakesh Junjun Wala, warren buffet like most of the big investors before they invest do fundamental analysis understand the management of the company see past records, learn Balance sheet, and many more factors we have to see also before you investing any company.
Main factors of Fundamental Analysis
1. Market Capital
2. P/E Ratio (Price-To-Earnings Ratio)
3. Dividend
4. ROE (Return on Equity)
5. ROCE (Return on Capital Employee)
6. DEBT
7. Enterprise value
8. Profit Growth
This all are important factors we will discuss shortly
1. Market Capital
Market capital means the value of the company. It changes according to the share price of the company. If you can see the share value of the company is less than the market capital is also less. Market capital depends on no share of the company. A company’s market capitalization is how much the business is worth as determined by the stock market. To calculate a company’s market capitalization.
Mathematically Find Market capital:
formula: (Market capitalization) = (Cost per share) x (Number of shares)
Let’s understand how is formula works? , if the company have 300Cr Number of share and the share value currently run around $100 in Indian value around RS 7000 then what will be market capital of the company, just multiply both cost of share and No of share ( 300Cr x 37000 ) is equal to 21 Lakh something in Indian rupee and dollar is $ 28000 US Doller.
For example, a company that has 20 million shares selling for $200 each would have a market cap of $2 billion. Mean no of shares of the company and running value of the company. t
hats how we can able to calculate the market capitalization of the company.
Before you invest in any company you have to see the market capitalization of the company. You should understand one thing if market capitalization is less than or equal to 10000 Cr then the company into a SMALL CAP mean probability of High profit and High risk. If market capital is less than or equal to 30000 Cr then the company into MID CAP, which means the probability of getting profit is MID PROFIT with MID RISK. But in case the company has market capital is more than 30000 Cr than in this company, you will get sure shot profit and less risk. This all are large capital companies like TCS, BRITANIA, ASIAN PAINTS, etc. If you invest your money like these companies then you will get sure shot profit. This is about the analysis of market capital.
2. P/E Ratio
P/E Ratio means the Price to Earnings ratio. The P/E ratio is calculated by dividing a company’s current stock Value/earnings per share (EPS). P/E ratio change according to market situation & share price. EPS is calculated to dividing the valuation of dividends per net income and divide the result of share value.
Generally, If the P/E Ratio is more than 25 then you don’t have to enter the market for a buying scenario. Its show share price is overbought and there are more chances to share price will fall from that situation. Before choosing your stock your share price is the lesser side with less P/E Ratio. If you see this kind of scenario then you BUY this stock & Investment in that company.
3. DIVIDEND
The dividend is also an important factor for the investor, most of the investors before investing they see the Dividend of the company. Dividend mean company offer some small profits with shareholder those who hold our share more than a 1 year. Dividend Is in percentage every company has our dividend percentage, Dividend is not fixed its depend on the company, some of the company provide more than 10 % dividend or some company provides less than 5% dividend but most of the time dividend will be in between 1% to 12 %.
Don’t be greedy here, because in the good company they provide always less dividend and worst company provide more dividend. How it should be? I will tell you why it’s happening like this .in Large Cap companies always runs good and shareholder gets profit every time so large-cap companies offer less dividend it should be less than 5%. Because the company shareholder earns good profit from our company so they don’t need to give that much of a dividend to the shareholder.
But shareholder holds there to share more than a year. In small Cap they provide good dividend may be more than 7 % but investor not hold their share that much longer in like this company.
Small-Cap companies know this thing that why they offer that much dividend percentage to hold shares by shareholders. Before Invest you don’t go on dividends, go on the main fundamental of the company, Don’t Be greedy here. That is all about Dividends.
4. ROE
Return on Equity (ROE) is an important factor to understand the company is growing or degrading. If the ROE of the company is good then you can think of investment in that company or else skip that company. Find better on those who give you profit. ROE shows how shareholders’ money utilizes by the company and making a profit from that. ROE is totality depends on sales of the company. The company will more sell mean more profit and you will get the best returns from that company.
5. ROCE
ROCE Mean Return on Capital Employed. It uses the subsequent formula to calculate ROCE: ROCE = EBIT/Capital Employed. Capital Employed = Total Assets – Current Liabilities. Calculating Return on Capital Employed may be a useful means of comparing profits across companies that supported the quantity of capital. Always see in this ROCE is more than ROE then you can say that company is doing good growth daily.
As a general rule, to point a corporation makes reasonably efficient use of capital, the ROCE should be adequate to a minimum of twice current interest rates… No performance metric is ideal, and ROCE is most effectively used with other measures, like return on equity (ROE)
ROE reveals what proportion of profit a corporation earned as compared to the entire amount of shareholder equity found on the record. Return on Equity is a crucial measure for a corporation because it compares it against its peers. With return on equity, it measures performance, and usually the upper the higher.
6. Debt
Debt on company mean Loan taken by the company from other organization or banks. This is also the main factor to see before investing because if you invest in a high debt company then maybe more possibly to you can lose your money from this company.
Understand one factor if loan more than 10% of market capital then you don’t have to invest in that company. But the loan will be less than 10% then it’s ok to be invest because this company will easily pay our load and make it debt-free. Simply put, debt represents an IOU from a borrower that’s given to an investor in exchange for cash. But while the concepts of risk and return may be common to both debt and equity, debt investment has its own language, principles, and metrics.
7. Enterprise Value
Enter prise value is the addition of cash available in after company, market capita; & debt of the company. Enterprise value (EV) may be a measure of a company’s total value, often used as a more comprehensive alternative to equity market capitalization. EV includes in its calculation the market capitalization of a corporation but also short-term and long-term debt also as any cash on the company’s record. Enterprise value also an important factor before you invest in any stocks,
Let’s take an example: If a corporation has 10 shares and every sell at Rs100, the market capitalization is Rs1,000. this is often required to be paid to shop for every share of the corporate. Thereby, it gives more of the worth than the worth of the corporate.
In comparison to the market capitalization, on the opposite hand, modification of market cap that has debt and cash for valuing a corporation is defined because the Enterprise Value \ Total Enterprise Value (TEV) or we know as Firm Value (FV). In other words, a more comprehensive, alternative, and accurate representation compared to the Market cap is that the EV, which helps measure the company’s total value. Simply put it’s the minimum that somebody would pay to shop for a corporation outright.
Enterprise value is calculated because of the market capitalization plus debt, minority interest, and preferred stock, minus total cash and cash equivalents.
8. Profit Growth
Profit growth shows the company is in profit last from 3 years or how much return generated by the company. Profit Growth this factor is important to understand the growth of the company & You can decide on this factor, you have to invest or not. Profit growth is mainly used to understand the company management they are working properly to grow their company or not. On that, you can predict a company is good or bad. Because investors always want profit & they are also seeking better investment for the future.