Saturday 5 March 2016

Are you an Investor or a Trader in the Stock Market

It's very important to know yourself in the Market. Are you an Investor or a Trader in the Stock Market? Buy right and Sit tight !!! Read on...

Hello friends,

Hope you are all doing great and having a great time in your work and family life. We have been learning together so far and covered a few basic concepts. For those who have not read my previous articles, here they are. Read them once, so that you get the context.

How does Warren Buffet choose his businesses

Fundamentals of Investing in the Stock Market
Decoding Trade/Order Book in the Exchanges
Choose the Perfect Stock Broker for Wealth Creation
Top 5 Questions to ask before investing in a Stock/Business
Stock Market Basics - Value vs Price
Initial Public Offering

Today, Ill cover a topic which defines an individual in the stock market. The actions, strategies & decisions are totally defined by the attitude with which the money is put in the stock market. Generally, in my experience, I have observed 4 kinds of people in the stock market. You must be wondering that the topic has only 2. But, yes.. There are 4 kinds viz.

1) Trader

2) Investor
3) Spectator
4) Blind Follower

Now who is a Spectator?

1) A Spectator is one who is never to going to buy or sell shares. He is only going to watch share movements and post on multiple public forums about stocks just like he is buying or selling them.

2) He creates panic among his group when the stock falls down and encourages everyone when the stock goes up. 
3) His behavior will be mostly unreasonable and unjustifiable. He would never try to understand how businesses work or how the market moves. He knows nothing about the business he is talking about.
4) He will always talk big but without any stuff in it.
5) He is never ready to take the risk and is just passing time. You will find a lot of such people in multiple public forums, whatsapp groups, facebook investment groups etc. I have seen maximum such people on Moneycontrol Board :-)

We need to ignore such people and not take them too seriously. We need to focus on what we are all here for and evolve.

Now, let come to our next group - Blind Follower (BF)

1) A BF makes buy or sell decisions purely based on discussions with other people.

2) He never attempts to understand anything about the business or the stock market and wants to make quick money.
3) He will buy if people say buy and will sell if people say sell.
4) He trusts people who have sounded successful and criticizes people who gave a call which didn't work.
5) Since, he is a blind follower, he doesn't have any idea about when to enter or exit a stock. 
6) If he buys a stock and it goes up 10%, he waits until it goes higher. If the stock goes below his buying price, he keeps waiting or buying again and again without a clue.
7) He doesn't survive long in the stock market since he never understood what it is all about. Most probably, he phases out and never encourages anyone to put money in the market since he lost everything.

Friends, there is nothing wrong in following someone and learning the art. It's dangerous to blindly follow anyone without doing your homework. I get so many emails from people who have taken heavy loans and mortgaged their property to finance their losses. They have no clue why they bought a stock. They mostly bought it since X or Y talked about it on multiple forums and greed took them for a ride. Stock market is a wealth creating machine for those who know the game. So, focus on learning.

Now, let's come to a Trader. Ideally who is a trader? 

1) In layman terms, a trader is one who generally does not own anything. He buys from the source and sells it to the customer at a premium.

2) He has a wide contact network and knows where the supply is high so that he can get the product for a cheap price. He also is clever enough to reach out to customers who badly need the product and sell it at a higher price and hence, making a tidy profit.
3) His idea of demand and supply is impeccable. 
3) His timing should be perfect so that he can buy at the right time and sell at the right time. 

In the stock market, a Trader does the same thing. 

1) He doesn't put the money in a stock with the idea of ownership. 

2) He just wants to buy the stock at a lower price and sell it at a higher price or vice-versa (In short selling, you can sell at a higher price and buy back at a lower price)
3) He doesn't give much value to the fundamentals of the business. 
4) He makes his decisions based on the news or general trend in the business or sector. 
5) He makes use of the sentiments of people in a particular stock and moves along with it.
6) He can hold a stock from a few seconds to a few weeks.
7) A good trader is extremely disciplined and knows how much profit to make and take :-)

Now, the market is extremely dynamic. Since traders are in the market to buy and sell to make quick money, timing is extremely important. Also, knowledge is everything. They will also have to know when to get into a trade and when to exit. They have to learn to take loss in their stride and move on to the next trade. They need to monitor their trade continuously and make quick and efficient decisions. They should never get emotional when things do not go their way. They should be ready to take high risk since they are trying to predict something in the short term. They use various methods to predict the movements. They study the technicals and look at the past graphs and charts to understand the movements and try to predict the future movement. I know a lot of traders who make good money. But they swear on discipline & alertness, without which you can never evolve as a trader.

Now who is an Investor? 

1) Investing itself means that you are putting your time, energy and money in something which has high potential in the longer term.

2) Investing is always done keeping medium to long term goals in mind.
3) An investor never invests the money he needs immediately. Saving is a habit !!!
4) An investor always trusts himself since he has done enough homework before investing.
5) Investing is done with a high level of understanding of the future growth in the area of investment.

Normally, investors do not try to time the market. They do not have to do this, since their vision is not short term. Deep understanding of the company fundamentals is required for an investor since he is putting his hard earned money into a business. An investor never tries to gamble his money away. He spends enormous amount of time reading about the Sector, Economy, Business potential, Annual reports, Balance sheets, Debt, Cash Flow etc and invests only if he finds high value in the business. He also tries to see if the stock is currently selling at a price lower than its intrinsic value. If the stock is cheap compared to what he would pay for it otherwise, he buys it and then holds it. Buy right and Sit tight is a well known saying. An investor practices it to the core. He doesn't sell the stock if the company fundamentals are intact. If the price of the stock goes way above what he would pay for it, he sells it making a good fortune.

Having a good mix of technical understanding (price movements, demand supply) and fundamentals (strength, cash flows, business potential) can be very advantageous for an individual in the stock market. Since such a person understands the business well and can also relate to the price movements, his timing might be a little better. But again, in my experience, its extremely tough to exactly predict anything in the market in short term.

Now, whether you are an investor or a trader, the following points are very important:

1) What are you investing or trading for? Understanding the goal is key.

2) The right temperament and attitude is extremely important.
3) We all make mistakes. But, are we ready to own it up and move on?
4) Booking profits or losses is not at all wrong. The more experienced you are, your timing will certainly get better.
5) Future potential of the stock is extremely important for an investor.
6) Following news about a stock on a minute by minute basis is extremely important for a trader. 
7) Don't fall in love with your stocks. You are here to create wealth by investing in good companies or trading with the flow.

So, are you an Investor? Or a Trader? Or just a Speculator or Blind follower? Or a mix of all?? 

Something to think about huh??? It's important to evolve in the stock market.

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Please share this post on multiple public platforms so that many more can get benefited and master the art of Investing in the Stock Market !!!

Good luck,

Fundamental Investor


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