Basics Of Trading In Stock Market And Investing In Stock Market
Trading in stock market
Trading in stock market refers to buying a stock (shares) or an index at a low price and selling the same at a high value, thereby making a profit.
Many people think that buying always takes place first and selling afterwards. However, it is not always true.
People normally buy a stock first and sell it afterwards in the Spot Market (also called as Cash Market) segment of a stock market. There is another segment generating many times the volume of cash segment. It is called the 'F&O' (Futures and Options) segment.
A trader can buy first (create a long position) and sell it afterwards (square off the long position) afterwards in the F&O segment. Similarly, he can sell first (create a short position) and buy it afterwards (square off the short position) afterwards in the F&O segment.
In stock markets of some countries, he can sell first (create a short position) and buy it afterwards (square off the short position) afterwards on the same trading day in the Cash Segment.
A trader is interested in earning profits from his transactions. He does not intend to hold the shares of a company for a long term. Obviously, he is not interested in the past and future of any company. He is just interested in opportunities of earning profits. He buys first if he thinks that the price of a share is going to rise (for any reason whatsoever); and he (short) sells if he thinks that the price of a share is going to fall (for any reason whatsoever). He does not bother whether it is a good company or a bad company. The opportunity must be good for him.
However, it does not mean that every trader earns profits in every transaction. In fact, most of the (individual) traders lose money in trading. A trader takes the help of technical analysis to spot the buy/sell opportunities. There are several methods of technical analysis. Different methods of technical analysis may generate different signals for a particular company at a particular point of time. It means that a method is generating a buy signal for a particular stock at a point of time; and some other method is generating a sell signal for the same stock at that same point of time. This makes the traders confused. They become more confused as they know more about technical analysis.
Investing in stock market
Investing in stock market is totally different on the other hand. It refers to buying a stock (shares) and holding it for a fairly long period of time with a view to earn a regular return on investment. Of course, return on investment is the primary objective of investing and growth of capital is the secondary one.
Obviously, an investor has to select a good company for investing. He has to study the past performance of a company and the also the future prospects for that company. He can find a good company for investing after a comparative study of several alternatives available to him.
He has to find out who are the promoters of a company, who are the directors, what is the sector, what is the domestic and global demand supply position in that sector, what kind of competition the company is facing, whether the government policies are favorable or adverse for that company, what are the headwinds and tailwinds, what is the market share of the company in its field, what is the top line (sales), what is the bottom line (profits), whether the company has grown in the past, if yes, whether the growth is consistent, what are the future plans of the company, what are the different important ratios for the company, what are the figures of current EPS (Earnings Per Share) and forward EPS and so on.
This study is called the 'Fundamental Analysis'. This is very useful to investors and not to traders.
However, investors also have to find the right time of entry and exit. Fundamental analysis does not help them in this regard. They also have to time their buy/sell decisions on the basis of technical analysis.
Do share your comments on this article here on this blog. Also visit my website at www.hnkanade.in
Regards,
Hemant Kanade
Trading in stock market
Trading in stock market refers to buying a stock (shares) or an index at a low price and selling the same at a high value, thereby making a profit.
Many people think that buying always takes place first and selling afterwards. However, it is not always true.
People normally buy a stock first and sell it afterwards in the Spot Market (also called as Cash Market) segment of a stock market. There is another segment generating many times the volume of cash segment. It is called the 'F&O' (Futures and Options) segment.
A trader can buy first (create a long position) and sell it afterwards (square off the long position) afterwards in the F&O segment. Similarly, he can sell first (create a short position) and buy it afterwards (square off the short position) afterwards in the F&O segment.
In stock markets of some countries, he can sell first (create a short position) and buy it afterwards (square off the short position) afterwards on the same trading day in the Cash Segment.
A trader is interested in earning profits from his transactions. He does not intend to hold the shares of a company for a long term. Obviously, he is not interested in the past and future of any company. He is just interested in opportunities of earning profits. He buys first if he thinks that the price of a share is going to rise (for any reason whatsoever); and he (short) sells if he thinks that the price of a share is going to fall (for any reason whatsoever). He does not bother whether it is a good company or a bad company. The opportunity must be good for him.
However, it does not mean that every trader earns profits in every transaction. In fact, most of the (individual) traders lose money in trading. A trader takes the help of technical analysis to spot the buy/sell opportunities. There are several methods of technical analysis. Different methods of technical analysis may generate different signals for a particular company at a particular point of time. It means that a method is generating a buy signal for a particular stock at a point of time; and some other method is generating a sell signal for the same stock at that same point of time. This makes the traders confused. They become more confused as they know more about technical analysis.
Investing in stock market
Investing in stock market is totally different on the other hand. It refers to buying a stock (shares) and holding it for a fairly long period of time with a view to earn a regular return on investment. Of course, return on investment is the primary objective of investing and growth of capital is the secondary one.
Obviously, an investor has to select a good company for investing. He has to study the past performance of a company and the also the future prospects for that company. He can find a good company for investing after a comparative study of several alternatives available to him.
He has to find out who are the promoters of a company, who are the directors, what is the sector, what is the domestic and global demand supply position in that sector, what kind of competition the company is facing, whether the government policies are favorable or adverse for that company, what are the headwinds and tailwinds, what is the market share of the company in its field, what is the top line (sales), what is the bottom line (profits), whether the company has grown in the past, if yes, whether the growth is consistent, what are the future plans of the company, what are the different important ratios for the company, what are the figures of current EPS (Earnings Per Share) and forward EPS and so on.
This study is called the 'Fundamental Analysis'. This is very useful to investors and not to traders.
However, investors also have to find the right time of entry and exit. Fundamental analysis does not help them in this regard. They also have to time their buy/sell decisions on the basis of technical analysis.
Do share your comments on this article here on this blog. Also visit my website at www.hnkanade.in
Regards,
Hemant Kanade
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