Basic Concept
You might have read articles suggesting Investment over Trading and vice versa. For the Beginners people often suggest investing over trading. They say you lose money in Trading but make money in Investing. But they successfully ditch the question what is difference between the two.
The most important concept of Stock Market is Buy at Low and Sell at High. Stock will always fluctuate. They will never rise in a straight line slope. So you should always know when to buy and when to sell a share. If you can master this simple concept then you are the Money Magnet.
But this simple concept is difficult to realize. Predicting the direction of Stock movement is back bone of Technical Analysis and Fundamental Analysis.
Technical and Fundamental Analysis is systematic approach to decide future of a Stock. Now often people term long term holding of a particular stock as Investment and short term holding of a stock as trading. In this article we will bust this myth and try to give you idea why combination of both is required.
Difference between Trading and Investment
Fundamentally in my personal opinion there is no difference between trading and investment except approach to select the stock. Two important trading terms are very much popular
- Intraday trading
- Swing trading
Similarly two important investment terms are very important
- Value Investing
- Growth Investing
We will have detailed articles on these concepts. But for now I presented these classifications for Beginners.
For now I will outline basic approach People follow
Intraday trading
Based on news or technical analysis people buy and sell stock same day. Fundamentals and Quality of stock does not matter. It is best way to make quick money and it very compelling.
Swing Trading
In this case decision is made based on recent news like company got some order or Government policy and technical analysis people buy stock for 1 week to 1 month or so horizon. They sell once the stock reaches their target. Fundamentals of stock is often overlooked.
Value Investing
In this method people look for stocks which are good and have potential. But for some reasons stock is trading at very low price like 52 week low or multi year low. In this case Fundamental Analysis takes the front seat. The technical analysis is often overlooked.
Growth Investing
In this method people look for stock which have potential to out perform market in near to long term. The stock may be costly. It may not be near the lows. People cite that company has potential so it will grow from this point on. The technical part is overlooked and Fundamentals are given importance.
As you may have seen Fundamental Analysis is given more importance in case of Investing whereas Technical Analysis is given more importance in case of trading. But successful investors combine both of the approach to succeed.
Combining Trading with Investing
Warren Buffer says the time period to hold on a stock is Forever. This is the line which inspire many Investors. They buy a stock and think we should hold on forever but they forget that Quality of a stock changes with time.
Many world famous companies have died with time and new companies have replaced them (Google and Yahoo , Apple and Blackberry , RCom and Airtel etc) . So periodic evaluation of time is important.
Similarly in case of Junk stocks if you are doing Intraday then the stock can move in either direction drastically (Stock price can be manipulated). This will increase your losses. That is why people advice you to trade in Nifty stocks which are not manipulated.
So the best way is to combine Investing principle like Fundamental Analysis with trading principle like Technical Analysis while making Buy and Sell calls in a stock. We can put the same in simple words as below.
Note I will cover Fundamental Analysis and Technical Analysis in details later on.
Buy and Sell decisions
- Make sure the Stock is fundamentally sound.
- Make sure the price can not be manipulated. the volume of stock is high
- Make sure the technical suggest a Buy and Sell
Note if technical does not suggest a Buy and Sell then your wait period is extended. This can be very frustrating and people lose the patience. This is where Technical Analysis combination with Fundamental Analysis helps you.
Putting emphasis on volume and quality of stock help you protect yourself from price manipulation and erratic movement of prices on either side. So it insulates your from big loss.
Also whatever Technical suggest a news will always have potential to change direction of stock. So which ever stock you are tracking you should also track if there is any development or recent news or upcoming news which can impact the stock price.
If you combine recent news or upcoming news with Technical analysis your chances or making profit increases drastically.
Later when we discuss more about Fundamental and Technical analysis these concepts will get more clear. So for now if you follow school of one then try to combine both.