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Investment or Trading which is better for Beginners
If you are new to the share market, some of the experts have told you that investment is the better option, and you may have seen some experts who say trading is better.
Both investment and trading have their own advantages and disadvantages. It is your responsibility to determine which one is suitable for you.
So in this article, I am going to provide you with a brief explanation about investing and trading. At the end of the article, you will have a clear idea of which is perfectly suitable for you.
What is Investing ?
Investing means you are buying a share in a company or buying a bond, land, gold, treasury bills, certificates of deposits etc. If the value of an asset you invested in grows, you will get profit. Otherwise, you will be in loss. By conducting research on which asset or a company shares will give you profit, is known as fundamental analysis
What are the types of investment?
There are many types of investments in the finance world, but I am going to cover some important and popular ones.
- Mutual fund investment
- Bonds
- Money market funds
- Index funds
- Equity
1.Mutual fund investment
What is mutual fund?
A mutual fund is when a mutual fund company assigns a fund manager to collect funds from investors who want to invest their money but lack knowledge about investments. The company pools funds from thousands of people and divides the money into several parts, which are then invested in various assets such as stocks, bonds, and money markets. The company charges a small fee for investing your funds. If the fund manager invests your money in profitable assets, you will earn a profit; otherwise, you will incur a loss.
How to choose correct mutual funds to invest?
You must conduct fundamental analysis on mutual funds before investing. Fund managers typically disclose the level of risk associated with the mutual fund and the expected returns. Additionally, you should examine the assets in which they are holding their funds. After that, you should assess the fund size and, finally, learn about the fund manager. These are the fundamentals you must analyze before selecting a mutual fund.
Advantages of Mutual funds
- The biggest advantage of mutual funds is diversification. By investing in mutual funds, you are spreading your money across various sectors and assets, resulting in a balanced portfolio.
- Your fund are managed by well-trained professionals who have been investing money for years. They will invest your money with a proper plan, so you don’t have to worry about planning.
- Mutual fund give you accessibility, so you can start with very little money. You can begin investing money as a SIP on a monthly basis, and with enough time, it will grow bigger.
- Mutual fund companies are required to disclose their holdings, performance, and fees regularly to their investors so you will have a complete transparency
Disadvantages of Mutual funds
- The main disadvantage of mutual funds is that they will charge you various fees such as management fees, operational expenses, etc., which can minimize your returns. So you must understand the fee structure before investing.
- If your mutual fund is managed by a fund manager who lacks skill in investing, it can result in potential losses. You do not have full control over your portfolio, which is another disadvantage of mutual funds.
- Mutual fund investments are subject to market risks. So even if a skilled fund manager is handling your fund, you must be aware that you still face market risk, which can result in losses if the market does not perform as expected.
- Sometimes, you may not like the strategy which your fund manager was used to invest, and you may have a better investment idea, but the fund manager will not listen to their investors, and the conflict will occur naturally in mutual funds.
2.Bonds
What is meant be investing in bond?
Bonds are mostly issued by corporations or public sector companies that want to raise money. By issuing the bond, they will pay interest periodically and repay you the entire face value on a specific date.
How to invest in bond?
In the US, you can buy bonds directly from the US Treasury. This allows you to purchase Treasury bonds directly through the service called Treasury Direct, enabling you to bypass a broker and avoid paying brokerage fees.
Advantages
- Investing in bonds provides you with a fixed income stream at regular intervals by providing you interest.
- Bond investments are considered to be a safer investments than stocks as they have a higher claim on assets in case of bankruptcy
- It will provide you with great liquidity as bonds are traded at public exchanges, making them easy to buy and sell.
Disadvantages
- When the bond price increases, the interest rates decrease, and vice versa. So there will be an element of risk if you sell the bond before the maturity date.
- If the inflation increases faster than the bond’s yield, then the return on investment decreases.
- Bond prices can be affected buy market moments, economic conditions etc., just like any other investment.
3.Money market funds
What is money market?
Money market is a short term, high liquid and low risk investing instrument that will stabilise your fund and allow you to park your money for a year or two. Money market investment includes, buying treasury bills, Certificates of Deposits, municipal notes etc.
Advantages
- Money market investments are considered to be a safer investments as they provide low risk, high credit quality to the issuers.
- Money market will provide you predictable results, especially compared to riskier assets such as stocks.
- Money market instruments are subject to strict regulations and oversight which will provide investors some additional safety for their money.
Disadvantages
- Since the money market investments are considered to be safer investment option, the returns will be very less when compared to stocks, bonds and mutual funds.
- Money market investments are not designed for long term investments.
Index funds
What is index fund ? An example for index fund is s&p 50. s&p 50 is the total benchmark index value for the top 50 most money making companies in US such as Alphabet, Meta, Amazon, Microsoft etc., By investing in s&p 50, you are investing your money in the index funds which was created by the value of these companies. As long as these companies makes profits, you will get consistent returns.
Investing in index funds are generally considered to be an ideal investment plan for a beginner especially who are learning about stock markets. Investing in index funds such as s&p 500 may potentially give you long term consistent returns. You can start by investing $10 a month. In a long term, your money will consistently grow.
Advantages
- When comparing to invest in individual stocks, index funds having a low risk rate.
- Investing in an index fund is a very easy process to start. Anyone can create an account with a stock broker and start investing.
- You don’t need to have a very good knowledge in finance to research about index funds. It is a complete beginner friendly process.
Disadvantages
- The main disadvantage is if the market crash happens, the top money making companies are the first who are going to suffer. Hence you may also encounter loss.
- The index funds are generally very sensitive and the geopolitical events such as wars, pandemic will impact them largely.
5.Equity
The main aim of this article is to check which one is better for beginners? Investment or trading. If you are investing in the above 4 mentioned instruments such as index, mutual fund, bond and money markets, you may not get rich very soon. But if you pick a correct stocks and do some proper fundamental analysis and invest, you may get rich sooner than the other streams.
But how to do fundamental analysis if you are a complete beginner?
You have to conduct some research about the company such as promoter’s holding, P/E ratio, company debts etc., I have written a detailed article about fundamental analysis you can read the article here.
Advantages
- If you buy a correct stock for a fair price, you will generate consistent returns.
- If you hold the stocks in your portfolio, the company will give you dividend periodically for all the investors so it will be an additional bonus for you.
- Legendary investors like Warren Buffet, Peter Lynch, proved that you will make millions of dollars by investing in stock market.
Disadvantages
- If you made a wrong analysis or a wrong call, you will encounter some serious loss.
- Unlike other instruments, investing in equity having a very big market risk.
Why most people did not make profit in investment?
This is the main reason as most of the retail investors are not having a proper plan to invest. At early stage, they will invest with great enthusiasm, but once they started to lose money, they will give up and withdraw their funds. Market will not steadily move upwards. Somedays it will go up and some days it will come down. So you need to give time for the market to grow your money
Beginners do not believe in their judgement and they will start to search share market courses or they will join any investment course to learn. But more than 90% of the people are scammers who are telling themselves as an expert. Instead of believing in some unknown person, try to learn basics from the text book and start analysing and believing yourself will give you good results.
Not believing yourself is a crime in investing world but also being over confidence is another crime. If you are trying to be over smart, you will do over analysis which tends to make wrong decisions. So don’t do over analysis just do the basic research about the company just like I told you in other article
90% of the retail investors failed in share market because all the profits are taken by the corporate companies. Similar to the retail investors, corporate companies are also doing the fundamental analysis and invest their money. Since Foreign investment institutions(Fii), Domestic investment institutions(Dii) having a set of experts team, they know where to collect exclusive information or data. So they will make more profits which means retail investors will suffer loss.
To over come this, you should practice how to follow, FII, DII and you must be updated about every little finance news and politics.
Trading
A short definition of trading is, you are buying a stock and keep that stock for a short period of time and sell it for a profit. In some cases, you will sell the stock within a day or some times you will hold it for a month depending on the type of trading.
For example if you have $10000 and you are trading in a company xyz, the current market price is $100 per stock. You will get 100 shares for $10000. After 1 or 2 hours, If the share price increased by 1% that is $101 and you are selling all the stocks for $101.00 means you are earning $100.
It seems like a very easy money making process but it is more riskier than investment.
Types fo trading
Trading can be classified into three types in share market:
- Equity trading
- Futures trading
- Options trading
I will explain one by one and then we will compare investment with trading to know which is better.
Equity trading
Equity trading means you are buying a stock directly from the stock market and selling it for profit. In trading instead of doing fundamental analysis, we have to do technical analysis.
Equity trading can be classified in to three types:
- Intraday trading or Day trading
- Swing trading
- Positional trading
Intraday trading
Intraday trading is also known as day trading means, you have to buy the stock and sell it on the same day or you can do short sell and buy it on the same day.
To do intraday trading you must technically strong about trading concepts such as price action, volume, support and resistance points etc. For investing you should know about fundamentals like company’s background, debt, P/E ratio etc., but all those things does’t matter in trading.
All you can do is to analyse in which way the market will go. Once you finalised your decision, you can buy/sell the stock and close the trade with smaller profit.
Short selling
In intraday trading, you can earn money if the market goes anyway like bearish and bullish. If the market is bullish, you can buy stock for $100.00 and sell it for $101.00 and get one dollar profit and it seems to be logical but how do you earn money if the market is bearish. If the market goes downwards, you can earn money by short selling.
What is short selling?
Short selling is nothing but selling the stocks you don’t have. But how it is possible to sell the stocks which I don’t have?. Let’s see an example. Suppose you are predicting that amazon share will go downwards for this day but you don’t have any amazon stocks to sell. But you can still put sell order and let’s say you put sell order of 100 quantity. Once the order triggered your broker will generally hold some stocks for them and they is sell those stocks on behalf of you.
Now in your account the balance will show you have -100 quantity of amazon shares. You must buy the stocks within that day. If you don’t buy the stocks, your broker will auto close your trade and put some penalty to you.
If the amazon price comes down as you expected from $169.51 to $168.51 meaning that you sold that stock 100 quantities for $169.51 and buy is for $168.51 and you will earn $100.00. This is called short selling.
When it comes to trading, you can earn money from trading even if the market goes any direction.
How to make profit is intraday trading
Since intraday trading is a very short term process, it involved very high risk. So making money in intraday trading is very tough and more than 95% of the traders lose their money in intraday trading.
So how will you make profit in intraday trading?
As I told you 95% of the people failed, so you should try to follow the remaining 5% people. But who are those 5% people?
Those 5% who are consistently making profits in intraday trading are called corporate traders or operators. You should start following operators and try to trade along with them and it is the only way to make profit in intraday trading
Advantages of intraday trading
- The main advantage of intraday trading is you can earn money in both bullish and bearish markets.
- Intraday trading is one of the popular ways to become rich so quickly.
Disadvantages of intraday trading
- If you make even a very small wrong move, you will lose your money.
- There is a possibility in intraday trading where you may lose your entire capital in a short period of time.
- Intraday trading having the second highest market risk after options trading, compared to any other investment or trading types.
Swing and positional trading
Swing trading
When you decide to do swing trading, you should buy a stock and you should hold it for some days and wait for a big bull swing. The big swing may happen within a day or it may take weeks or more than a month. But be sure to do small fundamental analysis to minimise the risk. Once you get a big bull swing, you should sell the stock for the profit.
Example for swing trading: If you buy a 100 stocks at amazon at $169.50 and you did some fundamental research and found amazon is a strong company and it will not give you loss at the longer run. Once you bought the stocks you should not sell it in a same day like intraday trading.
You should wait for a bull swing to happen and let’s assume they stock getting a bull swing on 20th day and the price jumps to $175.50 and you are selling the stock. In this case, you will earn $6.00 per stock and $600.00 total earnings.
If you don’t get a bull run within a month and stock price goes downwards, you have to make a decision about the fundamental analysis you did is correct or wrong. If you think, you did the fundamental analysis correct, try to do some more research and make that trade as a long term investment. After some months, once you made profit you can sell them and go for next trade.
Positional trading
Positional trading is similar to swing trading but the main difference is you should not buy the stock straightaway. Instead you must do some technical analysis and try to determine the correct support point. Since the market will go both way, you should wait for the stock price to come down for the correct price.
Example for positional trading : If the current price of amazon is $169.50, you should wait do all the analysis similar to swing trading but instead of buying you should wait for correct support point or correct position to buy. After a week if the price of the stock comes to $164.50, you may take that position.
Once you take the position you should hold the position. Instead of single bull run, you should wait for multiple bull swing. It may take 2 or 3 months and if the stock price goes to $175.50 after 3 months, you will get $1100.00 as your profit for that 3 months.
Similar to swing trading, you should do fundamental analysis if the price goes downwards and make it as a long term investment. Once you made profit, you should exit from your position and go for the next trade
Advantages of swing and positional trading
- Unlike intraday trading, swing and positional trading will give you full control in your trade.
- Market risk is lower when compared to intraday, futures and options trading.
- If you learn it correctly, it will give you some pocket money every month consistently
Disadvantages of swing trading
- It is not a quick rich scheme. Making profits in swing and positional trading will take so much time and effort.
- Sometimes, the bull swing may last only for one hour or two so if you missed it you have to wait for another bull swing.
- Swing and positional trading needs so much patience. You may need some months to make profit so if you are in rush or in panic, you will lose your entire capital.
Futures trading
The simple definition for futures trading is you are buying a derivates of a stock from the future. Stock brokers will sell you the future contracts with fixed price.
Example for futures trading : Let’s assume, Today is March 1 2024 and If the current market price of amazon is $169.50 and if the broker sells you futures contract of amazon 100 quantity for the month of June for $175.50 and you are buying the contract. The broker will charge you anywhere around 10% to 50% from the original price($1775.00 to $8775.00)
The real meaning of buying this contract is you are buying 100 shares of amazon at $175.50 on June month even if the price of the stock in June is lower than $175.50.
When the contract expires on June month and the stock price goes above $175.50, you will get profit. Let’s assume at June 20 the stock price of amazon is $177.50, you will get $2.00 profit per share which means you will get $200.00 profit. Similarly if the stock price goes down at the end of June, you will lose your money.
Futures selling
Similar to buying the futures contracts, you can even sell the futures contract. In this case the stock price should move downwards instead of going upwards.
Let’s take the same example and in this example, instead of buying at $175.50, you are selling at $175.50 and at the end of June, the stock price should not exceed $175.50. If the stock price is $173.50 at the end of June, you will get $200.00 profit and if the stock price goes $177.50 at the end of June, you will lose $200.00.
Advantages of futures trading
- The broker will charge you only 10% upfront. So you will have more opportunities to buy different futures contracts and make more money.
- Similar to intraday trading, you can earn money in both bullish and bearish market.
Options trading
What is meant by options trading? Options trading means you are buying a derivative contract from the seller by paying a non refundable premium to the seller. As per contract the seller was agreed to sell you the stocks at the particular price known as strike price despite the current market price.
It may sound like similar to the futures trading but in Futures trading, you are buying stocks from the future date but in options trading, you are just paying the non refundable premium to the seller and buy a contract.
Let’s see an example so that you will understand it better.
Let’s assume that the market price in March 1st 2024 of amazon is $165.00 and you are predicting that amazon will reach $170.00 by the end of June. But if you invest the money in futures contract, you have to pay at least 10-15% value of the derivatives upfront.
But in options trading, let’s assume a seller is selling options contract for $168.00 as a strike price(fixed price) for the month of June and the contract contains 100 shares. You don’t have to pay 10% price upfront but instead the seller will set a premium amount which is non refundable. Let’s assume, the seller will charge $400.00 as a premium.
Since the premium is much lower when compared to options buying, you can buy around 4 contracts for $1600.00
Possibility 1
At the end of June if the price of amazon is increased to $175.00, you can buy those shares from the seller at strike price $168.00 and sell it on the current market price of $175.00. Which means $7.00 profit per shares and you will get $700.00 in total if you buy one options contract. If you buy 4 options contract you will get $2800.00 profit. If you subtract the premium, you will get $1200 as your net profit
Possibility 2
If the market price did not increased, you need not but those shares. You have a choice to buy it on the strike price or you can just leave it. In this case you will lose your premium of $1600.00
Since it may sounded like a complex one, you will earn more money by practicing it. Options trading involves very high risk so it is not recommended for beginners to do options trading right away.
Advantages of options trading
- Options trading can make you rich very quickly than you think.
- Since you have paying low premium, you can buy more contracts from different stocks to minimise the risk.
Disadvantages of options trading
- Options trading requires so much experience and skills in share market and you should have to follow the market for the longer time to make correct decisions
- Options trading involves very high risk compared to any other types of trading.
Till now we saw the clear explanation about investment and trading. Now you might have an idea to choose which one is suitable for you.
Now I am going to compare investment with trading to check the advantages and disadvantages and find out which is suitable for beginners who are completely new to the stock market.
Comparing Investment with trading
While both investment and trading having their own advantages and disadvantages, let’s compare them one by one
Analysis
To do a long term investment, you should do fundamental analysis and for trading you should to technical analysis. Fundamental analysis will be useful for futures and options trading.
For investment you should follow all the finance news and you must be up to date. For trading you don’t have to follow all the finance news.
Skills
In order to do technical analysis you should need more skills and experience. You can easily do mistakes while doing technical analysis of a stock.
But when it comes to fundamental analysis, you don’t require skills, instead you should know all the informations about the company or the mutual fund which you are going to invest.
Corporate companies involvement
Corporate companies will involve in both investment and trading but operators in trading will control the entire chart for the period of time so you must work hard to follow the operators in order to make profits in day trading.
When it comes to investment, even though both FII and DII will be ahead of retail investors, if you invest in right company and allow your money to grow, you will earn profit at the long term. So corporate involvement in treading will be difficult to tackle comparing to investment.
Get rich quick
Investments are usually designed for long terms. Some investments like money market may give you short term profits but it will give you very small returns.
But trading will make you rich sooner than you think. But in order to get rich quick, you must develop some unbelievable technical skills and experience in share market
Consistency
Investment in index fund or a correct mutual fund gives you consistent profit and also if you invest in an equity stock for the correct price, it will generate consistent returns along with dividends.
Trading will not give you consistent returns. Some day you will make profitable trades, some day you may not have profitable trades and some days you may not have an opportunity to trade. So patience is very important for trading
Advice for beginners
- I did both investment and trading for more than 6 years. So my personal opinion is investing is much better than trading if you are a complete beginner.
- My personal advice is you should see the long term and allow your money to grow and don’t try to make profits in shorter period of time.
- If you want to trade, try to be patient. You must develop your character, skills, attitude and personality. You must have patience with never give up attitude to become a successful trader.
- For both investment and trading, consistency is the main key. If you are consistently implementing and testing your strategy, you will become successful.
- When it comes to trading, you must practice for at least one year with paper trading account. Once you are so confident about your strategy, you can do real trading.
So the conclusion is investment is better than trading in my opinion. If you think trading is better option, you can do trading but remember to follow the above steps.
Useful links
- Check out our article to know how to choose a mutual fund
- If you want to learn more about fundamental analysis, this article will help you
- This article will teach you, how to make consistent profit in day trading
- I did fundamental analysis of TCS. You can check how I did that
- Article from investopedia about options trading for beginners
- Article from Motilal Oswal about future trading
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