Most beginners or first-time investors are unsure whether they want to invest for the long term or are better off trading intraday or over a period of few days, weeks, or months. This lack of clarity becomes and obstacle in planning and organizing their investments.

For example, Mr. Chintamani bought 100 shares of ABC stock for short-term trading at Rs.500 per share and continues to hold the shares when the stock is trading at Rs.450 per share, leading to a paper loss of Rs.5,000 (Rs.50 loss X 100). Although Mr. Chintamani bought this stock for trading purposes, he feels that he can onow hold onto the shares as an investment, in the hope that the price one day rises to, or exceeds, Rs.500 and begins to generate profits.

However, over the next three weeks, ABC stock plunges and comes closer to Rs.400. Mr. Chintamani ends up with a huge loss of

This example clearly shows how mixing trading and investment strategies can lead to incorrect decisions. In this case, Mr. Chintamani did not bother about a stop loss level or a price at which he would book his losses instead of waiting for prices to recover and then continue to lose. Although a simple example, several cases exist in which mixing up trading and investing strategies has backfired in a significant way.

For example, Mr. Chintamani bought 100 shares of ABC stock for short-term trading at Rs.500 per share and continues to hold the shares when the stock is trading at Rs.450 per share, leading to a paper loss of Rs.5,000 (Rs.50 loss X 100). Although Mr. Chintamani bought this stock for trading purposes, he feels that he can onow hold onto the shares as an investment, in the hope that the price one day rises to, or exceeds, Rs.500 and begins to generate profits.

However, over the next three weeks, ABC stock plunges and comes closer to Rs.400. Mr. Chintamani ends up with a huge loss of Rs.10,000 (almost double the loss seen on the same day).

Now, let’s spend some time understanding the difference between investors and traders.

Investors vs. Traders

1. Time Horizon
Investors: Generally, most financial advisors and experts advocate that investors buy equities for the long term (i.e., between three and five years). However, one can also invest for the medium term (one to three years) or the short term (less than one year). The choice of time horizon depends on one’s savings potential, income expectations, risk appetite, and other factors.

Traders: There are different types of traders:

  • Intraday traders (who generally buy and sell within a day or a trading session)
  • Short-term traders (who trade for a few days to a couple of weeks)
  • Position traders (who trade over a period spanning a few weeks to several months)

In addition to the time horizon, trading style can differ. The above classification is not strictly defined or sacrosanct but is just to gain a broad understanding. An individual trader may also use two or more strategies.

To put the above in a nutshell, Investors are like marathon runners whereas traders are like sprinters.

2. Motive
Investors: Investors’ main motive is to benefit from medium- to long-term growth of a company or stock. Returns can be in the form of dividends or price appreciation. However, other forms of returns may exist, such as bonus shares.

Traders: The main motive of traders is to gain from the difference between the purchase price and the sale price. Therefore, traders either buy low and sell high (called a long trade) or sell high and later buy low (called a short trade) to profit from the price difference.

3. Risk Management
Investors: Investors use various techniques to control risk, including:

  • Diversifying an investment across a number of stocks or sectors (to avoid loss from extreme movements in individual stocks)
  • Use of stop loss or an exit price to liquidate loss-making investments

Traders: These professionals use various techniques, but the key is to have a stop loss for every trade to be able to limit your losses. Some traders also buy or sell once the stock crosses a support or resistance level. [Support is seen as an imaginary base or floor price whereas resistance is seen as a ceiling price.]

These are the key differences in the strategy of investors and traders. Other differences also exist, which are not important for us at this stage. Let’s shift our focus on whether you should be a trader, an investor, or both.

Being a Trader
Acquiring the skills to trade stocks takes a lot of training and experience. Why? For example, traders are professionals who spend all of their time as a dealer/trader for a brokerage company or have their own trading firm or account for this purpose.

You could become an employee of a brokerage firm or work independently for yourself or for a franchise. Most traders have to be glued to the market for the entire time that it is open, from 9:00 a.m. to 3:30 p.m.

Traders do a lot of background work or homework before the market opens by tracking the Asian markets. They also need to follow the European markets in the afternoon and the U.S. markets in the evening after 6:30 p.m.

Why do they do this? Simple. Any major market trend (upwards or downwards) can be capitalized on if one closely follows the international markets. For example, if U.S. markets fall by 3% today, the trader could take a short position on Nifty Futures or certain stocks when the trading session opens at 9:00 .m. tomorrow.

Independent traders have a lot of flexibility in choosing their work hours and trading strategies; however, they still have to work full-time to generate significant earnings on a regular basis. You need to prepare for this kind of lifestyle if you want to become a trader.

Being an Investor
To be an investor, you do not necessarily need to spend all of your time studying markets. You can also take assistance from professional advisers to build your portfolio and/or use your own knowledge or skills.

As an investor, you must have the following key motives in mind:

  • Invest for the medium to long term: Which can range from one year to three years or more. If you hold the stock of a large cap company that is an industry leader, you could hold onto it for a very long time, or for life. The famous investing guru Warren Buffet used to say “My holding period is forever”; however, for small investors, one to three years is realistic. If a stock is doing well, you can extend your holding period, and can book profits when a downtrend in the industry begins or issues begin to arise with the company.
  • Buy or Invest Systematically: The best way to start investing is to start slow and get comfortable with the process instead of taking a big-bang approach. Further, you should not try to buy a stock in large quantities in one shot, instead you can stagger your purchases by buying on dips in prices and gradually accumulating shares over time to help you deploy your savings in different stocks instead of committing your funds all at once.

For example, you can invest a fixed amount, say Rs.5000 every month. However, if your income or savings increase or if stock prices become attractive, you may consider investing more. Mr. Peter, who wanted to boast of his stock picking skills, bought 100 shares of Infosys at Rs.2500 on July 2, 2012. When he checked his account on Aug 29, 2012, he was shocked to see that the price had declined to Rs.2387, translating to a loss of Rs.113 per share, for a whopping total loss of Rs.11,300 (113 X 100).

Had Mr. Peter invested gradually, he could have bought Infosys at different lower price points and reduced his holding cost. This example shows how investing is not a one-time trade but a slow and steady process of wealth building.

  • Regular Review of Investments: This activity is an important part of portfolio management and includes a wide range of activities, such as:
    • Monitoring news or updates from the company or about stocks
    • Keeping track of any news in the industry (for example, news of the 2G scam that affected the telecom sector, mining scandals affecting mining/metals stocks)
    • Making changes to your portfolio mix by rebalancing different asset classes or stocks. For instance, if one stock comprises 20% of your portfolio, you can look at selling some quantity or adding other stocks to achieve diversification.

“We will discuss financial planning in greater detail in “Lesson 9: How to plan your finances and allocate your investments.”

Being an Investor cum Trader
People who are seasoned traders or investors with solid experience in markets can be traders and investors at the same time but is not recommended for beginners or small investors. People who already lead busy lives in other occupations should stay away from trading.

If you plant to be an investor as well as a trader, some of the key principles discussed above apply to this decision. However, a few additional points to remember are as follows:

  • Keep a separate account (or separate stocks) for trading or investment: Clearly demarcate your accounts for trading and investment to avoid mixing the two. Separating accounts ensures that your objectives and ideas remain clear for each. However, if you still want to keep the same account, you must distinctly know which stocks are for investment and which are for trading.For example, suppose you have invested in stocks A, B, and C and you trade in stocks X, Y, and Z. Assuming you have the same account for both, you should strictly avoid mixing the two activities, which means that you must not buy and hold X, Y, or Z and you must avoid trading in A, B, and C. Too many people have lost money by losing track of objectives or ideas for a particular stock.
  • Distinct Strategies: Being an investor requires a different strategy from the strategy for being a trader; therefore, you need to have a distinction in strategies or approaches.

By now, you have a clear idea of your core strategy. However, the focus of this course is only to enable you to become a smart investor. If you want to become a smart investor, you will find the next few steps quite interesting and practical.

The next step is to open your online investment or demat account, which we discuss in Lesson 6. Until then, feel free to visit the websites of brokerage or investment firms to understand the procedures for opening an account. We will then meet again to know how to “kick-start your demat account.”