A valued reader send this question:
I am a new trader in business, actually a housewife.
Could you please guide me on my stock holdings? Also, could you guide me on how to learn trading?
It’s good to see your enthusiasm and interest in this difficult profession, despite being a housewife. Trading and Investing are two different beasts and tough business at that. Lot of people confuse and mix-up investing with trading or vice versa.
A concise definition of investing is to buy and hold assets like Stock, Bond or Real-estate for long term for wealth generation, whereas trading is flipping the asset in a short time to make a quick profit for income generation.
Just to give a common example, Mr. Warren Buffett or our famed Mr. Rakesh Jhunjhunwala are investors, in the sense that they buy a company or shares in a company and hold it over many years for wealth generation.
Whereas traders buy a stock or even short-sell a stock and close the position within minutes, hours or days. With the advent of electronic trading, average holding position for stocks is as short as 11 seconds. i.e. computers trading on Wall Street buy and sell within 11 seconds or less to make quick profit.
Please remember that when you are buying or selling a stock, you are directly competing with a large fund house or a proprietary trading desk or a hedge fund, which employs dozens of experts such as fundamental analysts, technical analysts, economists, programmers and also have access to lot of inside information. Retail investors or traders are neither formally trained nor have access to superfast source of information and data.
With all these drawbacks, how does a housewife make money in stock markets?
It is neither impossible nor difficult, but requires a sustained effort on one’s part to understand markets and create strategies which work for you. Everyone can win in the markets, simply because nation’s economy and companies grow with a decent percentage growth each year. Hence stock markets reflect this growth and generate more wealth each year, which then get re-distributed within investors and traders community as dividends or trading gains or capital gains. So there is money to be made, but how do you get a pie out of this?
First step is to know thyself, whether you are a Trader or an Investor? It’s a good idea to focus on either on these skills, but not on both especially as a beginner. As an investor, you would analyze fundamentals of company and invest for atleast 6-12 months in a stock for a decent capital gain on your holding. The skills required for an investor are understanding company’s business, ability to read simple financial statements like Balance Sheet, P&L statement and Cash Flow statement and some simple financial ratio analysis. Strategies such as Value investing and Growth investing would help an investor to make money in an undervalued stock which rest of the market is ignoring. For example, some of the small-caps and midcaps stocks are undervalued in Indian markets currently and one can take a 12 month view to make money on these investments.
As a trader, your world is markedly different. A trader has only one skill, the ability to read a chart or price action, which is also known as technical analysis. A trader would enter or exit a stock multiple times during a day and aim for quick fire profit making. As a trader, you often don’t focus on fundamentals of a company, but select a bunch of stocks which are volatile and move sharply during the day to enter at low price and exit at slightly higher price or vice versa. Traders can even short-sell or sell a stock, which they don’t own to make profit when the stock falls in price.
So, these are two entirely different skills. A stock investor is a careful analyst, poring through financial data and doing days of careful analysis to make a investing decision for medium term or long term, based on company’s fundamental and growth. Whereas a trader is a quick doer, who takes split second decisions and buys and sells several times during a day and aims for quick profit by the end of the day. One should choose either investing or trading, based on his or her temperament and focus on learning either fundamental analysis or technical analysis to profit from stock markets. Everyone can be successful in this field, and only prerequisite is focus, hard-work and dedication on your part, and yes, some good luck as well.