The Indian stock market intrigues many. Though equity market is considered as a place to multiply money; lack of knowledge and caution may also result in huge losses. If dealt cautiously, all types of investors can earn handsome returns, be it the long/medium term investor or the short term trader.
Trading and investing are two methods of attempting to make money in the Indian stock market depending on the time period for which you are ready to hold your investments. In simple words, trading is buying at a lower price and selling at a higher one in a relatively short period of time. This could be within a few minutes, a day or a few weeks. On the other hand, investing aims at building wealth over a longer period of time, generally 3 years and above.
Trading Vs Investing
The differences between the two methods of multiplying money are as below:
- Holding Time Period: Most traders take advantage of market fluctuations, significant news and small market mispricings to make profit. Therefore, trading rides mostly on the situation rather than fundamentals and hence the time period here is very short.
In contradiction, investing looks at business fundamentals and bets on the future of the same. As a result, investing is long term.
- Risk: Be it trading or investing, putting in money in the stock market always carries a certain amount of risk. However trading involves a higher risk, though with higher returns within a short period of time. Since trading involves taking advantage of the market situation, one has to be quick and precise to ensure money is made.
In investing, the risk involved is comparatively lower. The returns too may be slightly lower here, but the longer the holding period, the more compounding interests and dividends yield. Daily market fluctuations and sudden crashes do not affect long term investments.
- Knowledge: Once again, both methods require knowledge, but slightly different. Trading needs you to be very well-informed about the current happenings in the market and have technical knowledge of market movements to be able to benefit from situations.
Investing needs you to be knowledgeable about the fundamentals of businesses and economy to make sound decisions on long term investments.
Therefore, trading requires more understanding of market movements, while investing needs knowledge about business fundamentals.
- Capital Growth: Both, trading and investing are methods to make money. However, the capital growth in both cases may not be similar. While trading may yield profit more often in a short time, investing earns money through compounding and dividends over a period of time.
- Capital Gains Tax: In India, the government taxes the profits made on short term capital gains (STCG) and long term capital gains (LTCG) differently according to the Income Tax law. If you hold an investment for over 12 months before selling it to make a profit, then it is liable for LTCG.
STCG is taxed at regular slab rates of an individual’s income. The short term capital gain is added to the gross total income and paid accordingly after deductions. LTCG on the other hand is taxed at 20%.
Multiplying money in the Indian stock market
Any method to make money in the stock market can be very tempting, but always remember, it is easier to lose money than make money here. Therefore, constraint is always advised to minimize risk and it is necessary to be wise while trading and/or investing.
- Read, research & learn! Always be armed with knowledge & information when you want to trade in the Indian stock market.
- Practice constraint. Never get too greedy or too hopeful; always stick to your targets and stoplosses.
- Be quick & precise when it comes to taking advantage of a situation in the Indian stock market to make money.
- Put in only as much money in trading as much as you can afford to lose. Never put anything beyond that.
- Be aware of the charges. Know the fees charged by your brokers so that it does not eat up much of your profits.
- Be aware of the taxes. It is advised to know the taxes your profits will be liable for.
- Read, research & learn! Knowledge takes one a long way, especially if it is about where to invest your money to make it grow.
- Know what you want. It always helps in understanding your financial goals to make good investment decisions.
- Be patient. Do not allow market fluctuations, crashes, lull or the likes to invite panic. A good investment will remain so, despite the storms.
- Track your investments. A long term investment only needs to be tracked over time to ensure it remains a good bet to create wealth.
- Know the charges & taxes. You should always be aware of anything that may eat into your profits.
While short term trading can be thrilling and exciting, a long term investment can help fulfill dreams. Attempting to make money out of market situations or on business fundamentals, as long as money is made, it works for all!