The Informative guide to the basics of share market for beginners

Stock markets have become such a talked about subject of conversation nowadays, hasn’t it?

I mean, be it at dinner parties or casual lunches or reunions with friends or family, stock markets just creep into the conversation somehow.

And if you don’t know too much about basics of share market, it’s bound to be a little embarrassing. I mean, all you can do in such situations is smile and nod along, right?

I’m writing this blog today with the intention of clearing up some basic concepts that a lot of people get wrong.

Meaning of stock trading and investing:

Let’s start at the beginning.

Do you know what the difference between a stock trader and a stock investor is?

Most people use the words “trader” and “investor” interchangeably. However they are two very different activities. While traders and investors participate in the same marketplace, they perform two very different tasks using very different strategies. Both traders and investors are however, essential for the functioning of the stock market.

Stock traders are individuals engaged in the trading of equity securities, or the transfer of financial assets, either for themselves or for someone else. On the other hand, stock investors are individuals who use their own money to purchase equity securities which offer potential profitable returns in the form of capital gains.

Is this getting a little too technical?

Let me break it down further.

A stock trader is a person who buys a security, and it turn hopes to sell it for a profit. An investor, however, who buys the stocks of a company, and looks for it to grow in value, thereby increasing the value of the share.

Is this a little better?

It’s very simple, really.

Traders buy stocks and shares with the intention of selling them in the neat future at a higher price. Investors buy stocks with a longer time horizon. They wait for the stock to increase in value.

Let me give you an example.

Are you familiar with the story of Jack and the beanstalk?

When Jack’s cow stops giving milk, he goes to the market to sell it and exchanges it for a handful of beans.

Now if Jack had taken the beans back to the market and sold them to someone else for a higher price, he would be a trader. If, however, he went home and planted the beans, he would be an investor.

You guys already know how this story ends, so you would obviously pick the latter option, wouldn’t you?

It isn’t always that black and white in the stock market, though.

You won’t know whether the beans you’re getting are magic beans or regular beans.

Anyway, I’m not trying to tell you whether you should be a trader or an investor. I’m just trying to explain the concept to you.

Let’s carry on with the differences between stock traders and stock investors, shall we?

Stock investors are the market participants with whom the general public most often associate the stock market. Many investors believe in the buy and hold strategy. This implies that these investors buy stock ownership in a company and hold onto these stocks for a long time, generally years.

You may be thinking why do these people behave in this manner?

What makes stock investors tick?

What do they have to keep in mind while making such investments?

Good question.

Stock investors generally consider themselves with two things.

  • Value: Stock investors must keep in mind whether a company’s shares represent good value. They have to decide whether or not the company is worth investing in.
  • Success:Investors must measure the company’s future success by considering its financial strength and evaluating its future cash flows of the company.

Investors use fundamental analysis for the selection of the stocks.

Definition of fundamental analysis by investopedia:

Fundamental analysis definition by investopedia.png

Here are our two videos that cover basics of the fundamental analysis.

Basics of Fundamental analysis for beginners: Part 1

Basics of Fundamental analysis for beginners: Part 2:

Seems like a lot of work, doesn’t it?

Alas, as wise people have said time and again, there is no success without hard work.

Just in case you were wondering, stock traders also have to do a lot of work.

I’m getting to that part.

Stock traders, as I said before, are those market participants who purchase shares with a focus on the market rather than on the company itself. Such individuals try to profit from short term price volatility with trades lasting from several seconds to several weeks. Generally, stock traders are professionals.

There are four basic types of trading in the stock market:

1) Scalp Trading: In scalp trading, traders hold stocks from few seconds to few minutes
2) Intraday trading or day trading : As the name suggests, day traders buy & sell stocks on the same day with no overnight positions.

3) Swing Trading: In swing trading, traders hold the stocks from few days to weeks
4) Position Trading: Position traders hold the stocks for few months

Let me tell you what stock traders concern themselves with.

After all, just like stock investors, their pathway is not strewn with roses.

Stock traders generally keep four things in mind.

  • Price patterns: Stock traders look at the past price history in order to predict future price movements. This is known as technical analysis, by the way.
  • Supply and demand: Stock traders monitor their trades intra-day to see where the money is moving and why.
  • Market emotion: Stock traders play on the fears and emotions of amateurs. For example, they bet against the crowd after a large move takes place.
  • Trader support: The largest stock traders are actually hired to provide liquidity through rapid and frequent trading.

To analyse stocks, traders use technical analysis. Definition of technical analysis by investopedia:

Fundamental analysis definition by investopedia.png

Technical analysis is a methodology for forecasting the direction of prices through the study of past market data, primarily price and volume.

So, as you can see, being a stock trader involves no small amount of work either.

Ultimately though, the stock traders are the ones who provide liquidity for the investors. Traders are a very necessary part of the stock market. Investors, too, form the basis on which traders decide whether to buy or sell. The two groups combine to form the financial market that we are familiar with.

Difference between stock trading and investing:

Trading Investing
1. Trading is for the short term Investing is for the long term
2. Trading is considered as a business & hence taxable. Flat 15% tax             on the profit if shares are held for less than 1 year. Intraday trading is taxed as per the tax slab. Profit is tax free if holding period is more than one year
3. Traders use technical analysis to analyze the stocks. Investors use fundamental analysis to analyze the stocks
4. Trading is like post mortem as traders use historical price & then           buy stock on that basis. Investing is like diagnosis as investor analyses the company thoroughly & then take decision.
 5. Traders provide liquidity to the investors Investors provide volatility to the traders.

Do you understand the difference between traders and investors now?

It’s very simple, really, isn’t it?

The next time someone around you uses these terms interchangeably, you’ll correct them and set them straight, won’t you?

You can learn more about the basics of the share market here.

Well, this is where I sign off.

Now that you understand the fine difference between traders and investors, its up to you to decide which one you want to be. My advice would be to read up about both categories and then take short trial runs to see which one fits you better.

Let me know which one fits you better. If you want to add something or leave a comment, feel free to do so. Until next time then, happy trading/investing!

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