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Trading vs Investment in Stocks

Trading vs Investment in Stocks
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Trading in the stock market is a temporary thing to do but what if you are doing it for a long time? Does it qualify to be an Investment rather than Trading? What is the actual difference between Trading and Investment? What are the different types of trades?

Here we have the difference between Trading vs Investment. There are different types of Trading and investment strategy. We have different types of trades in the stock market itself in different segments.

As we already discussed, the stock market is a place where shares or stocks can be bought and sold. When you are buying these shares or so-called stocks, you are buying the ownership of the company which is represented by the Equity shares of the company. And, that is why this segment is called Equity Segment in the share market. The stock market is not the primary market, it is a secondary market and there are different types of securities and equity is one of them.

How to Start Trading in Stock Market

What is Trading in Stock Market?

Trading means simply buying for the purpose of selling and then selling it. So, when you are buying securities in the market and then selling them for a profit, it’s a profitable trade. Let’s suppose that you buy 100 shares of Reliance Industries Limited at a price of 2500 and once the price of the share rises to 2800, you sell it. so, there is a profit of 2800 – 2500 = 300 x 100 Quantity which is equal to 30,000.

trading vs investment

It looks really cool to see a profit of Rs 30,000 but you just try to analyze it. Here you invested 2500 per share with a quantity of 100 shares which makes it an investment of rupees 2,50,000. And, you made a profit of 30,000 by investing 250,000 which is a profit of 12 % and this 12% will be the same whether you have bought 1 share or 100 shares. Here the share price of reliance went up by 12% from 2500 to 2800.

What is Intraday Trading?

In the above example, we got a profit of 12% and let’s suppose it took 12 days to show this kind of move. So, you have to wait for that period of time. Another way is that you figured out somehow that the price of Reliance is going to give a good upside move today. And, you purchase a good quantity of it let’s say at a price of 2500 and by the end of the day it goes till 2650 but you sell it somewhere at an average price of 2600 which means a profit of 10o rupees per share.

Now, you would say that with the amount of Rs 2,50,000 we can purchase a quantity of 100 shares which makes it a total profit of 10,000. But, the difference is that this is called Intraday trading, why? Because you are buying and selling the shares on the same day. The first form of trade is called swing trading where you purchased it and then waited for a few days to sell it.

Swing trading vs Intraday Trading

While Placing the order for purchasing the shares, you have to specify where you want to take the delivery of shares or just an intraday trade. In Zerodha, Delivery is called CNC meaning Cash and Carry, and Intraday is called MIS. If you are choosing CNC, it means you pay the full price of the shares and get the delivery in your trading account as we did in the first example by paying Rs 2,50,000 for 100 shares at a price of 2,500. If you are selling it after some as we did, it is also called Swing Trading.

But, in the second example, where we are buying 100 shares in Intraday i.e. MIS it means that we have to sell it before the end of the day. This is called Squaring off the position and if you don’t do this square off on your own, the broker will do it and will charge a penalty also. In Zerodha, the penalty is Rs 50 if you don’t square off your position before 3.20 p.m. The question is why would anyone specify it as an MIS trade where they have to square off the trade the same day? The answer to this question lies in Margin.

What is Margin in Trading?

First things first, you have to understand that Brokerage is a source of earnings for a broker. And, this brokerage is calculated as a percentage of the value of the trade. So, if you trade for the value of Rs 2,50,000, and let’s say the brokerage is 0.03% the total brokerage will be Rs 75 which is very low for a broker.

trading in stocks

Now, since you are stating to the broker that you are doing an Intraday trade, the broker knows that you will sell whatever you buy by the end of the day which makes no difference for the broker as it’s just a transaction of money, no shares are exchanged. The broker would offer you a margin of let’s say 20% which means that you are required to pay only 20% of the trade and the rest 80% will be financed by the broker which he will take back by the end of the day after squaring off.

So, now with the amount of 2,50,000 you can take trades up to 12, 50,000 as 20% of 12,50,000 is just 2,50,000, and the rest 10,00,000 will be financed by the broker. In this case, the broker will get his money back by the end of the day and earn a brokerage of  Rs 375 i.e. 0.03% of 12,50,000. And, you as a trader can buy 500 shares of Reliance at a cost of 2500/share, and with a profit of Rs, 100/share it becomes Rs 50,000 in total (500×100). This means a profit of 20% instead of 4 %.

What is Investing in Shares?

So, now we have an idea as to what is trading in equity where you can do intraday trading or swing trading. In intraday trading, you can make a lot of money but the problem is that you never know how it is going to be as only a limited time is there. And, if your position is at a loss, you have to square off at any cost. But swing trading is somehow safer as you can hold the position as long as you are not profitable.

Investing is totally different from trading.  When you have the intention of selling the shares it is trading and whatever money you earn is your profit and also taxed as profit in Income Tax also. But, on the other hand, if you don’t intend to sell the shares, it becomes your investment. Investment is for a really long period of time where the intention is to become the shareholder of a company. Let’s say you purchased Reliance at a price of 2500/share now. But, after ten years it can be even 25000/share where you are getting a profit of 10 times.

So, when you are investing, you have to find good companies to invest in as you are going to be there invested for a really long time.