Know the difference between investing and trading
PV Subramanyam of subramoney.com explains the difference between trading and investing and how both these form an important part of one's strategy for wealth creation.
Wealth creation happens by doing two things –
a. Earning well and having
b. Good wealth creation and management techniques.
Wealth creation has many steps and one of them is investing. Investing itself is a complex field. It involves studying a myriad of investment vehicles, terms, concepts, strategies and processes. It also involves study of various markets – equity shares, real estate, money markets, economics, etc.
In the real world of investing, this study is best accompanied by training, observing, and experience. The complexity of the science (or art?) and a lifetime pursuit of financial goals means there are no short cuts that are allowed.
However, since the very beginning of the equity market (as well as commodity markets), there have always been some individuals who have attempted to trade – stocks, options, commodities, currencies actively in order to capture more profits than losses.
Obviously most of them hoped to make a profit.
The trading in shares was facilitated by the ‘share broker’ – who was more like a cowboy not very long ago. At in the Indian context the last 2 decades have seen the introduction of technology and a lot of regulation.
This led to many new entrants in the ‘broking’ business, expanding the size of the market. Of course, new entrants meant lesser brokerage charges. This has led to a great expansion of the business in the hinterland of the country.
Too many individuals have confused the ability to trade or execute a transaction with the ability to effectively manage their investment assets.
Some one who has the knowledge, training, time, maturity and experience to perform financial planning may not necessarily need a planner, advisor or broker to buy or sell a share.
However, the reverse is not true at all. Being able to execute a share transaction in no way lessens the importance of knowledge, training and experience in the lifetime pursuit of financial goals.
If after creating a financial plan, the asset allocation and risk model allows you to do equity trading and the risk tolerance for it exists, only then should actively trading in shares be considered. To do otherwise is sheer foolishness.