Investment-savvy is in accumulating wealth with long-term plans; avoid short-cut temptations

You can always opt for index funds. These funds mirror the performance of the overall market, consisting of established companies with strong fundamentals and a track-record of solid performance

Chahe Aap Nivesh Karen, Ya Keejiye Vyaapaar,

Soch Samajh Ke Karana Hi, Fayadaa Ka Adhaar-Shivam

Translation: Whether you trade or invest. ‘Caveat Emptor’ policy is the best.

When it comes to navigating through the securities market, there are primarily two approaches: investing and trading. While both involve buying securities at a lower price and selling them for a profit, they differ significantly in their approach. Investing revolves around analysing the fundamentals of a company, whereas trading leans more towards technical analysis. Hence, investing is proxy to buying a ‘business’ whereas trading is buying or selling a ‘price’.

The one primary distinction between trading and investing lies in the holding period of the security. Trading is short-term and profit-oriented, often involving holding securities for a day or a few weeks and carries higher risk. On the other hand, investing is long-term, spanning into years, and typically entails lower risk.

So, the million-dollar question arises: which is better, trading or investing?

Well, it all boils down to a few factors, such as one's risk appetite, understanding of market dynamics, and available surplus capital. For a normal individual, diving into intraday trading might be challenging due to the need for constant monitoring. In such cases, opting for investing can be a viable option to allow capital to grow steadily over time. On the other hand, full-time traders meticulously strategize, take positions, and square off during market hours. However, trading requires substantial capital, which can be a deterrent for many.

The differentiating factors between an investor and a trader lie in their mindset and risk tolerance. Trading demands unwavering attention to price movements during trading hours, as positions are opened and closed within seconds. It requires a deep understanding of technical analysis, including interpreting charts and forecasting price movements, skills that develop over time with experience.

Another aspect to consider is the expense ratio and tax liability. Every trade entails brokerage and transaction fees, which can eat into profits over time. For those unable to dedicate time to understanding the nuances of trading, long-term investing may be the way to go, allowing money to grow even while sleeping. The profit earned on trading is treated as normal income and attracts income tax as per the highest tax slab applicable to the individual. However, profit earned on investing is treated as “short term gain” or “long term gain” depending on the holding period of the particular security which is generally lower than the tax rate on normal income.

The investing arena can be a minefield, especially for us regular folks. who may fall victim to the siren song of so-called experts. From dodgy stock tips to shady schemes cooked up by unscrupulous characters, the risks are aplenty. This February, SEBI slapped a Rs. 7.4 crore fine on 5 Zee Business guest experts as they were involved in unlawful trades based on the recommendations that they gave on the news channel.

Well, this is just the tip of the iceberg. People also get lured into traps through SMS, where they receive stock recommendations with target prices. It's like a web, where a few individuals take a long position in a micro-cap stock because it's easier to manipulate. Then, they spread the word, claiming it's a golden opportunity to invest. This leads some retail investors to take the bait and pour a significant amount of money into these shaky securities. As the demand for the stock rises, these schemers dump their shares, making a hefty profit. But their exit causes the stock's value to plummet, leaving retail investors high and dry. This shady practice is known as the pump and dump scheme.

So, as an investor, it's crucial to understand the securities you're investing in. Even if you're not well-versed in the intricacies of the market and prefer a hands-off approach, you can always opt for index funds. These funds mirror the performance of the overall market, consisting of established companies with strong fundamentals and a track record of solid performance. For instance, since 2014, Nifty has grown at an impressive 14.16% CAGR. To put it into perspective, if you had invested Rs.10 lakh in Nifty back in 2014, it would now be worth Rs. 37.6 lakh.

So, the takeaway from today's discussion is this: if you're looking to dip your toes into the stock market, don't see it as a shortcut to quick riches. Investing is about building wealth, and that takes time.

Treat it like running a business, and make sure to do your homework before and during your investment journey.

(The writer is senior Vice-president, SBI Funds Management Ltd; Translation and content by Prateek Kumar Gupta, B. Tech, final year, Netaji Subhas University of Technology)