Monday, June 22, 2009

TRADER OR AN INVESTOR - WHO WINS THE RACE?

Remember the story about a tortoise and a rabbit competing in a race? In that race ,the rabbit , being more agile and fast , expects himself to win the race hands down against a slow but steady tortoise. We all know who wins the race in the end. We have the same race run on stock markets every day. We have traders and investors both competing to make more and more profit.

Traders are very similar to the rabbit who was fast and agile , while investors are more like the tortoise who made slow but steady progress. The end goal for both of them is same but the route that they take is different.


TRADERS - Traders are those set of people who make transactions in the stock market with a definite exit strategy. They initiate trade for short term and look to exit from the stock on making small gains. Sometimes, they can buy and sell the same stock 3-4 times in a single trading session, making smaller gains every time. They do not believe in "buy and hold" strategy.


INVESTORS - Investors are those set of people, who are looking to invest in a company stock for a longer period of time. They believe in the business fundamental of the company and are looking to profit from the dividend as well as appreciation in stock price over a long period of time. They have more patience than traders are in for a long haul.


PROS OF BEING A TRADER

1. Traders are considered to be businessman and as such they do have tax incentives. They can offset their losses in trading against any benefit /gain in future trades. They are also allowed busines expenditure deductions.

2. They make money faster than the investors. They do not have to wait for a longer period of time.

3. They can make money both in bull and bear markets by initiating trades accordingly.


PROS OF BEING AN INVESTOR

1. An investor makes money both from dividend declared by the company and also from the capital appreciation of the stocks over a period of time.

2. In India, there is no tax on dividend income and also on long term capital gains on stocks held for more than 12 months.

3. Long term wealth creation due to the power of compounding.


WHICH IS THE BEST STRATEGY? Both these strategies have their own merits and it depends entirely on you as to what do you want to do. Anybody looking to make money over a long period of time needs to stay away from trading. Also trading involves full time involvement of the person and a person having day job can not do it on his own. He can do it via a broker, but that will at into his margins. For common people, I think the best strategy even today is to buy good stocks with solid fundamentals and then hold it for 5-6 years at least to reap the rewards of dividend income and capital appreciation. The best and most famous investor Warren Buffet says" I buy stocks with a view of never selling it , I would buy the same stock even if the stock markets were to shut tomorrow for next 20 years". Besides, even in real life when it comes to money , its the tortoise which wins the race to financial independence more often than rabbits do.

1 comment:

  1. Hi Rajeev--
    Thanks for your comment on Online Investing AI blog. It seems I'm having a little trouble with the approval process, but will try to get it on the site soon.
    I'm also hoping to read more about Rakesh Jhunjhunwala here. Very interesting.

    ReplyDelete