There are many differences between trading and investing. For one, investing is a long-term process, while trading is a short-term process. In investing, company fundamentals, and stop loss play an important role in taking a decision to buy or sell, while trading involves studying charts while deciding on buying or selling a stock. There is no concept of delivery involved in trading. An investor pays the entire share price upfront, while a trader pays only the margin money, which is a part of the actual share price. It allows him to earn massive profits by simply depositing small amounts.
We all know of those people who have claimed to make money in stock market. There are reports in newspapers giving attractive accounts of how the investors made a fortune when the stock indices reached an all time high. As a result, many people are drawn towards day trading or intra day as it is popularly know. But is it really all that is made out to be? Are there any drawbacks to day trading or is all sugar and spice? Let us understand what it is, and its pros and cons.
What is day trading?
In day trading, you buy the shares of a particular company and then sell them off on the same day. There is no concept of taking delivery. You don’t actually hold the stock. There is no concept of stop loss or studying the fundamentals of the company involved in this method.
How does a trading differ from investing?
There are many differences between trading and investing. For one, investing is a long-term process, while trading is a short-term process. In investing, company fundamentals, and stop loss play an important role in taking a decision to buy or sell, while trading involves studying charts while deciding on buying or selling a stock. There is no concept of delivery involved in trading. An investor pays the entire share price upfront, while a trader pays only the margin money, which is a part of the actual share price. It allows him to earn massive profits by simply depositing small amounts.
E.g. assume the price of a share is Rs. 1200. To own 100 shares, an investor must pay Rs. 1,200,00, which is difficult for a small investors. So a trader can make a deposit of Rs 10,000, which is called as margin money and buy these shares. Now assume the share price rises to Rs. 1300. The trader can now sell his 100 shares and earn Rs. 1,300,00. His profit is Rs 10,000 (Rs. 1,300,00 – Rs. 1,200,00). So simply by making a nominal deposit, a trader earns a healthy profit.
What are pros and cons of day trading?
While money is the primary motivator that attracts people to day trade, they should not forget the drawbacks of the process. Here are some of the pros and cons of day trading.
Pros:
- Ability to work at the pace and terms of your choice and. You don’t have to deal with a boss, inquisitive colleagues and company rules.
- Can be done in the privacy of your home. All that is required is a PC and internet.
- You can work any time of the day, since there is no work schedule to follow.
- Wide choice of trading sites and brokers, with varying charges. It will let you choose the ones offering best service at lowest rate.
Cons:
- Higher risk of losing money as the market can crash after buying.
- Increase in your tax liability, as the profits earned is treated as business income.
- Need to be emotionally detached, as it is important to sell off your holdings as soon as you make losses, instead of sticking with them in order to recover your money.
- Need careful monitoring of stocks, since the markets can swing wildly on any given day. This is much more important if you are trading in mid and small caps, which tend to fluctuate wildly.
Though trading can be a good money earner, it is important to be careful, as your chances of suffering a loss is as high as making any profit. No wonder, legendary investor Warren Buffet has said it best, when he stated, “Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years.”