The debate about the best trading mechanism has been going on for decades. Some believe technical analysis is the way, while others prefer fundamental analysis for picking stocks.
Interestingly no one has still reached a definite conclusion. While some prefer to read charts and conduct technical analysis daily for intraday positions, others prefer to analyse companies’ financials and invest long-term. Some may even use a combination of both these strategies to earn money.
Online stock trading has become the new norm with the advancements in technology today. All you need to invest in the stock market is a demat account that you can easily open online. So it turns out that instead of there being a concrete way of investing, it depends upon the behaviour and traits of the individual participant. To understand what type of investing suits you, you must understand the fundamental difference between online trading and online investing. Let’s dig deeper so that you get valuable insights about both from this article.
What is intraday trading in the stock market?
If you choose to trade intraday in the stock market, you will be holding stocks for a concise duration. Intraday trading refers to the purchasing and selling of stocks on the stock market on the same day before the market closes. Upon failing to take a counter trade on the same day, the exchange will square your position by default.
Intraday trading is generally risky as the market volatility is high. To make money in volatile markets, a good grasp of technical analysis and market psychology is crucial. It would be best to understand how the movements in prices occur daily.
What is online investing in the stock markets?
You hold the securities for an extended period when investing in the markets. Before investing, you must conduct a fundamental analysis of your chosen companies. It would help if you understood their business models, cash flow streams and framed an expectation of their future performance before investing. Long term investments are subject to lesser risks, but you must invest carefully.
What are the differences between online trading and online investing?
Let’s understand how trading differs from investing and how you can use this knowledge to make money.
1. Investment tenure
Long term investments are typically held for several years. The period could range from 2-3 years, to even decades. Price fluctuations do not affect investment decisions as the intention is not to profit in the short term.
However, intraday traders study market movements and price fluctuations in great detail. Sometimes stock prices change within seconds and as such intraday traders have to be active stock market participants to gauge market opportunities and book profits.
2. Risk involved
The risks involved in intraday trading are comparatively higher. But it is crucial to remember that with added risks come better rewards. If the price moves in the traders’ favour, the trader can pocket the extra gains. However, if the price starts to move in the opposite direction, the trader must square off the position to avoid further losses. The trader can then exit the position with the help of a stop loss.
3. Income opportunities
There are two ways of making money in long term investing. The first method is capital appreciation, and the second is to earn dividend income. Capital appreciation is the increase in the stock price of the company’s good performance. As the company’s business and fundamentals grow, investors are rewarded with an increase in their share price. However, this income is not realised until you sell the stocks.
On the other hand, during a company’s growth years, the management might pass on the gains to investors through a dividend distribution. Dividend income will be realised by you when the company declares a dividend.
In intraday trading, income is realised when you square off your market positions.
Whatever your preferred way of earning money, remember to research and study market movements.