Difference between trading and investing?

Many of my friends used to ask about the difference between investing and trading in stocks. My friends also used to ask about the differences between short term investment, long term investment.

I would like to try put together all those points here, which I am sure should give a fair idea about these topics.

To understand investment, first one should understand what is trading with respect to stocks. Particularly in the context of Indian stock markets such as NSE, BSE and MCX.

So, lets define trading.

Trading can be defined as the process of buying at one place and selling at another place, mostly for a profit. Well, the selling can be after few days also. Luckily stocks are not perishable goods (well, some stocks are...) like vegetables.

If you see any company involved in trading such as BigBazaar, SPAR and observe what they do - i.e buy at lower price and sell at higher price - you can identify one factor. That is nothing but hording.

So, these guys buy onion or tomato or sugar and store them in store rooms for a while, and when they see a profitable price to sell -  they will sell it. But the underlying factor is attempting to buy low, hold it with themselves for a while and then sell. This will be standard pattern.

They don't really care about quality of the product, so cheaper quality means lesser price on both buying or selling side. That's all they care.

Now we apply the same logic to stock markets, you can see the direct co-relation. So in trading, the traders buy cheap, sell at profit after holding for sometime.

Taking losses is part of trading.

Sometimes the shops also sell less than their buying price  to reduce their inventory. The same is applicable for stock traders.

One thing that I want to clarify is: Both so called short-term investment and long-term investment  (as popularized by media) are nothing but trading. The TV guys even tell short-term investment means holding period of 3 months. Long term investment means holding period of 5 years.

Sometimes the short-term investment time will change to 1 year, and some times the same 1 year is applicable for long term investment.

So, moral is - there is no concept the short term investment or long term investment as such.
It is just a perspective from individual view point. It is just plain trading.

Then what is Investment?

 To understand Investment in the context of India and Indian stocks in NSE, BSE -  I would like you to ask one question to yourself.

The question is:
How much time you spend before buying a property like house or land? or even a LED TV?

Normally most of us spend anywhere between 3 to 6 months for deciding on a property. Then ask this question:

How much time you spend before buying a stock?

If the answer is less than 3 months - most probably you are not investing.

Then ask this question:
What all research you do before buying a property, and what all research you do before buying a stock?

If you can co-relate  the questions, you will know what I mean by investing.
 

What parameters to verify on daily basis if I am trading? -

This is follow up post for following post:
http://mvrfuture.blogspot.com/2010/02/what-parameters-to-verify-on-daily.html

My buying method is explained in the following items
http://mvrfuture.blogspot.com/2010/02/risk-management-while-trading-in-stock.html
and
http://mvrfuture.blogspot.com/2010/02/futures-trading-methodology.html

For gathering information to plan trades, I do following:
1. Morning Verification is done around 8:30 AM. Till then no need to see anything.
2. Around 10 to 11 AM NASDAQ futures will be verified.
3. And Evening 8:30 PM I will again verify the FII Data, http://icharts.in/ and http://finance.yahoo.com/
    During this time I pick the stocks to trade and place the orders next day as per my observations.

4. I am planning blog those observations also here.

What parameters to verify on daily basis if you are trading?

Have you ever thought what parameters need to be checked on dialy basis if you are a trader?

Following information can be verified everyday.
1. Before Market Hours
    a) The first thing to verify is US Markets chart.
         http://ichart.finance.yahoo.com/z?s=^DJI&t=1d&q=c&l=on&z=l&p=e8,e26,b,p&a=r14,ss,v
         This chart will give idea on how the flow of sentiment is there in US markets.
         To get  clear picture one may have to spend little more than 10 mins watching how the bars are formed. This information will be available by 2:30 in the morning.
  
    b) Then verify http://sgxnifty.in/ SGXNifty opens around 7 AM India time. You can check it around 8:30 AM. Takes 5 mins.

    c) After this verify how asian markets are performing. By the time anybody cross checks SGXNifty they will get an Idea on how Asia is doing. But still going to http://finance.yahoo.com/ and verifying the stuff there is a better idea. This also can be done 5 to 10 mins to get a fair idea.

    d) After opening, generally our markets will get influed with US Futures. One can track US Futures http://money.cnn.com/data/premarket/ and http://money.cnn.com/data/afterhours/
        My observatoin is all world markets sing and dance to the tune of these parameters. Except the the fall and gain can be little more. This task need to be done every 1 hour if someone is a day trader during market hours.

   e) Around 12 PM and 1 AM, one would like to go and see what happens in Europe Markets. What influence those markets will have on Indian Markets. Again can be important for day traders.

   f) Finally after market closes, and one can take a break.

   g) After 6 PM http://icharts.in/ gets updated with EOD data, one can go an verify the charts for his stocks in this site. And after 7 PM, FII and DII will be uploaded on BSE and NSE. http://www.bseindia.com/histdata/categorywise_turnover.asp

   h) Similarly one can verify the delivery data of a particular stock, http://nseindia.com/content/equities/eq_scriphistdata.htm
       Checking on this data will increase our confidence on the stock we have selected.
      
   i) Actually there is no need to track US market at this time. But still you are curious to see, then just log on to http://finance.yahoo.com/ and see what is happening around.

Risk Management while trading in Stock Futures, Can we really preserve capital trading in futures?

Can we really preserve the capital while trading in futures?

How to choose the Stock Futures?
1. Stock should be part of the Futures list obtained from NSE website here.
2. Use http://icharts.in to find stocks with following conditions.
a. Stock should be trending upwards.
b. Stock should have a buy signal in daily charts.
c. Stock should get Buy signal in real-time charts.
d. When there is not access to realtime charts, stock should have a buy signal in MACD, and it should be near and greater than the monthly pivot.
e. Stock valuations should be fundametally reasonable.
Deciding on Stop Loss
1. Stop loss for above purchase would just below the pivot value.
Anytime the stock breaks this, it would advisable to exit the stock.

Deciding on Trailing Stop Loss
1. One should enter into a trade after deciding on Stop Loss.
2. After the stock starts moving up, a trailing stop loss should be adhered. Trailing stop loss can be marked by looking at the weekly pivots, or moving average cross overs.
(OR)
3. Fix a reasonable amount from the stock at the time of trade. Generally a stock moves in the range of 1 to 3% in a day. The reasonable amount of profit would 2%*Margin. If a stock is showing firmness, then this reasonable amount will become trailing stop loss.

Money Management
1. Futures trading will become lucartive mainly because of the margin amount available.

2. If have hard cash to buy entire lot, then futures is the best way buy a stock, as it would help you to buy required quantity in 1 shot where volumes are thin in a stock.

3. But the question is in the case when you want to buy futures with limited cash, how to handle the trade. Can we preserve the capital?
The answer for this question is, capital can not be preserved without hitting stop losses.
In case of futures,
a) Develop a trading methodology and stick to the stop loss given by the trading methodology.
b) In my case the trading methodology is discussed above.
c) Capital erosion can be stopped only by following first StopLoss and then Trailing StopLoss.
d) As it is a stop loss based system, capital preservation may not be possible, but capital erosion can be stopped.

4. How much cash can be allocated for futures?
This depends on the risk taking ability of an individual. I would use additional cash that is not part of my day to day activities for trading in futures.

5. How many days a futures position can be held?
Still need to work on this question. But as of now, going on long on futures based on the pivots and moving averages is best option. Decide on Stoploss, maximum profit, and minimum profit based on the pivot values.

6. What will be brokerage costs?
Still experimenting. So, not focusing on reducing brokerage costs.

Futures - Trading Methodology

After all the research, I was able to conclude following points.
1. Futures can be traded like how stocks can be traded with Pivots, and moving avergae lines.
2. The major advantage with futures is, we can buy stocks in bulk when we have physical cash.
3. Futures can be shorted.
4. Futures can be traded in 189 shares available in NIFTY.

Dangers with Futures:
1. Futures can erode cash quickly, if we are leveraging our position.
2. Need to check if brokerage firm will charge any interest on leveraged amount.