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Trading vs. investing in Indian stock markets

20 May 2015 |By: Team Finalaya

Trading vs. investing in Indian stock markets

Most retail investors in the Indian stock markets simply acquire some shares of their choice, either through an IPO or from the secondary markets and then wait for a particular price point at which they will sell the shares and realize the profits (may not be always). But, is this the only way that one can deal with the Indian stock markets?  One of the cardinal principles of playing the stock market is never to love your shares. On that note, let us examine some of the different methods of transacting business in the Indian stock markets.

Trading in stocks on daily/weekly basis

Trading in stocks constitutes an ideal way to maintain a decent cash flow throughout the week/month.  However, it is expected that you already have adequate knowledge of effectively tracking price movements for specific stocks and the stocks that you focus on.  On any given day, you notice that some stocks are extremely active with decent price swings.  Consider a particular share opening at say Rs.1300/- and then drifting to say Rs.1250 across the day. If you sold the scrip at 1300 and purchased it back at 1250, the difference minus expenses is for you to keep.  You can sell shares from your portfolio or enter a short sale even without owning the scrip.

Free tool from Finalaya – Fundamental Screener

Not for the chicken hearted

Inorder to make a profit by trading in shares, you are generally glued to the computer/TV screen and can spot opportunities as they arise.  Therefore, this method may not suit investors who cannot track price movements across the day and take appropriate decisions very quickly.  Brokers may also accept orders with limits, but if the limits you prescribed are not reached, the transaction will not be completed.   Do remember that just as you can make money by trading in shares, the reverse is also true.   Another downside is that significant price swings can be seen in high value shares.  Therefore, your ability to find quick finances on days when you get stuck with a transaction is important.

Short selling

Short selling means you are placing a sell order without actually owning those shares. You expect that the price will come down on the same day or in the next couple of days. This method generally works best when you have the ability to square off your transaction on the same day. If the trade gets carried over and your transaction is moved to ‘auction’ for want of delivery, you could be in a spot of bother. This transaction too requires a decent level of constant monitoring of market movements and the ability to take appropriate decisions at the right time.  Short sellers generally focus on squaring off transactions on the same day to avoid bigger losses and problems associated with frequent auctions in your account.

These are but some of the measures that can be diligently employed to make your money work harder.  Effective homework will however be the key to keep you insulated from risks associated with financial decisions.

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