Stock market investing or trading is no rocket science and anyone with some basic knowledge and experience can invest or trade in a stock market. The novice investor usually begins by being an investor, while a seasoned stock market player is usually a trader. So, what is the difference between investing and trading? The difference is not just the time horizon of investment but, more importantly, the difference is between the parameters of stock buying and selling. Investing is basically based on fundamental analysis, while trading is purely based on technical analysis of the stock or the index. Let us broadly examine what fundamental and technical analyses entail and how the analytical parameters are utilised for buying and selling stocks in stock market.
This is an analysis of the financial performance of the company based on certain financial parameters such as growth in sales, operating and net profits, gross and net margins, return on equity capital employed (ROCE) and return on net worth (RoNW), leverage ratio (DER), earnings per share (EPS), prospects of the industry in which the company is operating and its market share in the overall industry, track record of the management, dividend history, and so on. These parameters provide an overview of the financial health and the growth prospects of the company.
This is an analysis of the movement of share price of the company over a period of time. The technical parameters provide an indication to the trader about when and at what price level to enter a share (take a long/short position) and when to exit or close the position. There are many technical indicators which a trader uses to determine his entry or exit from the stock. Some of the technical indicators include support and resistance levels, overbought or oversold zones, simple moving average (SMA), exponential moving average (EMA), relative strength index (RSI), breakout levels, and many more.
The common attribute for being a successful investor and trader is doing the homework right.