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How to invest in stock market - Part 2

In this part, we are going to cover the types of investing based on the time period involved.

These are divided into 3 categories-

1. Long Term Investing - It means investing in a stock and holding it for more than a year. People generally invest for long term to create wealth through the effect of compounding. The main thing to be concerned about when thinking of investing for a long term is the fundamentals of the company, which includes many factors such as its Shareholders, Debt to equity ratio, profitability and growth, dividends, and many more things.

Also, different types of investing requires a different mindset. For ex- If you invested in a stock for a long term and its value went down a little, you should not panic and sell the stock, that’s the basic rule of long term investing. Over the term, there may be many ups and down in a stocks price, but in long term investing you don’t track those price changes,as Warren Buffet said “ If you aren’t willing to own a stock for ten years, don’t even think about owning it for ten minutes.”

2. Short Term Investing – It means investing in a stock and holding it upto a year. People generally invest for the short term when they think that the stock is wrong valued and they can gain from it or sometimes they want to go with the trend and benefit from the momentum of the stock. Unlike long term investing, fundamentals don’t matter much in short term investing. You can just identify the trend in the market and invest accordingly to earn a profit. Short term investors also use stop-loss because they invest for a shorter time, there is a good chance that the price of the stock will never come above the cost price for some time, that’s why short term investors prefer to sell the stock if it is not performing according to the expectation and as best put by John Keynes: “ Markets can remain irrational longer than you can remain solvent”.

3. Intraday Trading - It means buying and selling of stocks on the same day. It is done by speculators to earn profit from the volatility of the stock. It is preferred by the investors who want to buy or sell huge quantities of a stock to earn a decent amount by just a little movement. They are able to do this due to the leverage available to the intraday traders. Through leverage, one can buy stocks which is worth 10 times more than the amount available with the trader. For ex- If we have 1 lakh Rs. and we want to buy shares of DLF at 200, then we would be able to buy only 500 shares but if we do this for intraday and use leverage(Assume 10x), then we will be able to buy 5000 shares of DLF. One more advantage of intraday trading is that we can also sell stocks. If we think that the stock is going to go down then we can benefit from that also by selling the stock first and then purchasing it at a lower price. For ex- We think that the price of DLF is going to go down from 200, so in intraday, we can sell DLF at 200, and then we can buy it at a price lower than that. We can’t do this for the short or long term. One important thing here is that the price of the share should go down on the same day or else we will lose our money. Experience and knowledge are very important for anyone to make money in intraday trading.

Choosing amongst different types of investing is a personal choice and It depends on the mindset and instinct of the investor and sometimes it takes a lot of time for an investor to learn which type of investing would be more preferable for him or her.