Now that we know it is a good thing to invest in equity as an asset class, let us try and understand the styles of investing. Note that I am talking about basic styles in purchasing, holding and selling, not stuff such as futures, options and derivatives that are anyway suitable only for the more evolved investors.
The objective of any investment is ultimately to make money. However, this can also be done in different ways. You may invest in stocks and make money through long term growth via capital gains. You may churn your portfolio at shorter time intervals and make profits through these transactions. You may finally buy and sell at very short span of time to make money.
Let us start by looking at what is known as Day trading. A day trader bets on daily movement of stocks, ideally something that can be bought in the morning and sold off during the day. This can have good potential of earning, especially in a volatile market. However, this does require a reasonable amount of capital and has a risk of loss too. If you want to be a day trader, you must have great discipline in squaring off your positions by the end of the day even if you are at a loss. Remember that this requires a lot of involvement and is pretty much a full time job. On the positive side people who have been successful in this have really earned greatly out of this. Whatever you earn out of a salary can seem trivial compared to what even a moderately successful day trader earns. Remember, it is not easy at all to do this well.
Short term trades where you are betting on stock movements over a duration of weeks or months is another option. Here you will need to be stock specific and take calls on how the company will do in terms of news flows, sentiments and consequently stock prices over the short term. There is great potential of making money here as long as you accept there will be some losses on individual stocks. You need to build up a portfolio and churn within that. I have some friends who do this very successfully and earn handsomely out of it, enough not to worry about doing other things in life. This has far less risk associated with it than Day trading.
Finally we come to long term holding of equities or “buy and hold” as it is often called. Here you bet on stocks for the long term and make changes to your portfolio only if the company really does badly. There is a risk here of being saddled with duds from time to time ( Kingfisher Airlines in my case ), but if your selection is careful your overall portfolio should do well over the long run. The added advantage here is that you will get dividend yield too. The rewards can be spectacular at times – I bought L & T at 60 Rs a share and that 6000 Rs investment is worth 2 lacs today, apart from 1.5 lacs that I have sold and the dividends gained.
If you are wanting regular income from the stock markets you can choose short term trading. If all your income has to be from the stock market you can look at Day trading. However, for most of us who have limited time and money, the last option is really the most pragmatic one. It will require a certain amount of money, knowledge and understanding of business and loads of patience.
The rewards that you get out of it are well worth the effort though.