Trading vs. Investing in the last 10 years

Forget "get rich quick" schemes. The financial world offers two main paths to wealth: trading and investing. While headlines scream about trading gurus and social media influencers raking in cash, the reality is far less glamorous…

Financial literacy is on the rise, but myths about trading persist. Even pioneers in the finance industry like Nitin Kamath, founder of Zerodha, shed light on the dark side of trading losses and advocated investing as a more sustainable path to financial freedom. 

So, why does trading hold the allure of a shortcut? Let's debunk the myths around trading and explore this financial strategy more logically, as it should be.

Loss Makers In The World Of Trading

Making Money:

• Only 10-11% of people who traded stocks with options or futures contracts made well averaged profits between Rs 1.5 lakh and Rs 1.9 lakh.

Losing Money 

• The vast majority (82-89%) of people who traded stocks with options or futures lost money.
• Losses averaged between Rs. 0.66 lakh and Rs. 0.77 lakh for options traders and were much higher (Rs. 0.96 lakh to Rs. 2.1 lakh) for futures traders.
• The youngest traders (under 20) had the biggest swings - both the highest average profits for those who made money and the highest average losses for those who lost money.

Key takeaways:

Trading stocks with options and futures can be risky. Most people lose money, and the potential losses can be significant.

Trading Myths Debunked

• Trading vs. Investing: The Dueling Paths to Market Gains (and Losses)

Trading and investing represent distinct strategies, each offering unique paths to potential gains and risks. Trading focuses on short-term market movements, relying on technical analysis and quick decision-making. 

Trading, a high-risk affair on the market's edge, offers the rush of quick profits but also the danger of rapid losses. It relies on split-second decisions and technical prowess.

Conversely, investing involves a longer-term approach, centered on fundamental analysis and the growth potential of assets over time. A more stable and low-risk financial route.

Both avenues offer profit opportunities but differ significantly in terms of risk tolerance, time horizon, and the depth of market knowledge required for success. Understanding these differences is crucial for navigating the complexities of financial markets effectively.

• Investing vs. Trading: It’s All About Time

At the core, it all boils down to time. Investors take a long-term approach, buying and holding assets like stocks, bonds, or mutual funds for years or even decades. Their faith lies in the overall growth of the market and the ability of companies to weather storms and increase in value.  

Traders, on the other hand, are stock market ninjas. They engage in frequent, short-term transactions, aiming to capitalize on price fluctuations within minutes, hours, or days. Their strengths are technical analysis, using charts and indicators to predict short-term market movements.

• The Past Decade: A Feast for (Some) Traders

The last ten years have been a wild ride for the stock market. The S&P 500, a benchmark index for U.S. stocks, has delivered an impressive average annual return of around 14.7% (as of December 2023).  This stellar performance might make you think traders are making tons of money. 

• The Dopamine Deception

There's a hidden truth in the world of trading: success stories are often overstated, while failures go unnoticed. The thrill of a winning trade gives a rush of dopamine, a feel-good hormone that can be highly addictive. This can lead traders to focus on their wins and downplay their losses, creating a skewed perception of their overall performance.  

Studies suggest that a significant portion of traders lose money consistently.  A report by the FINRA Foundation revealed that only 34% of day traders were profitable over six months. 

The Investor's Edge: Patience is Rewarded  

While some traders might hit the jackpot occasionally, long-term investors have a distinct advantage.  By staying invested through market ups and downs, they benefit from the power of compounding, where their returns generate even more returns over time. 

The Bottom Line: Choosing Your Path

The choice between trading and investing depends on your risk tolerance, time horizon, and personality.  Investors with a long-term focus and a stomach for volatility might find success in a diversified portfolio.  Traders, on the other hand, need a strong understanding of technical analysis, significant discipline, and the ability to handle the emotional rollercoaster of the markets. 

Remember, even the most skilled traders can face losses. So, before diving into the trading arena, be sure to weigh the risks and rewards carefully. You might be better off taking a page from the investor's playbook and letting time be your greatest ally.