Each market participant has his or her own unique style to participate in the market. Their style evolves as and when they progress and witness market cycles. Their style is also defined by the kind of risk they are willing to take in the market. Irrespective of what they do, they can be catego-rized as either a trader or an investor.
A trader is a person who spots an opportunity and initiates the trade with an expectation of prof-itably exiting the trade at the earliest given opportunity. A trader usually has a short term view on markets. A trader is alert and on his toes during market hours constantly evaluating opportuni-ties based on risk and reward. He is unbiased toward going long or going short. We will discuss what going long or short means at a later stage.
There are different types of traders :
a.Day Trader – A day trader initiates and closes the position during the day. He does not carry for-ward his positions. He is risk averse and does not like taking overnight risk. For example – He would buy 100 shares of TCS at 2212 at 9:15AM and sell it at 2220 at 3:20 PM making a profit of Rs.800/- in this trade. A day trader usually trades 5 to 6 stocks per day.
b.Scalper – A type of a day trader. He usually trades very large quantities of shares and holds the stock for very less time with an intention to make a small but quick profit. For example – He would buy 10,000 shares of TCS as 2212 at 9:15 and sell it 2212.1 at 9.16. He ends up making
1000/- profit in this trade. In a typical day, he would have placed many such trades. As you may have noticed a scalp trader is highly risk averse.
c.Swing Trader – A swing trader holds on to his trade for slightly longer time duration, the dura-tion can run into anywhere between few days to weeks. He is typically more open to taking risks. For example – He would buy 100 shares of TCS at 2212 on 12th June 2014 and sell it 2214 on 19th June 2014.
Some of the really successful traders the world has seen are – George Soros, Ed Seykota, Paul Tu-dor, Micheal Steinhardt, Van K Tharp, Stanley Druckenmiller etc
An investor is a person who buys a stock expecting a significant appreciation in the stock. He is willing to wait for his investment to evolve. The typical holding period of investors usually runs into a few years. There are two popular types of investors..
a.Growth Investors – The objective here is to identify companies which are expected to grow sig-nificantly because of emerging industry and macro trends. A classic example in the Indian con-text would be buying Hindustan Unilever, Infosys, Gillette India back in 1990s. These companies witnessed huge growth because of the change in the industry landscape thereby creating mas-sive wealth for its shareholders.
b.Value Investors – The objective here is to identify good companies irrespective of whether they are in growth phase or mature phase but beaten down significantly due to the short term mar-ket sentiment thereby making a great value buy. An example of this in recent times is L&T. Due to short term negative sentiment; L&T was beaten down significantly around August/
September of 2013. The stock price collapsed to 690 all the way from 1200. At 690 (given its fun-damentals around Aug 2013), a company like L&T is perceived as cheap, and therefore a great value pick. Eventually it did pay off, as the stock price scaled back to 1440 around May 2014.
Some of the really famous investors the world has seen – Charlie Munger, Peter Lynch, Benjamin Graham, Thomas Rowe, Warren Buffett, John C Bogle, John Templeton etc.
So what kind of market participant would you like to be?
Key takeaways from this chapter
1. A stock market is a place where a trader or an investor can transact (buy, sell) in shares 2. A stock market is a place where the buyer and seller meet electronically
3. Different opinions makes a market
4. The stock exchange electronically facilitate the meeting of buyers, and sellers 5. News and events moves the stock prices on a daily basis
6. Demand supply mismatch also makes the stock prices move
7. When you own a stock you get corporate privileges like bonus, dividends, rights etc 8. Holding period is defined as the period during which you hold your shares
9. Use absolute returns when the holding period is 1 year or less. Use CAGR to identify the growth rate over multiple years
10.Traders, and investors differ on two counts – risk taking ability and the holding period.
∏
7.1 - Overview
If I were to ask you to give me a real time summary on the traffic situation, how would you possi-bly do it?
Your city may have 1000’s of roads and junctions; it is unlikely you would check each and every road in the city to find the answer. The wiser thing for you to do would be to quickly check, a few important roads and junctions across the four directions of the city and observe how the traffic is moving. If you observe chaotic conditions across these roads then you would simply summarize the traffic situation as chaotic, else traffic can be considered normal.
The few important roads and junctions that you tracked to summarize the traffic situation served as a barometer for the traffic situation for the entire city!
Drawing parallels, if I were to ask you how the stock market is moving today, how would you an-swer my question? There are approximately 5,000 listed companies in the Bombay Stock Ex-change and about 2,000 listed companies in the National Stock ExEx-change. It would be clumsy to check each and every company, figure out if they are up or down for the day and then give a de-tailed answer.