Now you have a better understating of the 3 Types of accounts you need to start trading. Let's understand the types of traders and investors in our stock market.
As of my writing, there are 1.9 Cr traders/investors in India. That is somewhere close to 2% of the population. If you compare this with other countries, China is having 10% and The United States is having almost 27%. That is 27 people out of 100 people engaged in the stock market through one form or the other. Not all the people who are engaged in the stock market are traders or investors. If you take the big bull, Rakesh Junjunwala, he is pictured as the Warren Buffet of India. If you have no idea who Warren Buffet is, he was the world's richest person back in 2012-2014. He is an Investor and has been an investor for his whole life.
Different people trade with different styles with their own techniques which they have learned and mastered throughout their career in the stock market. Their style will also determine the kind of capital they might be using and the risk they will be taking.
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Let’s learn about the types of Traders there are out there, most of whom do this day in and day out, the bread and butter for their day. They look for quick and short trades and often get out of the trade as quickly as possible. The time they hold a share will vary from few minutes to few days to even a few weeks. They are on a constant alert and on the lookout for opportunities whenever their risk appetite works.
This type of trader usually gets into a trade and exits out from the trade on the same day. He doesn’t hold onto his position to carry forward the next day. He doesn’t take risks keeping his position overnight. There can be cases of any news overnight and the stock can fluctuate based on that. Here the trader utilizes the advantage of leverage. Leverage is an option given by the broker to trade 4-5 times your capital. With a minimum amount, the trader can buy a huge number of shares. The trick here is to calculate your risk appetite and plan the trade accordingly.
The psychology behind taking these trades will be fast in fast out. Consider yourself driving a formula 1 car and think about the number of decisions you will have to make every second. This will be the mindset of a Day trader.
These traders usually trade equity shares, where they buy large quantities. For example, if a trader is trading in TCS, he will buy 100 shares of TCS priced at 2850. Thus, the capital will be 2,80,500 and he will mostly keep the position for few minutes. Suppose the price goes up by 10 rupees in the next 5 minutes, he will exit out and take 1000 rupees (10 rupees*100 shares) as profit and close his position. The trader might take multiple trades like this on different shares. He usually takes 5-6 trades in a day.
This trader is also a day trader but he gets in and gets out very quickly. Even quicker than a normal day trader. The trick here is to scalp or multiply the opportunities on a trade. He closes his position within minutes, normally in seconds. Think about driving a Formula 1, in this case, he will have to think like a formula 1 engine. That speed and accuracy are required to excel in this trade.
This trader would have to ensure good capital in his account even though he is taking leverage and should have the mental processing power of a formula 1 engine.
He would normally use the advantage of leverage and trade in huge quantities. Let’s take the above TCS example. He would get into the trade at 9.25 am buying 10,000 shares of TCS at a price of 2850. By 9.26 am, the price has gone up to 2850.1 and he will close his position and come out of the trade. His profit will be 1000 rupees (0.1 rupees*10,000 shares). If you compare the day trader with Scalper, a scalper is highly risk-averse, which means he doesn’t want to take any risk at all keeping his position open. He usually takes 6-8 trades in a day.
There is one more way this trader does scalping, increasing his position. If the stock price is going in his favor, he starts to increase his position thereby taking the advantage of the trend in his favor. Remember, the trend is your friend, and never trade against the trend!
A swing trader is someone who keeps his position for few days to few weeks. He sees the technical aspect of the stock and also the fundamental part of the stock. Think about swinging your bat, if it hits it goes good, if you miss nothing much happens. This is the same mindset of a swing trader.
These people will mostly be analyzing the stock for a long time and get into the trade for keeping it for a longer time. They don’t get the liberty of leverage, thus they need to hold onto their position with their original capital. Thus, they usually buy the quantities which their capital can afford.
Suppose a swing trader analyzed TCS and he gets into the trade. He buys 100 quantities of TCS at 2850 and keeps it for few days. He will be having a target price in his mind and once it reaches the target price, he gets out of the trade. Suppose his target is 100 rupees and TCS reached 2950 after 2 weeks, he gets out of the trade. He would have made a profit of 10,000 rupees (100 shares * 100 rupees). The trader usually takes multiple trades in a month's time.
Again, he either scales up his position when it reaches his target or gets out of the trade completely. All this depends on his strategy, technique, and risk appetite.
Some of the really famous traders the world has ever seen are: George Soros, Ed Seykota, Paul Todur, Michael Steinhardt, Van K Tharp, Stanley Druckenmiller, etc and the list goes on.
An Investor is a person who studies the company in detail before he puts his money into it. He does a fundamental analysis of the stock, reads the annual report, watches news, articles and keeps himself updated with the activities that are happening with the stock. He ignores the short-term fluctuation and focuses on the long-term growth. An investor takes a considerable amount of time researching the stock, valuations on his parameters, and deciding whether to go ahead or not. Once he puts his money, he doesn’t care what the market does in the short term.
There are 2 ways an investor puts his money into a stock. He either puts his entire money and waits for the price to reach his level or puts his money in parts as the stock moves up slowly according to his calculation. Either way, his aim is to become profitable in the longer run.
I have told you about analyzing the stock. Since there are 5000 companies listed in BSE and 2000 in NSE, the way he analyses the stock will be different. Mostly this will be based on his risk appetite. Risk appetite means the mindset he is onto and the risk he is willing to take when the investment doesn’t go according to his plan.
The typical holding period for an investor ranges from few years to forever. Yes, some investors have never sold their shares, even after 30-40 years into investment. A great example will be Warren Buffet who brought Coca-Cola shares back in the 1960s and is still holding the entire shares he brought after 60 years of his first purchase.
These investors normally look at the growth potential of a company and see how it is performing in the current market. They look at the possibility of them in the merging market and look into the fundamentals. They usually go for companies with strong fundamentals and have good records in the past.
A good example will be Infosys back in 1990 when it was in the emerging phase. Infosys was growing at the time but was also a fundamentally good company to invest in. The stock had already got its name, but investors saw growth potential for the stock. Thus, you can imagine how Infosys is now and relate how its growth would have been over the years.
Their holding period will be significantly less compared to value investors since the price can reach higher highs faster than a value stock does. But, the holding period is ultimately upon the investor's mindset and risk appetite.
Value investors are people who see value in a stock. Let me take you through an example. When you see furniture in a shop, let's say a chair is priced at 1000 rupee. You would be thinking it's highly-priced for the product they are offering and consequently, you will ignore the chair. But your sister sees the chair as undervalued and thinks the chair should have been valued at over 3000 rupees for sure. Thus, 2 people see the same chair differently. This is where the beauty of value investing comes into the picture.
Here also, there are 2 different types of value investors.
One who sees an undervalued company smashed down due to any news or external factors and thereby making the decision to buy the stock till it reaches its determined value.
When L&T was trading at 1400 during 2011, due to some external factors the price smashed down at 600 levels during 2012. Almost half the price it was trading. But, even though the price was halved, the companies fundamentals remained the same and all other operations were going smoothly. Investors saw growth in this stock, particularly back to its original trading levels. Thus, forward 1.5-2 years, in 2014, the stock was trading at 1400 levels.
The next type of investor will see an undervalued company, invest in it and hold onto the investment for a very long time.
Rakesh Junjunwala analyzed the company called Titan back in 1999 and 2000. He saw the company as a fundamentally strong company with very huge growth potentials. Even though it had the vision and mission for superb growth, the price at which it was trading was extremely low. The price was trading around 9-10 rupees per share. Rakesh Junjunwala invested in this share back in 2000 and stayed put on this. He hasn’t sold a single share of the Titan to date. As of today, Oct 17th, 2021, the price of Titan is trading at 2400 per share. Now you can imagine the returns he got on his investments. His portfolio for Titan now stands at 10500 Cr.
Another example is Eicher Motors back in 2002. Eicher Motors brought Royal Enfield back in the 1990s. In 2002, the price of a Royal Enfield bullet was around 55,000. Instead of buying a Royal Enfield bullet, if you would have invested that money in buying Eicher Motors share what would have been that money right now, in 2021, after just 20 years. The company has given numerous dividends, stock splits, bonus issues, right issues, etc over the years. That 55,000 which you had invested in 2002 instead of buying a Royal Enfield Motorcycle has now grown to 8.5 Cr. Yes, you have heard it right, you would have now been sitting with 8.5 Crore. That's the power of compounding combined with picking the right stock and staying invested for a long time.
Some of the really famous investors the world has ever seen are: Charlie Munger, Peter Lynch, Benjamin Graham, Thomas Rowe, Warren Buffet, John C Bogle, John Templeton, etc. and the list goes on.
Whichever type of trader or investor you are, it is always better to try out all the different forms and come to a conclusion on which one suits you better. Which style of trading is making you profitable and suits your day-to-day lifestyle. Choosing the right style is extremely important before you put everything on the line.