The ABCD of Investing Vs.Trading for a Stock Market Newbie: Swikarya Aganja

Article by Swikarya Aganja

Trading implies short-term buy and sale of stocks while investing means a long-term buy and sale of stocks. In general, trading requires technical analysis whereas investing requires a sound knowledge of fundamental analysis.

Fundamental analysis means analyzing a company's fundamental statements, its various ratios, and its future prospects.

Fundamental analysis can be done through various tools such as Price to Earnings (PE) ratio, Earning Per Share (EPS), Dividend Yield Ratio and Price to Book ratio, etc.

PE ratio indicates the number of times investors are ready to pay as compared to earnings. E.g. - If the PE ratio is 10, it means in order to earn 1 rupee, an investor is ready to pay 10 rupees for that share. If the PE ratio is greater than 18, the stock is considered overvalued and PE less than 18 is considered as undervalued. More PE ratio can also mean investors are optimistic that the company is going to progress a lot in the future.

Likewise, Earning Per Share (EPS) is another significantly important tool that indicates the portion of profit allocated to each share. For e.g. - If a company's EPS is Rs. 10, it means one share has earned Rs. 10. The more the EPS, the better the company is considered.

Similarly, the Dividend Yield Ratio refers to the ratio that provides information about how much a company is paying dividends every year relative to its share price. E.g. - if the Dividend Yield Ratio is 2%, it means the company is providing a dividend of 2% of the current price. Thus, fundamental analysis deals with finding out the intrinsic value of a share. It tells an investor which shares to buy. It tells us which companies would give great returns in the longer term.

On the other side of things, technical analysis implies forecasting future price movements based on examination of past price movements. It is all about studying charts, patterns, and trends that suggest what a stock will do in the near future.

Technical analysis involves keeping track of and analyzing indicators like Support/ Resistance, Candlesticks, Relative Strength Index (RSI), Moving Average Convergence Divergence (MACD), Fibonacci Retracement, etc. These indicators help in forecasting the trends of the market. E.g. - Different patterns like the cup and handle, head and shoulder, double top, flags, and pennant tell an investor when is the best time to buy and sell a stock. It simply gives information about when to buy, hold and sell stocks.

If you want to invest for the long-term and benefit from the bonus shares, dividends, and rights offering, it is necessary to do fundamental analysis and place your bet on blue-chip companies. Blue-chip companies are companies that provide huge dividend returns, have low volatility, higher growth prospect, stable performance, and good reputation. If you want capital gain (a short-term profit), technical analysis is an important requirement.

Both are good in their own way. It depends on the investor, their risk appetite, and the intensity with which they want to be involved in the investing game. A person having enough time to watch over the Nepse Index can probably do trading whereas a person having scant time can do investing to earn good returns in the longer term. Trading requires ample knowledge about technical analysis while investing requires a shrewd eye for company valuation and fundamental analysis. However, this doesn't mean that technical and fundamental analysis do not go hand in hand. There are investors who study company fundamentals to filter better-performing companies and simultaneously use technical analysis to time their entry and exit.

So, what type of investor do you want to be? Which strategy matches your personality and investment style? How do you feel about the strategies described? The comment section is for you.

Swikarya Aganja is a KUSOM, BBA 1st year student.