Why Traders eventually become Investors?
Have you ever pondered over the question why most of the richest men in the world invest in stock markets rather than trade in it?
Even successful intra-day traders slowly shift towards swing trading (where we hold our positions for a few days) and investing with time.
In this article, we will try to find out the reasons behind it.
- Risk Reduction
- Liquidity issue: Difficult to trade with big capital
- Old Age
- Social Status
Newbies in share market prefer trading, as their aim is to increase their capital fast. For a limited time period trading may be a good way to multiply your capital.
However, once their capital becomes large, they look for more risk averse avenues. Their risk-taking capability reduces as their capital increases.
Liquidity issue: Difficult to trade with big capital
Once traders gather a lot of money and their trading capital becomes huge (say around 5 crores), it becomes hard for them to do intra-day trade. There may be slippages in time between them placing their order and it finally getting executed. This slippage may cost them a lot of money (even if their view was right).
Especially, if you are an option buyer or cash intra-day trader, you aim to catch the momentum in market that may last only for a few seconds or minutes. Any delay in order execution on the part of your broking app may reduce your profits or even turn your profit into a loss. Scalping with big capital is almost out of the question.
That’s why big traders slowly start doing swing trading, or long-term investment in share market and other financial instruments.
With age our liquid intelligence and quick decision-making capability declines. But in intraday trading we need to be quick and take lightning-fast decisions.
This may prove difficult for old traders. So, they slowly shift to swing trading where they can take decisions after contemplating all the aspects for 2-3 days.
This last reason is more of a status symbol or related to social status. In our Indian society, trading is not considered a very good profession - it’s considered very risky, almost like gambling. Traders are not considered as intelligent or smart people in general (probably because many traders are loss making rather than profit making).
On the other hand, share market investing is considered a good thing. Such people are considered smart and financially literate.
When you hold long term positions in a share, you get to become the part-owner of that company. If you are a big investor and own a lot of shares of a company, you may get a say in the management of that company, and build your social network. This further provides them opportunities to make more money in a relatively safer way.
This is more of a social image thing - in reality good swing traders may make more money than long-term investors in a share.
So, now you know the reasons behind successful traders transitioning to swing/positional traders and long-term investors. Even if you are a trader, keep this in mind. Boost your capital by trading and then move on to safer investment avenues with time. Keep on learning about swing trading and fundamentals of companies - eventually that may become your major income source.