Investing in Philippines: Stock trading vs. Stock investing

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Sunday, October 10, 2010

Stock trading vs. Stock investing



This issue has been lingering for sometime. Let me cast my thoughts on it and hoping it would clear some gray areas regarding the two. But first let's define them to established basis.


Stock trading/Momentum investing(from http://www.investorwords.com)
Buying and selling securities or commodities on a short-term basis, hoping to make quick profits.


Stock investing/Value investing(from http://www.investopedia.com)
The strategy of selecting stocks that trade for less than their intrinsic values. Value investors actively seek stocks of companies that they believe the market has undervalued. They believe the market overreacts to good and bad news, resulting in stock price movements that do not correspond with the company's long-term fundamentals. The result is an opportunity for value investors to profit by buying when the price is deflated.

The main difference of the two primarily lies on the strategy in achieving profitability. Trading is the act of buying and selling for quick profit while investing is more of positioning or buying at low prices and waiting for the stock to appreciate to profit.

In stock trading one watches particularly the stock's price changes against participants reaction to current trend. Price trends may be influence by current news within the company or in the Global or regional market in general. 

News like the entry of MVP(Manny V. Pangilinan) of TEL to PX(Philex Mining) and LC(Lepanto Consolidated Mining) raised their stock prices coupled by the bullish PSE market. I remember profiting 35% at my LC within two days of trading. A sudden change or better than expected performance of a company may also influence  its stock price. When the price of a stock is gaining momentum most investors suddenly buy that stock creating more price uptrend thus a surge of stock price in short period which may led the stock to be overbought and will suddenly drop when sellers are more than buyers...

Stock investing on the other hand primarily is about making the cost of the stock lower thus the concept of cost averaging come into the picture. Besides cost averaging investors look for companies with intrinsic value. Companies with long term potential but are currently undervalued are said to be one of the stocks with intrinsic value. The concept of intrinsic value was started by Warren Buffet. With this concept one must be patient enough to realize the expected value which mostly comes after 1 - 3 years or more.

Companies become better over time and as the company grows its value also grows. Fundamentally sound companies are one of the companies that one may consider as companies of value. These
companies may be one of the blue chips or maybe a small company that recently started but was able to withstand various financial crisis.

What now then is the best strategy when one enters the stock market?

The answer to this question depends on one's risk appetite.

Traders are seen as risk takers. Some may term them short term thus the terminology "going short" and other call them tsupitero or tsupitera. A common trait of a trader is establishing a comfort zone when trading and they ride the sudden uptrends and buying speculative stocks. Most establish a loss percentage of 5% meaning they sell their stocks if such is on or near the acceptable 5% loss level in order to invest their funds to a far better profit generating stocks. There is nothing bad with this idea since one enters the stock market to profit...only that this strategy is risky.

Investors or Value investors on the other hand has the patience to wait for that big price uptrend. They buy fundamentally sound stocks when they are or near floor prices. These people are happy when stock prices are falling(you might think their crazy) and they would always look for bargain. As time passes they accumulate and
make sure that the cost per share goes down as they buy more of the stock and when the stock price rises to up to 25 -50% that is the time they will release. It usually takes 6 months to 2 years or more thus patience is a key ingredient in value investing. At the same time one must be diligent enough to do research and analysis of the company before buying. 

The best way is to be both. One should establish a strategy to purchase some stocks for short term/profit taking  and establish some stocks to be for long term. To be able to fund one's long term goals one must have a continues source of funds which could come from short term trades.

Again rules to follow are the following:
1. Don't be greedy, moderate your greed when price of the stock is 
    near or on its TP(target price) sell and take profits
2. Research and investigate, when in doubt don't buy, trade at your 
    own risk
3. Cost-average
4. Always set aside emergency funds, always leave some free cash 
    for bargain buying
5. Only and only invest free cash

2 comments:

Pinoy Investing said...

hi bro louis, great blog you got here,
your readers can also get a free ebook on the basics of investing in the stock market.
Download your free copy here
--> http://investinginthephilippinesstockmarket.blogspot.com/2012/02/first-investing-ebook.html

keep writing and inspiring!

Anonymous said...

thanks for sharing lots on wisdom on stock trading in philippines. im just a rookie at trading and not at a trader level to play games with trades and even sleep well, im just fortunate enough to have small gains on my trades. I also remember the days when LC is the most actively traded stock, until the news about goldfields delayed payment and the EO mining policy.

CBS news just put up some news in their website about Ultimate Death Cross. although it said SP500, do you think it will have an impact in our market as well?

thank you very much.

Chitika