Do You Really Think of Trading as a Business?

Apurva Sheth
Before you answer that question let's just understand what is a business?

It is a commercial activity where you exchange goods and services for one another or for money.

The most critical element over here are goods and services. You need to produce goods and services to exchange them for money. As an entrepreneur producing these goods and services you need to have three main inputs - land, labour and capital. Trading is no different than any other business. So as a trader you would require the same three inputs to run your business. Let's look at all three of them in detail.

  1. Land

    An entrepreneur requires a factory or office from where he operates his business. A trader doesn't require any of these. He can trade stocks from the comfort of his own home.

  2. Labour

    An entrepreneur requires workers and employees to operate machines and administer offices. Unlike an entrepreneur a trader runs the show all by himself.

  3. Capital

    An entrepreneur employs capital in his business to purchase assets and produce goods and services. For a trader capital is nothing but the money which he uses to trade securities.

Land and labour are very important factors of production for an entrepreneur along with capital. On the other hand capital is the single most important factor of production for a trader. After all it is the lifeblood which keeps his business up and running.

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To be successful at trading you need to have a successful trader's mindset.  This mindset comes when you treat trading as a business. A trader starts his business with the capital which he employs. Unfortunately, the first and the most important aspect is neglected most of the time when it comes to trading.

Most of the people who are not trading for a living do not give adequate importance to fixing a dedicated amount for trading. An entrepreneur starts and operates his business with a fixed capital. But most part time traders do not trade and stick with a fixed capital.

I know a couple of my friends who do exactly the same mistake. Some of them trade in the markets only because they have received a payment from one of their clients and will not need this money for next one month. The moment they need the money back for their business they will sell all their profitable positions and hang on the losing one so they can exit them atleast at breakeven levels. A couple of others would trade as their Fixed Deposits have matured and they want to make some extra money quickly.

This is the story of most retail traders and investors. They forget to think of trading as a business and treat as a get rich quick scheme. Trading like any other business is a long term endeavor. And it's best to apply and follow the same principles that you apply in business. One of them being fixing a dedicated capital. Trading with a fixed capital helps you in a lot of ways.

  1. Helps you in Position Sizing

    Position sizing is a very important aspect in trading. This is what can make a big difference to your trading account. Position sizing rules work only if you have allocated fixed capital to trading.

  2. Helps in managing risk

    Proper position sizing helps you to contain risk at a stock level. While dedicating a fixed capital to trading and sticking to it limits risk on an overall portfolio level.

  3. Helps in measuring performance

    Once you have a fixed amount dedicated to trading then measuring your performance becomes easier. Once you can measure performance you can know where your shortcomings are and where you can improve.

  4. Helps you in planning your finances

    If you have allocated capital to trading in a haphazard way (like some of my friends) then planning your finances would become difficult. In such cases you would mostly take wrong decisions and sell stocks which you shouldn't have sold and hold on to others which you should have exited.
I am sure now you will see much more merit in dedicating a fixed capital to trading and sticking to it after seeing the benefits that it has. This will help you develop a successful trader's mindset and allow you to think of trading as business.

Do you have a fixed amount dedicated for trading? Share your views in the Club or share your comments here.

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9 Responses to "Do You Really Think of Trading as a Business?"
nilesh naik
08 Oct, 2017
we should always invest for only shortt or mid term because in long term nobody can guess or anticipate about market perfectly. we should invest regarding technicals more than fundamentals .no one can give assurance about long term fundamentals.there r somany risk factors in long terms like globlle surcumtancies,growth of firm govt.policies and all about these the meligne is always there in long term.i thik people know the meaning of meligne. Like 
veeranna
28 Sep, 2017
I like to trade with profitLike 
Syed Iqbal Ahmed
21 Feb, 2017
Thak u. It was an interesting and easily comprehendable. With these kind of information anyone can easily trade.Like 
Sunil
17 Feb, 2017
Thank you Sir for all the information in such an easy to understand format.Like 
RAVINDRA
04 Jul, 2016
In your opinion how much capital one should employ for a beginner so that he need not make losses. Ravindra ParikhLike (1)
mansi
18 Aug, 2015
I completely agree with Divekar. 85% deals are in negative . I think I made big mistake in subscribing this service. My own analysis of shares never given a loss like this magnitude. Let us hope they give some valid stock option atleast we can recover the subscription moneyLike 
SridharanSethumadhavan
09 Aug, 2015
Dear: No. I think we can do short term investment in Technically sound stocks and long term investment (Business) in good fundamental stocks. Regards. S. Sridharan Madipakkam Chennai 600091 Like (1)
krishnan vc
09 Aug, 2015
Very analytical and extremely important for persons who keep complaining about the share market. You want to do a business do it as a business not be a fly by night operator and spoil everybody else's interst by your stupid actions. I really welcome your advice Shri. Seth.Like (1)
Divekar
08 Aug, 2015
Trading is a subsection of business. Compared to Employee, Land Lord, Politician, Professionals, Yes. It is a business of sorts. In any business a plan of action is inked so that it generates a reasonable percentage of profit measured quarterly, half yearly, annually. Dividends are given on these is it not?. Swing trading is also let us consider as a business, yes, with 60 % profitable trades irrespective of direction of the movement of the market as per Sheths plan and as we trusted him and started the business. Earlier also I indicated that the subscription amount should be considered as our investment and as it is turning out to be bittrer, it is not heard. who can continue the loss making business and how longLike (1)
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