When you just begin investing in the markets, it is easy to get confused with a lot of jargon. If you don’t decode such stock market jargon, it can sometimes land you in trouble. One such jargon is with relation to the very identity of an investor. We are referring to the term “stock trader” and “stock investor”. Let us begin by understanding what differentiates these two.
An investor and a trader can be differentiated on the following parameters:
Transaction pattern:
Both investors and traders approach the market with the objective of making maximum returns but deploy different methods to achieve their goals. While an investor makes single transactions periodically and holds on to his investments, a trader makes multiple transactions in quick succession to maximize his gains. A trader also buys and sells stocks continually to make the most of the momentum in the market.
Time horizon:
This is another important parameter on which an investor and trader differ from each other. While an investor typically has a long term horizon based on his financial goals, a trader will not hold a stock beyond a day or two. The maximum time frame that a trader would be willing to hold a stock is one or two months at best, depending upon some market news that he thinks will cause an atypical price movement.
Stock selection:
Investors look out for stocks that are undervalued for investment. Since they have a long term horizon for investment, they have the patience to hold onto such stocks patiently till they give expected returns. Traders on the other hand, are only concerned about the price movement in the stock and not the valuation of the stocks. Thus they are likely to buy stocks that are overvalued if the price is about to rise and sell an undervalued stock if the charts suggest that the price is about to fall.
The markets they are active in
Investors are active in the spot market because they are interested in taking delivery of stocks that they invest in. Traders however are more active in the derivatives segment, because they are not interested in taking delivery of the stocks and carry out speculative action.
Tools used: investors vs traders
Investors use fundamental analysis as a primary tool for their research. Their stock selection is therefore based on either on a top down or a bottoms up approach. Traders on the other hand, rely on technical analysis to maximize their returns. Technical charts are made up of historical price movements as juxtaposed against the current price movements.
A word of caution for aspiring traders:
Now that you the difference between stock investors and stock traders, it is best to understand your personality, risk appetite and goals right at the beginning. If you are interested in trading rather than investing, do so only after you have the requisite knowledge and do not simply be driven by greed to maximize your returns.
You must understand, that you cannot become a trader on day one. You need to invest considerable time, effort and practice to learn the ropes of trading. You should consider trading in the first place if you have a true passion for it and love reading charts, picking up on market news, dealing with numbers and are not intimidated by stock screens.
The most important thing about day trading is having thorough knowledge of the markets. The reason why most investors fail is that they jump into trading without having adequate knowledge and trading experience.
Here are some tips for beginners in trading:
- Be ready to invest the time to understand the markets and learn how to use technical analysis to your advantage.
- Before using your real money make sure you make some practice trades on a stimulated web site.
- Different strategies work at different times, so be flexible with your strategies.
- Do not take on many stocks all at once. Keep a manageable number.
- Do not try to make profits on every trade. Overall profit is what you should have in sight.
- Maintain records of your trading results and carry out an analysis from time to time.
- Do not put large profits at stake. Consider selling if the market moves against you by 25% against your peak point of profit.
- Do not ever add to a losing position, as it’s a recipe for disaster.
- Do not get emotionally involved as emotions work against you.
Stocks markets are all about patience perseverance, discipline and determination. Whether you choose to be an investor or a trader, you have to make rational decision and subject yourself to the will of the market. Sticking to your guns will see you through, so here’s to happy investing!
