Are You More Like an Investor or a Trader?

Are You More Like an Investor or a Trader Featured Image

Investing and trading are two contrasting methods of making profits from the financial markets. Generally, investing is long-term while trading is short-term. The two have different time frames and strategies. Investors look for higher returns over a longer period through a buy-and-hold strategy. Traders, on the other hand, only do buy-and-sell for a few days or months and make use of the fluctuating market trends and positions over a shorter period, grabbing smaller but more frequent profits.

In reality, many people do not know the difference between the two and who they are – an investor or a trader. Thus, they occasionally use inappropriate strategies in what they are doing, which leads to a lot of risks. Most of them believe that they are investing, but are actually trading with the stock market. This deranged mindset and measures are the primary reasons why most of them quickly lose all their investments within a few months.

It is important to find out whether you’re an investor or a trader because each uses different methods and strategies during buy-and-sell.

So how do you determine what you are and what style is best for you? Keep reading and you’ll find out.

Let’s begin with, “What is Investing?”

The objective of investing is to progressively gain profits over a long period through the buying and holding of bonds, mutual funds, stocks, and other investment mediums. Investments are often held for a couple of years, or decades, making use of incentives like dividends, interest, and stock splits. While stock markets fluctuate, investors will endure the declines with the possibility that prices will ricochet, and any losses will eventually be reclaimed. Investors are usually more concerned with market scenarios, such as management forecasts and price-to-profit ratios.

What is Trading?

Trading includes more regular transactions, together with the buying and promoting of commodities, forex pairs, stocks, or other instruments. The purpose is to generate returns that surpass buy-and-hold investing. While investors may be satisfied with annual returns of 10-15%, hopeful traders might try to look for a 10% return each month. Trading profits are gained by buying at a lower price and selling at a higher price and vice versa or known as short selling.

Though investors wait for less profitable positions, traders always try to make profits within a definite period and commonly use a preventive “stop-loss” to automatically terminate losing positions. Traders frequently use technical analyses, like moving averages and vague oscillators, to search for highly profitable trading setups.

Trader Categories

Traders usually pick their trading style depending on factors such as account size, time dedicated to trading, personality, risk tolerance, and trading experience. Traders typically fall into four categories, which are:

  • Position Trader: Position traders can hold trades for months to years depending on their strategy. They anticipate whether the present trend will continue for a much longer period than a short momentum or a swing trade. These long-term traders are not bothered with short-term fluctuations, because they believe that their long-term investment horizons are regressions toward the mean.
  • Swing Trader: They are often interested in price trends and patterns, rather than the fundamentals or the intrinsic value of stocks. Swing traders seize short-term trends as trades are held from days to weeks. They attempt to secure profits in stock within a single day or a week by using technical analysis. The usual holding period for a swing trade is three to seven days.
  • Day Trader: They are all about buying and selling on the same day, without holding positions overnight. Basically, a day trader closes out all placed trades before the market closes. Compared to other trading styles, day trading requires strong discipline, rapid decision-making, and adequate capital to hold positions for minutes to hours and withstand possible losses.
  • Scalp Trader: They are also called micro-traders. Their style is all about repeatedly generating a small number of profits, holding onto trades that last from seconds to minutes with no overnight positions. Scalping or micro-trading is a strategy that endeavors to make substantial profits on fluctuating small price levels. These traders place anywhere from 10-100 trades within a single day hoping that trivial moves in stock prices are simpler to catch than big ones. Both day trading and scalping are what is known as intraday trading.

What type of trader are you?

You are aware that the stock market provides an array of opportunities to earn profits, but you are not completely sure how and when to buy and sell or have known any strategy that matches your personality. Either way, here is a short run-through of some of the known types of traders:

  • Fundamental Trader: They are traders or analysts focused on the value of the stock. Basically, they research first about the product and decide the perfect time to buy it. Although it is research-intensive and time-consuming, this type of trading is appealing to investors because it is primarily based on facts and logic. This trading strategy relies purely on fundamental analysis rather than the ever-changing factors of market trends or on split-second decisions.
  • Noise Trader: They are known to buy and sell without the use of company-specific fundamental data. These traders usually have poor timing and often place short-term trades to gain profit from numerous economic trends. They often disregard underlying values and only depend on perceived opportunities.
  • Sentiment Trader: They are identified as the ones who actively participate in trends in attempt to determine securities that go along with the current market momentum. These traders integrate significant aspects of both fundamental and noise traders to identify and participate in the movements of the market like those used by swing traders or contrarian traders. Success in this particular strategy requires proper timing, intensive research on market trends, and identification of highly profitable securities. Some of the challenges encountered by sentiment traders include the prediction of market trends, market volatility, and trading costs.
  • Market Timer: They are like guess monsters, taking shots on wherever a stock will move for them. They commonly search for reliable economic data or technical indicators to predict the direction of the movement. While short-term profits are possible, there is insufficient evidence to suggest that this specific strategy has merit in the longer run.
  • Arbitrage Trader: They buy and sell assets to gain profits from price differences of similar financial mediums. To make it simple, if a specific trade is cheaper on one exchange, it can be bought and sold on another exchange at a higher price. Arbitrage subsists as a corresponding result of market inefficiencies — it provides a channel to make sure that prices do not significantly drift away from equitable values over long periods. These traders are usually associated with hedge funds and they can make efficient ways to generate profits.

Key Differences Between Investing vs Trading

Investing and trading are contrasting approaches to generating profits from the financial market. To delve deeper, here are key differences between the two strategies:

  1. PERIOD: Trading includes holding of stocks for a short period, it could be for a single day to decades. Traders hold market stocks until the short-term high performance, while investors work on buy and hold strategy. Investors tend to put their investments for a few years, decades, or a longer period. 
  2. CAPITAL GROWTH: Traders search for the price movement of stocks in the market. If the price goes up, traders can sell the stocks. Basically, trading requires good timing to acquire profitable stocks whereas investing makes use of dividends and compounding interest through the years.
  3. RISK: Both investing and trading pose risks to your capital. However, trading comparably has higher risk and potential returns as the price may go up and down in a short period. On the other hand, investing takes time to develop. It primarily involves even lower risk and potential returns in the short run but could deliver significant returns by dividends and compounding interests if held constant for a longer period.
  4. PERSONALITY vs SKILL: Traders are proficient individuals who study the market and the current market trends to gain high profits at a specified time. On the other hand, investors examine their desired stocks by learning business fundamentals and adhere to it for a long time.

So are you an investor or a trader?

It is important to decide if you are a long-term investor or a financial market trader, so you can pick the best strategies that match your personality, available funds, and schedule. If you know yourself and financial status very well, you can easily prepare a roadmap to success by nailing down your objectives one by one.

About the author

Hi I'm Jeff Kiefer and this is my blog. I've been in the Internet Marketing industry for over ten years now, and I would like to share all my experience, insights and other fun stuff with you guys!

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