Are you a Trader or Investor?
The next topic in the Investing Basics series is investing vs. trading. When we think about people who invest in any market (stocks, real-estate, currencies, cryptocurrencies, etc.), two types generally come to mind: Investors and Traders.
The stereotypical trader might be the frenetic floor trader yelling orders out across the trading pit, sleeves rolled up. Traders generally buy investments with the intention to sell when the price reaches a particular point, usually within a short time frame and with hopes of making a quick profit. On the other hand, an investor might be the old, white-haired guru who knows everything about the guts of a company (think Warren Buffet) and focuses on building a portfolio that grows over time. Investors generally buy investments and hold them with the expectation that they will grow in value and with the purpose of generating income via dividends. Dividends are regular payments of profits to shareholders. Typically, investors don’t intend to sell investments, good or bad. These may be extreme stereotypes but they do represent some key differences.
You may be asking yourself, am I a trading or an investor? Which is better? How do I know? I’ll break each down for you below. Traders and investors differ in three main ways: Timeframe, activity, and risk management. While there may be commonalities, traders and investors treat these three categories different.
Traders typically look at the market as a place to seek quick-term gains. Their goal is to figure out how to get in and out of a trade with maximum profits so that they can do it all over again with more money. This “do-it-all-over-again” attitude typically results in traders having a shorter time frame for buying and holding investments than investors.
Second, traders’ activity levels are different. Activity means trading and a trader needs to know when to get in and get out of a trade. For many traders, this means analyzing price charts to figure out when to get in and out of an investment’s price ride. Reading charts to know whether to buy or sell an investment is commonly referred to as Technical Analysis.
Finally, there’s risk. When it comes to risk, traders are more willing to take on higher amounts of risk for increased probability of a successful trade. Traders often use stop loss orders or exit points and price targets to help define risk. I have encouraged the use of Robinhood, an awesome stock investing app. Open a free stock trading account and get a free stock to sweeten the deal! Now, that’s a WIN WIN deal!
Because investors want to generate earnings from the appreciation of the investment and from dividends, their timeframe may be considerably longer than that of traders. In fact, investors may simply buy a stock and hold it indefinitely, with no plans to sell based on time. Just like traders, investors have some means to determine when to enter an investment. Often, this decision is based on a company’s overall health, which is determined by looking at quarterly earnings reports, its balance sheet, income statements, and financial reports. But unlike traders, investors typically don’t have a specific plan to exit an investment at a particular price. For many investors, risk management is a function of picking the correct investment in the first place. Price fluctuations are a typical function of an investment’s life. And, if an investment’s price does drop, investors tend to believe that the price will trend up over the long-haul. The amount of activity investors engage in is much less frequent than that of traders and is typically confined to adding new investments, or larger positions in current holdings, to a portfolio over time.
If you are asking yourself, “Am I a trader or investor?” you are not alone. I’ll lay out some “What-If “scenarios for you to personally analyze which type of financier you are.
You might be a trader if you:
Buy on expected price movements
Have no real interest in a Company beyond its stock price
You might be an investor if you:
Are uncomfortable jumping in and out of market based on short-term price changes
So which one are you?
Over time, you tend to be one or the other but probably have some elements of both types. You might have a large chunk of your portfolio in long-term investments, where you act like an investor. And, you may have another smaller chunk of your portfolio that you have dedicated to active trading. The real answer to the question “trader or investor?” is yes and yes.
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