In the world of finance the terms ‘trader’ and ‘investor’ get tossed around pretty liberally, and are often used interchangeably. To the uninitiated this may not much matter, but there are important differences between an investor and a trader.
Let’s examine these differences between investors and traders, and see why it is so important to people who are just getting started in the exciting world of finance to decide which one they want to be.
A Day in the Life
So what is the biggest difference between an investor and a trader?
A trader spends his days trading different stocks based on price action. An investor, on the other hand, spends most of their time researching companies so they can make decisions based on a company’s fundamentals.
While traders aren’t necessarily glued to their screens 24/7, they do spend most their time trading or reading up on stocks, refining their trading skills, developing new techniques and grinding out steady profits day after day.
Investors spend most of their time researching companies that may be undervalued by studying their financials. They aren’t concerned with day to day price movements but are more interested in the bigger picture and the overall trend.
Traders spend more time trading because they are actively trying to make money every day by using price action and news catalyst to make their trading decisions. It is a much faster style than investing and requires a certain personality to handle the stresses of trading everyday.
Profits vs Returns
Investors are looking for a reasonable rate of return on their investments over quarters, years and even decades. A down year or two is fine because their target return is an average over many years, and there are bound to be some downturns.
Traders are looking for profits. Every day a trader sits down to trade they are looking to be buying and selling shares, and booking a profit on each trade. They aren’t worried about making a few percentage point of return ten years from now because they want to be retired somewhere warm and sunny by then.
Long Term vs Short Term Thinking
Investors will look for safe and stable stocks that offer regular dividends over long periods. Traders are looking for stocks that will increase in value this week, day or hour, so that they can make their profit and move on to the next target.
Investing involves developing a portfolio of complementary stocks and other assets that will gradually increase over long periods of time while minimizing risks.
Trading involves seeking out undervalued and overvalued shares, and then making a quick profit by trading these shares.
Investors think in terms of years and decades, traders think in terms of days, hours and even minutes.
Technical vs Fundamental Analysis
Fundamental analysis determines the equilibrium price of a share, technical analysis determines how the price action will get there.
Investors identify a target price for a stock, and then buy and hold until the price reaches that point.
Traders are looking at the huge range of variability that occurs as a stock’s price moves from its present position to its long run equilibrium.
A stock that increases 2% in one month could have increased and decreased more than 25% in total on its way there. By using technical analysis, a trader can book a profit many times over while the investor relies on fundamental analysis to book that 2% gain in one month.
Traders and investors as a whole do not face different levels of risk, but rather different types of risk.
Investors face the risk that their long and patient approach does not pay off in the end. While they may be taking it slow and steady, there is not much that they can do if they made a few wrong choices and ended up in the red at the end of the race.
Traders face risk every single day, but it is bite-sized risk that can be managed and controlled on a daily basis. A bad day today just means that you need to do a little better tomorrow.
Traders are able to adjust to circumstances because they are actively watching their positions and make quick changes based on the price action. Investors tend to set large stops based on fundamentals and will just sit back and see what happens. It is a much more passive way to invest in the markets but everyone approaches it differently based on risk tolerance and personal preferences.
Trader vs Investor: Which One Are You?
After reviewing the difference between an investor and a trader, it is up to you to decide which one is the right fit for you.
Investors look to stable profits long on the horizon while traders are looking to take their wins or losses today and move on to a fresh start on each tomorrow.
There is no right or wrong choice, just a matter of which path suits your personality better. People who want a little more for themselves while they continue on with their working lives go on to become investors, while the people who want to put the effort in to get ahead in life follow the path of the trader.
Trader vs investor: choose your path today!