Are You an Investor or a Trader?

Many a novice investor believes that “investing” and “trading” are synonymous with one another—and it’s an understandable misconception. The terms are often used interchangeably by even the most seasoned of Wall Street professionals.

But in fact, these terms are defined by two distinctly different strategies. And understanding those differences is imperative in making an informed decision about which is the right one for you.

What’s the difference between an investor and a trader?

There are several.

To start, the goal of most investors is to accumulate steady profits over the long term. This is usually accomplished through a buy-and-hold strategy; investors build a diversified portfolio of stocks, bonds, funds, and various other investment vehicles, which they expect to mature and deliver strong returns over time. (By the way, if you have an IRA or 401(k) account, you’re invested.)

They’re more selective, and their choices are generally based on the investment’s fundamentals. They’re also generally willing to allocate larger position sizes to their holdings.

Because investments are typically held for the long term, investors may benefit from factors like acquisitions and spin-offs, as well as dividends and interest. And since the economy is generally expected to grow and move forward over time regardless of downtrends, shorter-term fluctuations (theoretically) won’t impact investors over the long term—at least not those who can withstand the price swings.

Traders, on the other hand, are more hands-on and active in the markets. They buy and sell their holdings (often quickly and frequently) to take advantage of shorter-term changes in the market, with the goal of outperforming a buy-and-hold strategy. They also tend to be less selective in their positions, choosing instead to devote smaller amounts of capital to a larger number of holdings.

Traders focus less on fundamentals than do investors, preferring instead technical analysis (which tracks market movements using tools like charts and moving averages). Various investment instruments and markets lend themselves best to trading, like the currency market, stocks, and commodities.

Which is the right investment strategy for you?

 

What’s best for you comes down to your own personal attributes as an investor. These include:

  • Goals: Knowing what you want out of the market is imperative to determining the right strategy for you. While long-term investors are interested in steady, long-term profits (10-15% a year), traders often look for returns of 10% or more per month. That’s a far different goal and requires a far different approach to the market.
  • Risk tolerance: Trading is an inherently riskier endeavor than investing. Traders must be alert and react quickly to price movements, lest they miss an opportunity. Due to the rapid nature of trading, traders spend less time on research. And they’re willing to add riskier names to their portfolios in the pursuit of higher profits.
  • Reaction to market movements: Since investors are usually in a name for the long haul, they’re less concerned with short-term price fluctuations, since they believe the price will rebound with time. Traders, however, often prefer to take losses and move on rather than wait out price movements.
  • Time: There are two important factors to consider here: a) Are you investing for long-term or short-term goals? And b) how much time do you have to devote to the markets? While traders reap rewards more quickly and often than investors, they also spend much more time at the computer watching price movements. Investors don’t need to manage their goldings on a daily or weekly basis.
  • Skill: The intricacies of trading typically involve more skill than does investing. You must be able to act and react quickly. Many traders use complex formulas and algorithms for determining their trades. But perhaps most importantly, traders develop and learn to follow gut instinct.

 

It’s important to note that investing and trading are not mutually exclusive. Both can be part of a balanced market strategy. But both don’t always appeal to everyone. And one is not inherently better than the other.

Depending on your goals and needs, either has the potential to deliver the returns you’re looking for. You just need to decide which is right for you.

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