Before participating in stock markets, it is important to know the difference between an investor and a trader.
Even though many people use terms investing and trading interchangeably, they are in reality two very different approaches of generating profits from the stock market. Let’s find out the key differences.
Investors invest their money for long periods of time, sometimes even decades. Short term fluctuations in the market are insignificant to investors.
Traders hold stocks for a much shorter period. It could be weeks, and more often a day. Swing Traders hold for more than a day. Traders who buy and sell on the same day are called Day Traders.
An investor typically would be happy with around 15% returns in a year whereas a trader would aim for around 10% return in a month. A trader aims to profit from changes in stock prices whereas dividends form an important part of an investor’s income.
Risk is the uncertainty associated with the market. Stock markets are much more volatile in the short term than in the long term, which makes trading much riskier than investing.
There are two broad categories of financial analysis:
- Fundamental Analysis: Uses fundamentals of the company like ratios, earning, financial statements, etc. to find the intrinsic value of the stock
- Technical Analysis: Uses past trading activity, price movements, trends, patterns and charts to predict the movement of stock price.
Investors typically use fundamental analysis. And traders, you guessed it right, use technical analysis.
5. Time Commitment
Trading requires a significant time commitment. A day trader has to put at least 2 hours everyday. Day traders aim to capitalize on the large price movements during the first one hour after the market opens which requires a lot of commitment.
The research that goes into investing can be done anytime and they only need to check on their stocks weekly or even monthly.
Warren Buffet vs George Soros
Buffet has been quoted saying he puts his money in stocks that he completely understands. He checks the fundamentals of the stock.He has been great at suppressing emotion through market fluctuations.
The Stock Market is a device for transferring money from the impatient to the patient — Warren Buffet
Soros, on the other hand, is a speculator. He relies on short-term fluctuations in the market. The fundamentals of a stock play a minor role in his decision making.
Markets are constantly in a state of uncertainty and flux and money is made by discounting the obvious and betting on the unexpected. — George Soros
Both trading and investing can be done together, in fact, some amount of investing is necessary for those rainy days. Your personality, risk appetite, time availability, etc. are few of the factors you can choose to decide if you are a trader or an investor.
What kind are you? Did you like the post? What can be improved? Let me know in the comments!