These days, the terms investor and traders are used very loosely and many people treat the former as the latter and vice versa. However, there is actually a lot of difference in the investment approach of the investor and the trader. This article breaks down the key characteristics of both and will help you identify the path that suits you best.
Investor: Long Term View
An investor is one who treats buying stocks as owning a part of the company. He or she believes in the long term fundamentals and growth of the underlying company of the stock and buys when the current stock price is less than the intrinsic value of the company. Therefore, a key aspect of investors is that they tend to not bother about the short term volatility or stocks and will buy when stocks are cheap, and sell when they are overvalued. For this group, the selection of stocks is the most crucial. Selection of stocks involve analysis into the company’s businesses, checking whether its growth is intact and also how strong the balance sheet is to cope through challenging times. Since their strategy involves buying a company that is cheap, the more the stock drops, the more attractive it is in their eyes. A key risk is that a wrong analysis will result in them taking a large loss if the stock price does not recover since most of them do not have a stop loss for their trades. The key benefit for investors is that they do not have to time the market but rather make their buy and sell decisions based solely on the stock price and therefore take a longer term view from 6 months to more than a year to realise the stock’s value.
Trader: Timing is Key
For a trader on the other hand, timing the market is a key trait. Traders take a shorter term view on the market, therefore when they execute a trade, they will expect fast results, depending on what type of trader they are, they could buy and sell a stock within a day to within a month. Traders identify stocks that signals to them that they will move in a particular direction, either up and down, through various methods such as technical analysis, earnings report or just feeling the market sentiment based on price action. When a stock moves against them, they have a stop loss price in which they will sell the stock to minimise further losses. Therefore, selection criteria is not as important for the trader as compared to risk management as well as market timing.
Which is Better For You?
Depending on your lifestyle as well as your personality, you may be more suited to being an investor or trader. Being a trader involves dedicating more time to the market in order to feel the sentiment and also track price movements on a daily basis. If you have a full time job, it will be more prudent to take an investor view as it is much harder to time the market when you are holding a job. Also, a trader needs to be able to control his or her emotions of fear and greed and not let these feelings get the better of them on a daily basis. Also, if you are a person who is more adept at running numbers and reading financial reports, being an investor could be a better path for you. There are many successful investors as well as traders which show that people have excelled at both fields equally. Ultimately, the path that you take needs to be aligned to your commitment as well as your personality.