Who’s a trader and who’s an investor? This question might be a bit tough to answer off the top of your head, especially since traders sometimes act as investors and investors have traders working for them.
To make it easier to tell the difference between the two, here are five things to keep in mind:
#1 Dividends vs Profits
Investors love dividends. Traders love profits. That’s as short as the explanation gets. The longer version is that while traders tend to look for the short sharp win of a stock sold for more money that they bought it for, investors are more likely to spend a long time researching a stock before buying it for (hopefully) much less than it’s worth. Then, they sit back and relaxing as the dividend comes in at regular intervals.
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Traders can make 10 trades in a day. Investors could spend weeks researching a stock before making a decision to buy. That’s because traders are focused on the stock itself, while investors focus on the company that has issued this stock. For the former, it’s a short affair. For the latter, it’s sometimes a lifelong commitment.
#2 Fundamentals vs Technicals
Investors like fundamental analysis. This is what they base their investment decisions on: long, extensive research of a company, including financial statements, the state of the wider industry, main competitors and their performance, and global trends in supply and demand for the product or service the company sells.
Traders have no time to waste with fundamentals. What they look at is the historical performance of the stock over a given time period (which can be as short as a day and as long as several years), the performance of the market and the latest price trends. They use tools, such as candlestick charts, moving averages and stochastic oscillators, to decide when to buy and when to sell. In short, they rely on technical analysis in their work.
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#3 Safety vs Risk
It should by now be clear that generally – very generally – speaking, investors are much more risk-averse than traders, and they are also much more patient. Dividends are a more certain income while trading profits on commodities, say, are very uncertain.
Yet on the other hand, even the most stolid companies may sometimes be forced to cut their dividend, which, from an investor’s perspective, might effectively be a loss on the investment, depending on how long they’ve held the stock. A lot of oil and gas investors, for example, saw their dividend vanish amid the 2014 oil price crisis.
Then, there is always the possibility of a seemingly solid company going under, leaving its shareholders empty-handed. Nothing is sure in financial markets – there is always room for surprises. Traders can avoid these much more successfully than investors by not committing to a stock over the long term.
#4 Faith vs Fear
This distinction has nothing to do with morals. It has to do with what drives wrong decisions for investors and traders. Certainly, both types of financial market players have to deal with faith and fear–but to different degrees. For investors, faith in the future strong performance of a stock is much more pronounced, while for traders, fear of an impending loss gets the upper hand.
Both faith and fear can lead to mistakes as both investors and traders would readily admit. That’s why for many traders a career in investment is not really an option – first you study the stock, then you buy it, then continue to keep an eye on it, so that you avoid ending up losing your investment.
That’s also why for many investors, trading is not an option – making decisions with no sound, fundamental basis, whatsoever, in a matter of minutes, can simply be too much of a stressful event with – and that’s the big part – no certainty it will end with a reward.
#5 Long-term vs Short-term
In the end, all differences between investors and traders come down to just one big one: investors are in for the long haul; traders are just visitors in stocks, commodities, options and whatever else there is to trade in.
Investors buy to hold, sometimes for generations. Traders buy to sell, sometimes as soon as possible. The two groups have very different priorities, as listed above, and they are for the most part unlikely to be willing to swap places. Each to their own, after all—and psychology plays a huge role.
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