INVESTORS VS TRADERS
Many people are lured into the world of trading because of the promise of “Quick Returns”! Yes, you can make money real fast, but you can lose your money real quick too!
Trading and investing are two very different ways of profiting from the financial markets.
Benjamin Graham defined investment clearly as:
"An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return. Operations not meeting these requirements are speculative."
When you are investing, you are looking at a longer time horizon and you expect the assets to generate income for you repetitively. It could be rental yield from properties; interest from bonds or dividends from stocks. The goal of investing is to gradually build wealth overtime. Investors look for values in assets, they focus on the fundamental of assets, they analyze assets using fundamental analysis. Investors are willing to buy and hold an asset, with the understanding that asset prices fluctuate in short term, but over the long run, prices will recover and move in a steady uptrend.
When you are trading you tend to speculate on an asset, hoping to take advantage of the price difference for short term gains. While most traders speculate on commodities, index futures, forex and stocks for gains on small price movements, others do practice longer term position trades that aim at bigger price differences. It is widely believed that most traders use technical analysis for their trades, however, fundamental analysis is also commonly employed by traders to give them a sense of a macro picture for the assets that they are trading.
Types of Traders
There are generally four types of traders:
Scalp traders – who hold positions in seconds and minutes, with no overnight position.
Day traders – who hold positions within one day.
Swing traders – who hold positions from days to weeks.
Position traders – who hold positions from weeks to months or even years.
I am both: an Investor and a Trader
Most traders are also investors, although the reverse is not necessarily true. For example, I enjoy holding long term position in the equity market as most of the stocks that I am holding are dividend stocks that give me fantastic returns annually. At the same time, I also trade in the derivative market to take advantage of certain “obvious trends” such as a “head and shoulder” or “double bottom” chart patterns. Hence, we can say that both types of investing styles can actually complement each other and add value to your overall portfolio.
Whether you consider yourself a trader or an investor, make sure that you learn well how to make good entries and exits. Discipline is very important to trading. Very often we failed because we procrastinate in cutting losses.
Investor or trader – which is better? Whichever fits your personality, risk tolerance and lifestyle. Do not let anyone tell you that you should be one or the other. Examine yourself, and do what lets you sleep well every night.