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Investing vs. Trading – Which One Do You Prefer?

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Introduction

 

 

In life, you will often notice that you tend to compare and analyze two separate concepts: good vs evil, fast vs slow, easy vs hard, hot vs cold, ect. It is in these distinctions that we are able to generate a better understanding of abstract concepts that we slowly begin to remember and unknowingly incorporate in our every day lives. Since you are relatively new to the world of investing, chances are you have heard of the two types of players on wall street – there are your traders and there are your investors – and you may want to find out if you are one or the other – and in some cases, even both. In this lesson, we will be breaking down the fundamental debate of today’s lesson: Investing vs Trading – to see how you stack up, as this will determine your core investment strategies of how, when, and what you really should be investing in moving forward.

 

But before we begin, we would like you to read and agree to the Terms & Conditions of this post before you proceed any further.

Disclaimer: Invest In Wall Street is in no way financially or legally responsible for any investing decisions made by any of our readers and are, in turn, acting on their own free will. The information in this article is purely educational and should not be abused or misconstrued in any way, shape, or form.

Investing vs. Trading

 

When we think about people who invest in the stock market, two types of people generally come to mind, investors and traders.

The stereotypical image of a trader might be the frantic floor trader yelling orders out across the trading pit – with their sleeves rolled up.

 

 

Traders generally buy stocks with the intent to sell when the price reaches a particular point, usually within a short time frame, in hopes of making a quick profit.

On the other hand, an investor might be the white haired guru who knows everything about every company and the ins and outs of every industry like the back of his hand. You know, the ones that focus on building up your portfolio over time.

 

 

 

Investors generally buy stocks and hold them with the expectation that they will grow in value – and for the purpose of generating income via dividends, which are regular payments of profit to the shareholders. Typically, they don’t intend to sell good stocks, even when times are bad.

Now these may be extreme stereotypes, but they do represent some key differences between the two types.

You might now be asking, am I a trader or an investor? Which one is better? How do I know? To answer these questions fairly, lets evaluate traders and investors, in an apple to oranges comparison.

This can be done by breaking down how traders and investors differ in three main ways: time frame, activity, and risk management.

While there are some common elements, traders and investors approach these elements in a slightly different way.

First, lets dissect how traders look at time frame, activity, and risk.

The Traders

 

 

Traders typically look at the market as a place to seek quick short term gains. Their goal is to figure out how to get in and get out of a trade with maximum profit, so that they can do it all over again.

This ‘do it all over again’ attitude typically results in traders having a shorter time horizon for buying and holding stocks, compared to investors.

Second, traders activity levels are different. Activity simply refers to trading – and a trader needs to know when to get in and get out of a trade.

 

 

For many traders, this means analyzing price charts and other signals to know when to get on and off of a stock’s price ride. Reading charts to know when to buy and sell a stock is often called technical analysis.

Finally, there’s risk.

When it comes to risk, traders often see risk in light of the probability of success of the particular trade. Traders often use stop-loss/limit orders or exit points and profit targets to create trades that have defined risk, which helps them calculate the probability of success.

 

 

Now that you know how traders approach time, activity, and risk, let’s look at how investors do.

The Investors

 

 

Because investors want to generate earnings from the appreciation of the investment, and from dividends, their time frame may be considerably longer than that of traders.

In fact, investors may simply buy a stock and hold it indefinitely, with no plans to sell based on time.

 

 

Just like traders, investors have some means to determine when to enter an investment. Often this decision is based on a company’s overall health, which is determined by looking at it’s quarterly earnings reports, balance sheets, income statements, and financial reports.

Unlike traders, investors typically don’t have a specific plan to exit the stock at a particular price. For investors, risk management is a function of picking the correct investment in the first place.

Price fluctuations are simply an acceptable part of a stock’s life, and if the stock price does drop, investors tend to believe that it will go back up over the long haul.

The amount of activity that investors engage in is generally much less frequent than that of traders, and is often confined to simply adding new stock to a portfolio over time.

 

Investor Or Trader – Which One Are You?

 

If you’re asking yourself “Am I a trader or investor?” – you’re not alone. Let’s answer this question by exploring what-if scenarios.

 

You Might Be A Trader If…..

  1. You like the idea of buying and selling stock or any other tradable asset.
  2. You buy based on expected price movements.
  3. And you have no real interest in the underlying company beyond the movement of it’s stock price.


On The Other Hand, You May Be An Investor If…..

  1. You have a strong conviction about the long term prospects for a company’s growth.
  2. Or if you’re uncomfortable jumping in and out of the market based on short term price changes.

 

So which one are you? Over time, you will find that you tend to lean one way or the other, but you probably have some elements of both types.

You may have a large portion of your portfolio in long term investments where you act like an investor, and you may have another, likely smaller portion of your portfolio, dedicated to active trading.

When it really comes down to it, the answer to the question trader or investor may simply be yes and yes.

 

Quick Recap

In Review…..

Investing vs Trading

  • Traders generally buy stocks with the intent to sell when the price reaches a particular point, usually within a short time frame, in hopes of making a quick profit
  • Investors generally buy stocks and hold them with the expectation that they will grow in valueand for the purpose of generating income via dividends, which are regular payments of profit to the shareholders. Typically, they don’t intend to sell good stocks, even when times are bad

Traders

  • Traders typically look at the market as a place to seek quick short term gains. Their goal is to figure out how to get in and get out of a trade with maximum profit, so that they can do it all over again
  • This ‘do it all over again’ attitude typically results in traders having a shorter time horizon for buying and holding stocks, compared to investors
  • Second, traders activity levels are different. Activity simply refers to trading – and a trader needs to know when to get in and get out of a trade
  • For many traders, this means analyzing price charts and other signals to know when to get on and off of a stock’s price ride. Reading charts to know when to buy and sell a stock is often called technical analysis
  • When it comes to risk, traders often see risk in light of the probability of success of the particular trade. Traders often use stop-loss/limit orders or exit points and profit targets to create trades that have defined risk, which helps them calculate the probability of success

Investors

  • Because investors want to generate earnings from the appreciation of the investment, and from dividends, their time frame may be considerably longer than that of traders
  • In fact, investors may simply buy a stock and hold it indefinitely, with no plans to sell based on time
  • Just like traders, investors have some means to determine when to enter an investment. Often this decision is based on a company’s overall health, which is determined by looking at it’s quarterly earnings reports, balance sheets, income statements, and financial reports
  • Unlike traders, investors typically don’t have a specific plan to exit the stock at a particular price. For investors, risk management is a function of picking the correct investment in the first place
  • Price fluctuations are simply an acceptable part of a stock’s life, and if the stock price does drop, investors tend to believe that it will go back up over the long haul
  • The amount of activity that investors engage in is generally much less frequent than that of traders, and is often confined to simply adding new stock to a portfolio over time

 

 

This lesson has highlighted the key distinctions between the two archetypes of wall street. Again, you will find that you tend to be one or the either – but it is perfectly fine to do a little of both.

A trader’s primary goal is to have short time frames to make small and quick profits continuously to build up to a large sum of cash – as this can be done on a monthly, weekly, or even daily basis. Traders typically have a set routine and have more time to analyze the price movements. They also have extensive knowledge of how the market works and how to predict price action. A trader tends to invest in primarily derivatives such as options, futures, forex, ect. but it also not uncommon for those to trade stocks, bonds, and other assets. Traders also develop skills and trading techniques that can be used to adapt to the ever-changing market conditions.

If you don’t have hours to spend watching the price of a stock chart or lack the judgment and discipline required to be a trader – but would still like to reap the profits that the stock market has to offer, then investing may be the option for you. Investors tend to pick assets for the long term – as their overall goal is to provide them with extra income, either through capital gains (appreciation) or through dividends, interest payments (coupons), ect – as they slowly buy more and more assets to increase their revenue. Like traders, they do review and make adjustments if needed but, unlike traders, they are more likely to hold on to a position if market conditions take a turn for the worse – rather than shorting their position like a trader.

I hope you have enjoyed this post and found the information to be quite useful. If you have any questions or concerns, please feel free to leave them down in the comment thread below and make sure to like and share this post.

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