Your approach to the trading market dictates your market strategy, your philosophy and the steps you take on the way to your goal. So who are you: a trader or an investor? Maybe both? Is there even a difference between them? Understanding the differences between investors and traders is important because it may prevent you from following a chaotic approach and making repeated mistakes. It might also allow you to pick certain traits of each approach and combine them in a mindful way.
In general, the goals of both traders and investors are aligned: the main intention is generating a positive outcome through market participation. However, the approach is different depending on the length at which the transactions take place.
Investors
Generally, investors are focused on larger timeframes. Their ambition is to build a portfolio over time, investing in stocks, bonds, mutual funds and other investment instruments. Here are some of the things that are associated with investing:
- Investors usually do not pay attention to short-term trends: their long-term commitment to the market allows them to wait out on any temporary downtrend with the expectation that the price will continue growing in the future.
- Investors normally focus more on market fundamentals, since they play a larger role in the long-term perspective. For example, market capitalization may not matter as much with trades that last from several hours to several days. However, investors that are purchasing a company’s shares to hold for several years will need this information in order to make a more informed decision.
- Usually long-term investments are associated with higher capital and larger investments. Investing implies buying, and shares can be quite costly, especially when purchased in high quantities.
- Diversification plays a huge role in investing, since portfolios are held for long periods of time. A well diversified portfolio should be balanced in order to manage the risks more efficiently.
Traders
Unlike investors, traders make short-term deals, which naturally means a larger amount of transactions. Traders’ main goal is usually to generate an outcome that may be compared or even exceed the outcome of long-term investing, without waiting for several years. Trading is characterized by the following points:
- Traders make a lot more transactions, but their length is considerably shorter than transactions that occur in investing. They can last from several minutes to several days or months, but not longer.
- Traders seek much higher returns, however, they are associated with higher risk as well.
- Volatile markets are much more favored by traders, while investors might prefer more stable conditions.
- Traders make both short and long deals (“Buy” and “Sell”), which may increase the amount of possibilities of entries.
- Trading is possible in any market conditions — rapid ups and downs might be preferred by traders, whereas investors always look for the optimal conditions to enter and exit deals.
- Diversification is just as important in trading, even though trading is normally associated with smaller investments. Risk management and the ability to control emotions are imperative for all traders.
What to choose?
While the two approaches are quite different, fortunately, there is no need to choose one or the other. Those who prefer having a bit more control over their investment and generally invest for longer periods of time, may consider trading as an option to explore new instruments. Those who prefer trading and the more rapid execution of transactions might consider investing in long-term options and manage risks accordingly.
No matter what choice you make, base it on your personal preferences and risk tolerance but don’t forget to evaluate all of the pros and cons of each option.
