Have you ever wondered whether you belong to the Investor camp or the Trader camp? Is there a difference? Well, the simple answer is – Yes! There are quite a lot of differences actually. For the beginners or maybe even for some who are already in the market for some time, this can be confusing.
This article aims to tell you what the differences are, and hopefully, makes you a better Investor and/or a Trader!
Let’s first look at what makes an Investor, an Investor!
1) The investor believes in time in the market
A good investor maintains a long term vision and is not concerned about the short term fluctuations of the stock. This is because the investor has been studying the company’s business fundamentals and feels confident that the stock price will likely be much higher than what it is today – in the next 3-5 years, 10 years or even more! The investor only sells when the business fundamentals declined or there is another company which is doing better. Otherwise, the investor would keep buying and accumulating the stock, if the business continues to do well, for as long as he/she wants to stay invested.
The investor believes time in the market is better than timing the market, therefore, makes long term investments.
Here’s the chart of Apple (AAPL) if one were to buy, hold and keep accumulating its shares for the past 5 years.
2) The investor may utilize some basic technical knowledge
After the investor chooses which company to invest in, the investor may make use of some basic technical knowledge to decide when to buy and how much to buy.
This ability allows a good investor to fine-tune on a slightly better entry timing as opposed to just buying at a random price.
For example, the investor chooses to buy on key support levels or on red days when the stock is down, rather than buying at the resistance or on green days when the stock has rallied up.
However this can be optional as the investor makes long term investments and does not really believe in timing the market. The investor can use the dollar-cost averaging (DCA) method – passive buying on fixed regular intervals, to accumulate the stocks over time.
3) Index is always an Investor’s best friend
The S&P 500 has an average return of about 10% per year for the last 30 years! Just like Warren Buffett said, for most people, the best thing to do is owning the S&P 500 index fund. This is because this style of investing can be quite passive and highly diversified, which would probably be suitable for most people, especially beginner investors.
Here’s the chart of S&P500 ETF (SPY) if one were to buy, hold and keep accumulating its shares for the past 30 years.
Then, what do traders do? How is trading different from investing?
1) The trader believes in timing the market
A trader times the market and buy/sell those fluctuations in the stock market. Volatility is the trader’s best friend. The trader can enter and exit the stock within months, weeks, days, hours, or even minutes! This will depend on how volatile the stock price is and the style that the trader adopts. The trader then makes money by buying/selling the difference in the stock price.
2) The trader makes full use of technical knowledge
To time the market well, a good trader will make use of a set of technical indicators, for example, moving averages, trendlines, support/resistance, price patterns and Fibonacci etc. There are just too many! But each trader has his/her own style and will make use of what he/she feels best. As such, traders are not concerned much about a company’s business fundamentals as they rely much on the charts and technical analysis of the stock price movements. They then place high probabilistic trades with sensible reward-risk ratio. They also have strict rules on position sizing, stop loss and profit.
3) Volatility is a trader’s best friend
Traders thrive on volatility i.e. stock price movements. Stock price that is flat and not moving is no good as the trader needs to buy/sell the difference in the stock price in order to make money.
A trader can trade the volatility during a shorter timeframe. Whereas an investor will buy and accumulate through a longer timeframe. Here are the charts of S&P500 ETF (SPY), comparing 5 days vs. 5 years.
As you can see, investors and traders are quite different. Investors rely on staying in the market over a long time, monitoring the business fundamentals or simply DCA into the index. While traders rely on timing the market by using a variety of technical indicators to place probabilistic trades and make money through stock price volatility.
Depending on your personality, risk appetite and the amount of time you can devote to monitor the market, you may be suitable to be an investor, a trader, or even both!
But regardless whether you choose to be an investor or trader, a good investor or trader does not rely on emotions or on others’ opinions to buy or sell the stock. Instead, they rely on fundamental knowledge (for an investor) or technical knowledge and rules (for a trader) in order to succeed in the stock market!
Invest and/or trade wisely! :)