Are you a beginner to the Stock Market? Do you get confused between the terms Investor and Trader? Are you an Investor or a trader? Which hat are you wearing? To clarify all these doubts read this article to the end. Let us start the topic of Investor vs Trader.
If you are buying shares of a company and holding it for a longer time I mean more than a year or couple of years or decades. Then it is called Investing.
Investing is one of the ways to create wealth. Few investors buy shares with a lump sum amount of money and few follow Systematic Investment Plans (SIP). When you are holding shares for such a long period of time you will be receiving dividends, bonus shares along with returns. If the price of a share goes down below the price where the investor bought it he doesn’t get worried because of his long term view on the stock. Instead, he will add more.
Benjamin Graham in his book “THE INTELLIGENT INVESTOR” stated that
“An investment operation is one which, upon thorough analysis promises the safety of principal and an adequate return. Operations not meeting these requirements are speculative”.
Warren Buffet referred this book as “ BY FAR THE BEST BOOK ON INVESTING EVER WRITTEN”.
Investors follow “Fundamental Analysis” and set their own criteria before buying a stock. They initiate the buy only when the stock meets their criteria. They don’t speculate. If you want to learn about fundamental analysis read this book Security Analysis: Sixth Edition, Foreword by Warren Buffett
Unlike investors, traders do not lay down their money in the markets for a longer period of time. Their transactions i.e., buying and selling happen in a very short time. They operate on leverages given by the broker. You can read about leverage by clicking me.
There are four types of traders
- Day Traders
- Swing Traders
- Positional Traders
Scalpers execute their trades within a few minutes. Some times in a couple of seconds. They are also called as Fast Traders. This kind of traders enters and exit into trades many times in a day. Scalpers plays for only a few ticks and exit with a profit. Nowadays the job of a scalper is done by High-Frequency Trading computers which are designed combinedly by machine learning experts, mathematicians, traders, and coders.
Day traders execute their trades within a day. They do not carry their positions overnight. Everything happens in a day. By the end of the day, he either has to take profit or loss.
Professional Scalpers and Day Traders make their own rules and follow them with discipline. They play with stop losses. Executing trades without stop loss can blow up traders account.
In swing trading, the trader loves to ride on the trend. As soon as a new trend is formed he tries to catch it, rides it and exit when it comes to an end. The length of the trade may range from 1 to 7 days.
This type of trading is most suitable for working professionals who can’t sit before the screen for the whole day. But at the end of the day, he has to give his time at least a couple of hours to examine his positions and trend of the market.
A positional trader holds his trades ranging from a week to a few months. He doesn’t react to very short term corrections. The risk in swing and positional trade is less comparable to scalping and day trading. The size of profits received by the positional trader will be more because they enter during good trend formations like swing traders and hold it more than swing trader.
The above all types of traders follow “Technical Analysis” and build their own strategies based on their trading style.
- Investors buy shares with long term view in mind.
- Investing is a way of building wealth.
- Investors follow “FUNDAMENTAL ANALYSIS”
- Traders operate with the leverage provided by brokers
- In trading buying and selling of shares takes place in a short time
- Traders follow “TECHNICAL ANALYSIS”
The upcoming article will explain the Fundamental Analysis and Technical Analysis in detail.
Here is another article which explains the difference between Trading and regular Job. To read it CLICK ME