Would you want to be a Trader or an Investor? 

Traders and investors can easily be mistaken for each other. The two have distinct differences. Understanding the difference between the two is important for participants or potential entrants of the financial markets. After understanding the differences between the two, one can choose which side he or she would want to identify with. Below are the differences;

Time Horizon

Traders take positions in the market for short durations that can last for seconds to weeks. Investors on the other hand, take positions that can be held for years.

Gradual Appreciation and Market Volatility

Traders often look for market volatility to ensure that they make money from price movements. Contrarily, investors look for gradual appreciation of their positions over time. Investors are less bothered with market volatility or price fluctuations.

Active versus Passive Income

Traders’ trait of being in and out of positions categorizes them as people seeking active income. Oppositely, investors seek passive income, which can be achieved through regular dividends and value appreciation.

Analysis

Traders find themselves obsessing over price movements coupled with either technical or fundamental analysis, or both. Investors keenly look a company’s value as one of their investment modalities. The company value is referred to as intrinsic value. This value helps investors project a company’s earnings into the future without necessarily worrying over current value or price declines. This is why an investor can easily buy an overbought market and hold his or her positions unlike a trader. A trader will be more skeptical over a similar move. Most traders appear to make decisions based on fragmented pieces of information unlike investors who look at a company in breadth and depth.

Exposure to Risk

Traders are exposed to more market risk compared to investors. The active form of money management traders have, exposes them to more mistakes such as emotional trading. This can easily lead to overtrading in a bid to recover losses made. Investors understand that markets need time and that good companies have a high probability for appreciating in value. As a result, investors are less exposed to market risks in their buy positions.

Risk Management

The behavior of the trader determines their returns, investors can sit pretty for long durations for markets to go their way, and they even can afford to forget they had a position only to check it after a few years. Traders have to engage strict measures on risk management that easily hurt novices and sometimes seasoned traders. For instance, a tight stop loss will often stop out a trader from his or her position and a trade continue to head towards his or her initially chosen direction. Investors on the other hand, need to understand the position of the company in its bigger picture and hence do not worry of being stopped out because they do not necessarily need to have a stop loss.

Traders can easily be affected by greed compared to investors. Traders can overleverage their positions to maximize their gains, this is less likely to happen to investors mostly because of their patient nature.

For the average person, investing is the best route to take. For novices or persons with no experience, strategy or a working system, trading would not be ideal.

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