The Difference Between an Investor and Trader
It’s good to review the basics over and over and over and over again, so I cannot encourage you enough to read and review my free stock market guide here and understand that despite beginning with just a few thousand dollars each, ALL of my millionaire trading challenge students have become millionaires within a few years**…not the decades that would be required such feats if they were investors.
As for the question at hand, there’s a world of difference between an investor and trader. When talking about how your money can make more money, the words “investor” and “trader” are often used interchangeably, but they most certainly shouldn’t be.
The reality is that while investors and traders are two completely different participants in the financial markets, they are different animals with different strategies, different actions, and different MOs–different goals.
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So, what exactly are these differences?
Well, it’s a tricky question to try to answer in an abbreviated format, but I’ll give it a try here. First ask yourself this, though:
What does a trader do while trading?
And what does an investor do while investing?
Somewhere in the answer you will figure out that a trader sometimes must act as an investor, and an investor sometimes must act like a trader–or at least he has to get traders to work for him.
More specifically, try out these five things that make the real difference between traders and investors:
#1 Dividends and Profits
I’ll start with what both traders and investors like most—money, which they get through dividends and profits.
Investors like dividends. They like to spend a long time researching a stock, sometimes even for weeks, before buying it–and they would do that for much less money than it’s worth and just wait as the dividends come in at regular intervals.
Traders like profits. They are focused on stocks specifically, preferring a short-term victory of a stock sold for, of course, more money than they spent when they bought it, and they may make anywhere from 1-10 trades in a single day.
#2 Long-Term vs Short-Term
This is the main difference between traders and investors, their perspective on time needed in order to profit. Traders like relations without obligations with stocks, while investors like long-lasting relations. Traders are buying just to sell it again, even in a very short period. Investors are buying to hold it, sometimes even for a very long time—even decades.
If you apply this to human relationships, it does make you think, doesn’t it? If you’re looking for a life partner, maybe an investor-type is better—present company excluded, of course.
#3 Fundamental vs Technical
Time plays a great role in this one, too. Investors like fundamental analysis, engaging in long and intensive research of companies, their financial statements, competitors, performance and global trends, to get as much as data about companies before making their own decisions about what to buy.
To the contrary, traders don’t waste as much time on that; they primarily keep up with technical analysis in their work and use fundamentals in a supporting role only. They look at the performance of the stock over a specific period, which can be short as a day or long as several years, then the performance of the market and the latest price trends, using charts, moving averages or other tools before deciding when to buy and when to sell.
#4 Risk, Patience and Security
We can’t talk about traders and investors without mentioning a risk, patience, and security, and these are also things that divide these two financial market animals.
Though traders take risks every day, investors might arguably be said to take even more risks, but they also have a great deal more patience when it comes to making money.
While working with dividends, investors are dealing with consistent income, while trading profits are much less certain. But either way, the market offers no guarantees. In both cases, you have to be prepared for unpleasant surprises.
In the case of a trader, you might lose a big chunk of money on any given day. Certainly, all of your daily trades aren’t going to be winners. But for an investor, the risk is losing huge sums that have been invested over years and decades. The pain after all that patience might be greater. Traders will be more adapted to losses.
#5 Faith and Fear
Faith is something that could be attributed more to investors: Faith in the strong future performance of a stock, for instance. It’s something traders don’t tend to have.
If making money on your money is a religion, then investors are true believers and traders are agnostics.
I think you are either a trader or an investor by nature. But when it comes to patience, they both have it—just in different ways. A trader puts a lot more effort, every day, into many different stocks. We get up early every day and run loads of technical analyses to find a few that hold promise for the day. Then we do it all over again, endlessly. It’s made a lot easier with all the tools and charts offered by the folks over at StocksToTrade. We might not have the patience to wait a decade or two to see results, but that is our psychology.
It doesn’t mean we don’t have patience. It means we have renewed patience every day, and we would get bored if we had to watch the same stock for 20 years. We want instant gratification, but we put a lot of work into that.
And when it comes to human relationships, well, don’t discount traders too quickly. We might not have the patience of an investor-type over decades, but every day is new and it’s a much more exciting ride.
Leave a comment below and tell me which you lean towards, trader or investor? There’s no right answer as we all have different personalities, strengths, and weaknesses, but it’s good to be honest with yourself, and with me, if you want to become my next millionaire trading challenge student as brutal honesty and self-reflection have been key to my success just as they will be key to your success too!