Hey Veterans: Have You Ever Been Confused About The Difference Between An Investor and A Trader?
Warren Buffet (the world’s greatest investor, in my opinion) once said that “Calling someone who trades actively in the market an investor is like calling someone who repeatedly engages in one-night stands a romantic…”
That statement is dead-on. And really funny too!
His point is that investing is an action that is taken with such gravity that it is almost an act of finality. It’s like you are choosing to get married to the stock, bond or other investment.
Trading, and in particular, active trading, on the other hand, is an activity that can be made on the slightest of whims and can terminate on even flimsier notice.
I like to think of this difference in more down-to-earth terms, and so we have put together this list which is borrowed from the infographic at the bottom of this article to help people really understand the difference more deeply.
1. The goals of trading and investing are basically different.
The goal of trading is to take advantage of temporary inefficiencies in the market and profit in the short term. The goal of investing is to accumulate wealth over time through the increase in the value of assets which can only be done by holding them for the long term.
2. Different Belief Systems
The underlying belief system of a trader is based on the idea that she can predict the direction of a short-term price fluctuation and take advantage of it. Investors typically have a deep belief in the intrinsic value of their asset and are only concerned about whether the asset will continue to add to this value.
3. Profit Expectations Differ
The way a trader profits is based on purchasing on a low fluctuation and selling on a “high point”. This is considered by investors to be a fool’s errand as the short-term market price fluctuations are nearly impossible to predict. Investors want to profit based on the ability of the asset to provide cash flow in the short term and value gains in the long term.
4. Holding Periods Differ Vastly
The holding period of a trader can be as short as a few minutes. The typical holding period of an investor is greater than one year, and many times, much greater.
5. Profit Expectations
The expected returns of an active trader might be as much as 10% per month. This is not always reality as fluctuations in market conditions make this kind of return supremely difficult to maintain. An investor might expect between 5 and 15% per year return and would be delighted with a 5% loss if the general market tanked 25% over that time.
6. Tools of the Trade
The analysis tools a trader might use are termed technical indicators which are mostly statistics that are generally based on the direction of price movement. Investors typically rely on ‘fundamental’ analysis which tries to determine the intrinsic value of an investment based on the cash flow the investment will generate over its lifetime.
The tactics a trader uses to earn a return is rapid buying and selling of the assets. The investor’s tactic is to buy an asset at a price they perceive to be significantly lower than the intrinsic value then hold as long as necessary for the market to bring the price to a point well above intrinsic value.
8. Avoiding and Preventing Loss
The trader’s defense against the unexpected might include trying to place sell orders that get them out of an adverse price move. The investor usually rides out adverse price moves based on the faith that their analysis of the asset is usually more correct than the market’s often wildly inaccurate fluctuations.
If you have other information to share about trading or investing feel free to share in the comments or on our Facebook page. Also feel free to share the infographic.