Investor?? Or wait… is it trader? Who am I? Who are you? Well okay, investing and trading are two very different methods of attempting to profit in the financial markets.
The goal of investing is to steadily build wealth over an extended period of time by means of buying and holding of a portfolio of stocks, baskets of stocks, mutual funds, bonds and other investment instruments.
Investors often enrich their profits through compounding, or reinvesting any profits and dividends into supplementary shares of stock.
Investments are frequently held for a period of years, or even decades, taking advantage of benefits like interest, dividends and stock splits along the way. Investors are typically more concerned with market fundamentals, such as price/earnings ratios and management forecasts.
Trading, on the other hand, involves the recurrent buying and selling of stock, commodities, currency pairs or other instruments, with the goal of producing returns that outpace buy-and-hold investing.
While investors may be gratified with a 10% to 15% annual return, traders might seek a 10% return each month.
Trading revenues are generated through buying at a lower price and selling at a higher price within a comparatively short period of time. The reverse is also true: trading profits are made by selling at a higher price and buying to cover at a lower price (known as “selling short”) to profit in falling markets.
Where buy-and-hold investors wait-out less profitable positions, traders must make returns (or take losses) within a stipulated period of time, and often use a shielding stop loss order to automatically close out losing positions at a predestined price level.
Traders often devote technical analysis tools, such as moving averages and stochastic oscillators, to find high-probability trading setups.
A trader’s “style” refers to the timeframe or holding period in which stocks, commodities or other trading instruments are bought and sold. Traders generally fall into one of four categories:
- Position Trader – positions are held from months to years
- Swing Trader – positions are held from days to weeks
- Day Trader – positions are held throughout the day only with no overnight positions
- Scalp Trader – positions are held for seconds to minutes with no overnight positions