The key difference between an investor and a market trader is that investors are in it for the long haul while traders are in and out of the market. While their methods are different, the market risk they both face is the same. Since both are equally at the mercy of the gyrating market, which of the two is better equipped to come out a winner at the end?
Investors put down their money in a “safe” mutual fund, a “blue chip” stock or “government-backed” security. They let their investment ride the ups and downs of the market until such time when they wish to redeem it. The last few years have proven that a “safe” mutual fund can drain thousands in management fees, a “blue chip” stock can get hammered with equal viciousness by the market as any other stock. And “government-backed” securities can quickly lose their lustre in a raging recession.
If choosing an investment vehicle is hard, holding it for the long term, as they have been told by their brokers and the media, is harder still. “Buy and hold” is a platitude in turbulent economic times, when you are left holding a third or a quarter of your initial investment. Worse still, this method takes a great psychological toll from risk-averse investors.
When their investment starts to go down in a bear market, they watch from the sidelines, hoping the trend will reverse and they will recoup their paper losses. They worry and fret, but are afraid to pull out their investment as that would crystallise their loss. Their only recourse is to pray and wait, and spend sleepless nights, worrying.
Most people find themselves in this predicament because they have been told that investing is for prudent people and trading is for gamblers. Unfortunately, this teaching has forced thousands of investors to lose millions of dollars.
The stereotypical image of a stock trader is one of an opportunistic shark, who darts in and out of the market. In reality, the trader is like a leopard stalking a prey and waiting for the right time and place to make the kill. While there are indeed some traders who day trade, there are others who are short, medium or long term traders. In fact, trading can be tailored to fit the personality and time horizon of the trader.
The major difference between the trader and the investor is that the former has a plan for both bull and bear markets, knows his entry triggers and has his exit strategy in place before he invests his money. A trader has a simple goal to make as much profit as the market can give him. For him, all stocks and securities are fair game. As long as he sees an opportunity for profit, he gets into and out of the market.
A trader must be alert and keep his eye on the market constantly to look for opportunities. This requires knowledge, patience and quick decision making skills. It takes some time to imbibe counter-intuitive skills like shorting a stock in a bear market. But these are skills worth learning and investing your time in. After all, if at the end of the day, you can profit from any market, it doesn’t really matter whether you call yourself a trader or an investor.