The Investor Entry #4: January 15, 2023
Investment and trading are two terms that many confuse their similarities and differences, especially ones who are newly being introduced to the world of finance and financial markets. Many also think that by being a trader one becomes automatically an investor.
What we need to clarify in this article is that investors and traders are two distinguished groups, but not so much mutually exclusive. You can be an investor and a trader, but in this case you are doing two things at the same time; trading and investing. You are not doing the same thing.
Being A Trader
The way I explain being a trader to myself, is someone who is looking to make a frequent income in the financial markets. Someone who frequently buys and sells any financial security/ies.
Does that mean that investors don’t make frequent income?
Well, the objective of an investor is different than that of a trader, and we will cover the objective of the investor in its dedicated section, but some investors who specialize in investing in stocks that are known for their dividend distribution can get a steady income out of the dividends they receive from the stocks they own. That is if they did not re-invest it.
If the strategy was to re-invest the dividends then this stops being a strategy of creating income, and becomes a strategy of wealth multiplication of an investor who is playing a long term game.
Being An Investor
An investor on the other hand is someone who is not trying to create short term nor a frequent income. The investor is trying to increase his/her wealth. This means that an investor is looking for a long term gain.
Investors are not all alike, the same way that not all traders are alike. The most famous three types of investors are; those that invest in what are called growth stocks, those that invest in value stocks, and finally those that invest in dividend stocks.
Those different labels for investors do not hold true for everybody. A value investor, for example, would say that they are buying stocks at great value that have a big potential for growth. Therefore, we cannot say that those different strategies have exclusive traits.
Many investors would refuse such labels, as they consider them very limiting to the mindset of an investor. Personally, I would totally agree with this view point.
There is one last type of investment that I would like to mention here which is the passive investor. A passive investor would invest frequent amounts in an Equity Traded Fund (ETF) for many years. This is someone who is saving his/her money in the stock market rather than a saving account, without having to worry about any fundamentals whatsoever. Is this an investor?
Well, people differ on their answer to this question. This person is for sure investing, but maybe we can agree that this person is not an investor, or they are finding difficulties in assigning time or acquiring knowledge, and there is nothing wrong with that.
Investors And Traders
The differences between investors and traders are not mutually exclusive. There are traders who hold their positions for prolonged periods of time which can be years, then they sell their positions to find better opportunities.
The real difference between a trader and an investor in my point of view is not the time frame that positions are being held for, but rather in the way they look at opportunities or identify threats, or reasons that they feel they need to sell their positions in a particular security.
Traders fundamentally depend on technical analysis with a view point on general economic and fundamental indicators that affect their positions. Investors on the other hand, look for a thesis regarding a particular position. Some investors would totally neglect even the economic fundamentals, and concentrate totally on the company fundamentals to scan for opportunities or to scan possible changes in thesis to drop their positions.
As long as the thesis for approaching or not approaching a certain security holds, their position holds. Once the thesis changes (in their point of view), they change their perspective on that particular security.
To Which Group Should I Belong?
Today I am looking for investment opportunities. I am looking at investment as a better substitution to a saving account. Instead of leaving money in the bank, I try look for opportunities to put that money in stocks that I believe will grow in the future; therefore, growing my account instead of saving my account.
I would also like to know how I could earn an income from stocks. Therefore, I intend to learn trading in the future, so that I can earn income that will enable me, have more to spend as well as have more to invest.
This blog for example, is something that I am having fun with and I am also using as a way to create income, or at least hoping that it will by using the online business techniques.
Conclusion
If I am going to use the analogy of video games I would describe investment as a strategy game, and trading as a high speed game that requires attention at all times.
I believe this analogy holds true for investors but does not really hold true for all trading techniques. There are trading styles which depend on longer time frames that can be very similar to the strategy game pace, but as we mentioned before, the indicators used in this case are different between long term traders and investors.
We hope we were able to talk about a topic that brought more clarification to this confusing difference. I say confusing, because for a long period of time I didn’t create this difference in my mind. Even writing this article made me realize certain differences and similarities that I didn’t think of before.
The Investor
Sunday 15 January 2023
About The Author
I started looking into individual stocks in January 2022. I created this diary initially for myself to track my investing progress, and second as a place that I can share my ideas publicly hoping that others will share their ideas and learn from each other, and lastly as an online business where some links that I share are affiliate links, and if anybody bought anything by clicking those links I will get a commission based on that successful sale, which of course will not affect the price that you are buying the product or service at.
For a more detailed information on my affiliate disclosure please refer to the Full Affiliate Disclosure page, and if you are interested in building your own online business you can check this post here.
Furthermore, this site is in no way or form is giving any financial or investing advice, nor it is encouraging or discouraging people to buy or sell any financial instrument. This is a personal diary in which I track my own progress and share for informational, educational and entertainment purposes.