Thursday, March 24, 2011

Investor? or Trader?

When I first got interested in the share markets, I used the terms invest and trade interchangeably and I think this is a common error that many people make. There are people that do not know these two words have very different meanings. I think, it is rather important to know the distinction between the two.

Warren Buffet is primarily an investor
George Soros on the other hand is primarily a trader

How are they different?
An investor by definition is one who commits capital in order to gain a financial return.
A trader by definition is one who trades (buying and selling) for profit.

I think an easy way to think about it is through these examples.
If you buy a property as an investment, you will hopefully rent it out to cover the mortgage costs and hold on to it hoping that value increases, hence, increasing the value of your assets and net worth.
If you are a trader, you’ll buy a property, renovate it hoping that it will increase the value of the property and then sell it to cash the profit

Another way that I look at it is, whether you pick a stock depending on fundamentals or technical indicators.

People who look at fundamentals tend to be investors. Fundamental analysis I guess is the study of external factors that affect the supply and demand of a particular market. They pay attention to various factors that will affect the company’s performance e.g. weather, government, p-e ratios, balance sheets, etc. A fair value for a company is then calculated based on various assumptions and algorithms and a decision is then made to buy or not to buy if the fair value is above the current asking price.

Technical analysis on the other hand, works quite differently and they tend to be traders. Technical analysis is based on the belief that, at any given point in time, market prices reflect all known factors affecting a particular market i.e. the price of a stock is a net result of everything affecting it. So they believe that a careful analysis of daily price action is an effective way to, well, predict which way the trend is moving. They are the ones who use different charting techniques and indicators. They also tend to have very strict rules or algorithms that they follow, that tells them when and how much to buy, as well as when to sell.

I think both techniques have their own pros and cons, and it comes down to the individual investing or trading. If you are better at a certain technique then by all means stick to it, in fact I will love to read about what your technique or formula is, so shoot me an email!

So are you an investor or a trader? Which one do you prefer? Which one is better?
What do you think? Let me know!

Once again, thanks for your time, do leave comments or send me an email or if you are really lazy, just click on one of the responses to the mini poll I have on the top right corner of the blog. I would love to read about what you think even if you think my post was complete bull.... It is a learning experience for us all.

2 comments:

  1. investors only take long positions?

    traders go long, short, use derivatives and the like...

    i reckon you can work a full time job and be a successful investor but to be a successful trader, you need to do it full time. also, a trader should also look at the fundamentals to confirm the direction of his technical analysis (and vice versa, but to a lesser extent since fundamentalists usually discount technical analysis as a form of gambling).

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  2. Thanks david, yeah i agree with what you said as well. You need to be hardcore to be a trader, however i do find technical analysis to be rather helpful.

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