Investor vs trader: The difference between investors and traders and how to know which approach is right for you. The key difference is time.
Investing is an interesting game, because there is more than one way to be successful at it.
The goal of all investors in the financial markets is the same—to earn a profit.
But the methods of profiting can differ greatly.
There are dividend investors, value investors, index investors, traders, meme stock investors, cryptocurrency enthusiasts, speculators and many more ways to profit from the financial markets.
Although there are many different investment styles, they can all essentially be boiled down to two categories: investor vs trader.
In this post, I will break down the difference between investors and traders, and help you decide which approach is best for you.
Let’s dive in.
Investor vs Trader
Investor vs Trader: What Is The Difference Between Investor And Trader?
The key difference between an investor and a trader is the time frame they invest for.
Investors hold stocks and investments for 5 years or more.
Meanwhile, the time frame of a trader is usually between 1 day to a few months.
Furthermore, investors take a long-term businesslike approach. They worry less about short-term fluctuations. Investors attempt to invest in companies that are growing earnings so that the market capitalization is larger in 5 years.
Traders, on the other hand, try to profit off short-term market volatility. Although they study market indicators and make educated guesses, they are more or less the same as speculators.
Let’s take a closer look at each individual style.
Investor
An investor is someone who aims to build wealth over a period of time.
They use fundamental analysis, investing metrics, and careful evaluation of management and earnings to make investment decisions.
Ideally, investors invest in stocks for at least 5-to-10 years.
If they invest for less than 5 years, the market could go through a market correction and their holdings may not have enough time to recover.
But if investments are invested for 5 years or more, even if the market experiences a catastrophic drop of between 30 to 50%, their holdings will have enough time to recover.
This is why, for the most part, investors aim to build wealth for retirement.
Because they have a long time frame before they will need the money, they have the ability to ride out the ups and downs of the market.
In regards to the way investors profit, they make money through long-term capital appreciation, dividends, interest, stock splits, stock buybacks, and the general compounding of their money.
Types Of Investors
Additionally, there are multiple investment styles available for long-term investors:
- Dividend investing
- Index investing
- ETF investing
- Mutual fund investing
- Growth investing
The investment style depends on the individual investor’s risk tolerance and personal preference. Dividend investors prefer to have company earnings paid out so they can reinvest and compound the money themselves. Index, ETF, and mutual fund investors prefer to be more passive and have someone else invest for them. Meanwhile, growth investors prefer that the company’s management team reallocates earnings for them to compound their wealth.
But the key similarity between these investment styles is that they are all intended for the long term.
Related article: Types Of Investors In The Stock Market
Trader
To put it bluntly, a trader is a short-term speculator that attempts to profit off market volatility.
Traders seek to earn a profit within a specific period of time. Some traders will get in and out of trades in less than a day, and some may hold up to a few months or years.
To earn a profit, they aim to buy low and sell high, or they will short a stock when it’s high if they suspect it will go lower.
Traders rely on news, rumours, stock market indicators, and technical analysis to make money.
Furthermore, trading often involves more active management and more frequent transactions.
As such, trading is a more time-consuming endeavour.
Types Of Traders
Similar to long-term investing, there are different styles of trading.
The different trading styles are mostly based on the traders’ holding periods.
Here are 4 of the most common trading styles:
- Day trading
- Swing trading
- Scalpers
- Sector or position trader
Day traders seek to get in and out of a position within 1 day. They will not hold overnight positions.
Swing traders make trades based on news and discrepancies in the market. For example, they may buy a stock when a bad news article comes out and sell it when it recovers.
As for scalpers, they are similar to day traders because they move in and out of positions quickly. In fact, they might hold positions for minutes, as they look to make gains from small movements.
Finally, sector or position traders will make seasonal trades or bets on sectors they have knowledge on. For instance, they will buy an oil stock in the low season and sell it in the high season.
The key similarities between these trading styles is that they all have shorter time frames than investors and they are all speculative.
Which Approach Is Right For You?
So, what’s the best way to go in the investor vs trader debate?
Frankly, it comes down to risk tolerance, the amount of time you have, and personal preferences.
Personally, I think being an investor is the only way to go because trading is speculative. I believe that you should invest the majority of your money and only trade with 10% of less of your total wealth.
But I will admit I am biased because dividend investing is my main strategy.
In my view, investing is more about risk management. So, I think both styles can fit together if you manage risk.
To give you a less tendentious answer, being an investor is best if you are saving for retirement, if you have a full-time job, if you have a long-time frame, if you have lower risk tolerance, if you want a more passive approach, or if you want to invest in and analyze business.
Alternatively, trading is good if you want to make it a full-time career, if you have a high risk tolerance, if you are more interested in macro trends, if you like betting and speculating, or if you find high-risk situations exhilarating.
Investor vs Trader – Final Thoughts
In summary, the key difference between an investor and a trader is the time frame they invest for.
An investor will invest for 5 years or more, while a trader will try to profit off short-term volatility.
In my personal opinion, being an investor is the only way to go, because trading is speculative.
If you want to be a trader, you should trade with only 10% of your wealth or less.
The rest of your wealth should be invested for the long time.
Now I’d like to hear from you: Are you a trader or investor? If you are an investor, do you trade with a percentage of your wealth?
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