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Trader or Investor?
You
can’t watch financial television or pick up an investment
publication without seeing the terms “trader” or “investor”
a couple of hundred times.
But what are the differences between these two types
of participants in the financial markets?
What behavior is appropriate for each?
Can you mix the characteristics of the two pursuits
or is this likely to get you in trouble?
What should be the focus of each?
It IS important to figure out if you are primarily
an investor or a trader.
You can be one or the other at different times, but
you have to decide which hat you’ll primarily be wearing when
embracing a specific transaction.
What is the key difference between an investor and
a trader?
An investor has to first be concerned about the fundamental
data about a stock, since he is in a position for a longer
period of time. Technical
analysis is secondary to an investor.
The trader needs to focus on recent price action of
the individual stock and the market as a whole.
The investor and trader get into a transaction for
different reasons and needs to keep in focus why they are
holding the position they are in.
A trader may buy or short a stock because of a particular
bottoming or topping action on a price chart.
An investor looks at a new product introduction or
a consistent pattern of earnings.
An investor better know what is happening in an industry,
where in the simplest terms a trader may not even care what
products a company manufactures as long as the share price
exhibits certain characteristics.
The investor better read as many financial publications
as possible, and he’d better know how to read an income statement
and balance sheet.
On the other hand an investor needs good charting software,
a fast link to the markets, and a bookcase full of books on
technical analysis.
There is a spectrum in which the two profiles can
be mixed.
In the middle of the time spectrum you need to develop
both skills.
You can have great gains by purchasing a rapidly growing
company with great earnings when the share price is temporarily
undervalued.
On the short end of the time spectrum the trader may
not be concerned about fundamentals since he is only holding
the shares for a handful of minutes or hours.
All he cares about is that the shares seem to be at
the low end of a range or has been steadily moving higher
with a discernable amount of momentum.
On the long end of the spectrum the investor doesn’t
care if a stock is at the exact bottom of a move since he
won’t be selling it until the stock significantly exceeds
the top of it’s current range due to excellent earnings and
product growth orchestrated by a superb management team.
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