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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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