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What Is The Difference Between A Trader And An Investor
Are you a trader or an investor? The difference
Many people are confused about the role of a trader and an investor. They think that they can only be one or the other. This misconception limits their perspective in learning to acquire the required financial knowledge. The truth is, a trader can be an investor, and at the same time, an investor can also be a trader. However, a successful trader may not be a successful investor and a successful investor may not be a successful trader.
A trader and/or investor is an individual who engages in the transfer of financial assets in any financial market, either for themselves or on behalf of someone else. The main difference between a trader and an investor is the duration for which the person holds the asset. Investors tend to have a longer-term time horizon, whereas traders tend to hold assets for shorter periods of time in order to capitalize on short-term trends.
This diagram shows the scale of intensity from zero or negative to maximum as it progresses from left to right for people who only save money in the cash, invest or trade financial securities. The second part of the diagram shows the different components that can be fit into the scale. For example, in terms of profit, as we see in the diagram, money you save in the bank will only give you limited interest. A person who saves his money in the bank gains zero or even negative profit from it. But why? Taking Australia as an example, the interest rate now is around 3%, which is very close to the inflation rate. Almost all the money made from the interest rate will be balanced up by the inflation rate. Inflation is the constant increase of prices for general goods and services, causing a decline of the value of money over time. Furthermore, countries such as Switzerland, Sweden and Japan are imposing negative interest rates on their citizens. Instead of receiving money on deposits, depositors must pay regularly to keep their money with the bank. With just a little bit of guidance and knowledge, you can easily start investing into a security that generates a return higher than saving your money in the bank. Nevertheless, a trader would generally make more profit in a short term time frame compared to an investor. That is because a trader captures more opportunities by obtaining additional information and analysis of the market.
Other than the profit, other components can be fit into the diagram as well. One example is the risk profile. Investing incurs lower risks compared to trading. Traders tend to sneak in and out of the market quickly to get the quick profit. Trading is subject to the market volatility and can be wiped out instantly without critical thinking and quick judgement. Hence traders generally require higher skill level, more time and more effort in their training to do well in the market. Investors, on the other hand, tend to hold on to their positions for a longer time. They are not affected as easily by market volatility as much as traders.
The trading terms are characterised by the period you hold your investment. Clearly, day trading means you trade and close on the same day.
Fast in, fast out. Day traders will open a couple of trades within the day and close them before the market closes. The short term will be typically 1–3 months, while long term can be more than 3 months to years. Generally people defined themselves as an investor if they are holding a particular security for more than 3 months.
The most important question to ask yourself is, what time commitment are you wanting and willing to give? The decision would depend on your life goals and current lifestyle. Can you sit in front of computer 8 hours every day to analyse the market? Maybe you would only want to look at the market once every day or once every week. Or you might have a full time job and just want to analyse the market for 15 minutes every day. In addition, your risk acceptance level may be high or low. All these factors contribute to the type of trading which is best suited to your needs and goals - short term, medium term or long term trading (investing).