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Making money is a top financial goal for most people who want to enter the world of trade and investment.
But profit doesn’t come as easy as saying, “I’m a trader” or “I’m an investor.” The challenge increases if you don’t understand the basics, like the difference between an investor and a trader.
Your success as a trader or investor depends on how well you understand basic concepts and how you use tools like trading platforms and interpret available data.
Another crucial aspect of trading or investing is partnering with a reputable brokerage like Taurex that cares about your progress.
Whether you’re just learning about financial instruments or you’re a long-time investor or trader looking for a broker that offers competitive trading and investing conditions, experts’ keen and candid advice can help you have the best trading experience.
Read on to learn more about investors and traders and how to become either or both.
The Roles of Traders and Investors
Traders and investors assume distinct roles and use different approaches in the market.
Investors buy and secure bonds, stocks, funds, and other investments to generate and establish long-term wealth.
In contrast, traders buy and sell securities, goods, financial products, and derivatives like currencies.
What Is an Investor?
An investor is a market participant that most people associate with terms like “stock market,” “stock trading,” and “stock exchange.”
If you’re an investor, your role is to purchase and hold company shares for the long term, indicating you have confidence that this company has solid future prospects.
Stock value and the company’s potential success are two of the most significant considerations for investors.
Who Are the Major Investors?
Major investors include:
- Mutual Funds: Investors usually keep their assets in mutual funds, which make long-term investments in businesses that meet specific standards.
- Investment Banks: Investment banks are institutions that help companies go public and raise money.
- Retail Investors: These individual investors buy stocks in the market for their personal accounts.
- Institutional Investors: These investors are large organisations or individuals who own sizable holdings in companies.
What Is a Trader?
Traders are market participants who buy and sell company shares with a focus on the market cycle rather than the company’s perceived financial strengths.
Traders generally concern themselves with the following:
- Price patterns: Traders examine the stock price history to predict future price movements.
- Supply and demand: They pay close attention to their trades intraday to understand the money’s movement.
- Market makers: Traders’ client services include hiring market makers to generate liquidity via rapid trading.
Who Are the Major Traders?
Here’s a list of primary traders:
- Investment Banks: Investment banks are in charge of selling the company’s equity via trading throughout the initial public offering process.
- Arbitrage Funds: These mutual funds exploit share price differences during fluctuations in the market.
- Proprietary Traders or Firms: These traders implement proprietary trading strategies and other techniques to make more money. They also compound the short-term gains that can be made by long-term investing.
Based on the information above, the primary distinctions between investors and traders are their market focus and the time they’re willing to hold on to shares.
Investors focus on potential future returns and are more likely to hold assets in the long term.
On the other hand, traders’ primary concern is to find the best position for their money within the market. This enables them to hold stocks for as short as a few minutes or as long as several months.
Trading and Investing: Two Approaches to Playing the Stock Market That Brings Risks and Benefits
Traders and investors participate in the stock market differently. They may experience different risks and receive different benefits.
As an investor, you’d have to commit the total value of your money upfront. The amount you invest represents the full scope of your potential return and risk.
With investments, you lose the exact amount you paid for shares in a bad investment.
On the other hand, trading allows you to earn or lose much more than your initial investment.
Investing vs Trading: What’s the Difference?
Investing and trading mainly differ in these areas: emphasis on time frame.
Traders take advantage of market volatility, so they generally enter and exit positions within a shorter time frame.
Meanwhile, investors seek larger returns and are more prone to hold shares for much longer.
Research and Analysis
Another difference between traders and investors is how they research their markets and seek opportunities.
Generally, investors focus on fundamental analysis. This analysis means investors examine available information regarding an asset to determine whether to buy or sell it.
In contrast, traders usually focus on technical analysis. In this analysis, traders evaluate price charts and analyse patterns, trends, and indicators to predict an asset’s potential price movements.
Risks and Risk Management
Trading and investing involve unique risks. Investors generally deal with the following risks:
- Market risk: This risk refers to when the whole market declines in value.
- Specific risk: This risk pertains to specific assets like stocks or crypto decreasing in value.
On the other hand, traders usually face these risks:
- Volatility risk: This risk refers to short-term price fluctuations.
- Leverage risk: As the name suggests, this risk refers to leverages or borrowed capital. Leverage can offer significant profit, but it can also magnify losses.
Financial markets are spaces for economic agents to transact using various financial instruments.
Under the law of supply and demand, this interaction between sellers and buyers determines the price of stocks.
Investing Basics: What Is Investing?
Investing means buying and holding a portfolio of stocks, mutual funds, bonds, and other financial instruments to build wealth over an extended period.
You can invest in the following ways:
- Passive investing: The primary purpose of passive investment is to match the market performance or benchmark index over time. This strategy uses funds like ETFs (exchange-traded funds) and index funds.
- Active investing: Using this strategy, investors actively buy and sell stocks for their portfolio to outperform a long-term benchmark index.
Here are some tips for investing wisely:
- Make a plan for buying, selling, and rebalancing your holdings in your investments.
- Consider index funds that mimic a market index’s performance, like the FTSE 100.
- Understand your investing strategy. This step includes identifying your retirement or college fund goals and how much risk you can tolerate.
Trading Basics: What Is Trading?
Unlike investing, trading is a more active, short-term-focused approach to engaging the financial market.
Traders usually hold assets for a shorter period than investors. Traders can hold or sell shares within days to a few weeks or short-sell them within minutes.
Moreover, investors primarily look for returns from increasing asset prices, while traders seek to profit from rising and falling asset prices.
Lastly, while investors typically ignore periods of underperformance, traders are more likely to use stop-loss orders to close losing positions automatically.
Here’s a list of typical trading approaches:
- Scalping: This trading strategy aims to pick up small profits regularly. It involves maintaining a position for a relatively short amount of time.
- Swing trading: This option focuses on more significant current price movements rather than basing positions on the start and finish of a price trend.
- Day trading: This approach involves opening and closing positions intraday or within the day.
- Position trading: This trading style seeks to profit from prominent price trends.
Here’s a list of trading tactics you can use to minimise your risks:
- Make a plan that specifies your buying and selling time frame. Set an amount that signals when to place and end a position.
- Follow your plan. If you just started trading, even an occasional adjustment of reasons for holding stocks can significantly increase your risks.
- Study short- and long-term capital gains.
What Is Social Trading?
Social trading allows traders, especially beginners, to observe or replicate the trading strategies of their peers or veteran traders.
Investing vs Trading: Which Is Better?
Trading and investing have their benefits and drawbacks.
There is no single approach that’s superior to the other. Both are effective strategies for making money in the international financial markets.
In the end, the number of variables determines which approach is best for you, including:
- Your knowledge of a specific market or asset class
- How much effort you’re willing to spend investigating and keeping track of your investments
- Your financial objectives
- Your risk tolerance
- The amount of capital you have to get started
Here’s a list of words and phrases that can help you understand trading and investing better:
- Crypto asset: You can electronically transfer, store, and trade this cryptographically secured digital asset
- Exchange-traded fund (ETF): This investment fund aims to track a specific market or index
- Going long: This phrase means buying an asset or placing your position
- Going short: This refers to selling an asset or ending your position
- Who is called an investor?
An investor is any individual or entity, like an organisation, who commits capital to a company, expecting to receive significant financial returns in the long term.
- What are the three types of traders?
The three types of traders are convergence, noise, and long-term value-based traders.
- Which involves more risk, trading or investing?
Trading can have a higher risk-to-reward ratio than investing and entails more risk. Investing is a long game, so it can involve less risk than trading.
- Which method earns more profit, investors or traders?
Investors and traders can both make money. However, when traders make the right choices and the market behaves according to their expectations, they usually earn more money than investors.
- What’s the difference between day traders and investors?
Day traders can make, and usually do, hundreds of trades within a day. On the other hand, investors take a slower approach and may hold stocks for months or even years.
- Can an investor be called a trader?
In a way, yes. However, most investors are not traders because they invest money in the market for a long time.