Why The Confusion?

What is the difference between traders and investors? This is one of the most important things to consider when evaluating your investment profile, and yet it is often answered incorrectly.  The main reason why people are confused over these terms is because many people started off as a trader but ended up as an investor when things go wrong.  Most people buy into a share hoping that they can sell it off after the price goes up and make some profit. But when the price drops, they refuse to cut loss and hope that at some point of time it will miraculously rebound. They held on to this hope for years and there you have it – A trader who unknowingly became an investor.

The Investor Has The Patience To Wait

The investor buys stock with the same objective as buying an asset, such as a property. His main concern is whether this asset can deliver an income stream and he is particularly concern about the fundamentals of this asset. The company’s performance, debts, dividend payouts, profits and loss will have directly affect the value of the company and will have a strong impact on the potential of his returns 5 or 10 years down the road, when he decide to sell off the shares.

Just like you are unlikely to sell off your house the moment property prices drop, an investor will not be too concern about short term fluctuation in the stock prices because the fundamentals of the company has not changed, and he will still be collecting dividend along the way. However, if the stock price rises dramatically he may be tempted to sell to collect a capital gain.

The Trader Takes His Profit To Generate More Money

The trader has a completely different objective, his patience for profits is lesser than that of an investor because he just wants to buy a stock and sell it off at a higher price within a short time frame. Using the profits, he will then buy and sell other stocks and continuously generate more money. Trading to him is just an activity that drives profits and it does not matter if the company he buys into is selling food, computers, electronics or clothes. He does not need to spend hours to study fundamentals, balance sheets, profits and loss statements etc, his job is to find a stock which he can sell for a higher price, any dividend is just additional bonus.  A successful businessman will capitalize on the current market fad and buy in items that are in strong demand because he knows that he can easily resell them at a higher price. If Valentine’s Day is approaching, he will stock up more roses instead of chrysanthemums, because those love struck guys will be fighting to buy roses even though their price is much higher than the low demand  chrysanthemums.  Similarly, we should buy stock that has a strong and rising trend so that we can sell them at a higher price within a short time frame.

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