Trader vs Investor :
“The markets have been falling for five sessions in a row. I think it is a good time to buy”.
“My stock is up by 25% in 2 months. I would rather book profits than regret later”.
“The stock price is near its support level. I am planning to buy”.
Nothing wrong with any of the above statements. End of the day, you want to make money. Trader vs Investor is a difficult strategy. Any strategy that results in a profit is a great strategy. However, the question remains. Are you a trader or an investor?
What is Trade?
A trade is a contract wherein the buyer and the seller (of a specific item) agree on its price. For example, if Mr. A buys 100 shares of Infosys Technologies Limited for Rs.1000 (per share) from Ms. B, then Mr. A is a buyer and Ms.B is a seller. Both Mr. A and Ms. B are traders as both entered into a trade.
Who is a Trader?
Based on our above understanding of the word “trade”, every person, who is either buying or selling, is a trader. However, the mindset of a trader is to BOTH buys as well as sell! He/She buys with the intention of selling. Similarly, traders sell with the intention of buying back. If you look around on our roads, we find many shops which are named as traders. AK Traders, Janata Trading Co, etc are some typical names. These establishments are essentially organizations who are “trading” in a particular product. Their Business model is to buy from wholesale shops at lower prices and sell it to retail customers at a higher price, thereby making a reasonable profit.
Similarly, a trader in financial markets is looking to buy securities that he/she feels is priced lower and hopes to sell it as its price goes up. Smart traders also sell securities that they feel are priced high and hope to buy them back as the price comes down.
The intent of the trader is to clearly make a profit. However, a seasoned trader knows that his/ her expectation about the change in price may go wrong. In such a case, the trader “books the loss”.For example, if Mr. Baazigar felt that the share price of AIL (All is Lost Ltd) would go up and buys a few shares, but finds that the price actually falls steeply, he would still sell the shares at the lower price and incur a loss. He would not wait in the hope that someday, the price of AIL would go up and then he will sell it at a profit.
What is an Investment?
So, What are Investments? When we “invest” our money, we invest with the expectation that we will get a return on our investment. In other words, we expect to get more money. For example, if we “invest Rs.10,000 in a Fixed Deposit, we expect to get, say, Rs.10,800 after 1 year. Obviously, we cannot get that money immediately. Thus, the “returns” are “promised” after some time in the future. There is no guarantee or assurance that the promised money will come back. Even Banks may fail and the money invested in Fixed Deposits may never come back. It is just that we have faith in our banks and do not expect the banks to default. Thus, investments are about “expected future returns” So, when we invest, we need to have a “time-frame” in mind. Unlike a trade, which can give you instant returns in a few minutes, an investment takes time to provide returns. Also, there is no guarantee that we will definitely get the returns or for that matter, our investment. Just like a trade, we can lose money when we invest. Hence, we need to be careful with our investment.
Who is a Speculator?
Often, trading is dubbed as “speculation”. If you make money, you are an investor. If you lose money, you are a “speculator”. This convenient classification comes from a lack of understanding of how different people think and work. “Speculation” is not a vice or a “dirty habit” akin to, say, smoking. It is not that the markets would be a better place if all speculators exit the market. On the contrary, Speculators play an important role in the market. However, speculators participate in the market by trading.
Who makes money?
Both traders and investors make money. More importantly, both traders and investors lose money.
Trader vs Investor
Trading is exciting. Investing is boring. Trading keeps you glued to the screen. Investing does not need constant attention. Taking Cricket as an analogy, Trading is like T-20 where there is action every minute. Investing is like Test match cricket. Nothing seems to be moving, but a lot would have changed between sessions. Both Trading and investing require discipline and clarity of thought. After all, it is your hard-earned money.
What does a trader do?
A trader actively follows the market. He/she looks at the price trends. A trader anticipates how the stock price would move in response to particular news flow. In fact, the trader actively looks for various triggers that can have an impact on the price of a particular security. While traders can also have a long term view, most trading is done with a short time frame in mind. Traders are not too worried about asset allocation and portfolio diversification, though smart traders would factor in the same.
In many ways, trading is about outsmarting other players in the market. You get that right, you make tons of money. You go wrong, then you have nowhere to go.
What does an investor do?
When it comes to investing in stocks, an investor looks at the stock as a business opportunity. For example, if an investor is thinking of buying the shares of Kal Kya Hoga Ltd, he/she would first understand the business of the company. What is the business of the company? (what products does the company make or what services does it provide?) Does he/she believe that it is a good business? We will not get into the criteria for decision making at this stage, but the primary point is that when you invest in a stock, you actually invest in a business. You would think multiple times before you are convinced that it is a business with good future prospects.
Obviously, investment is about the long term. You do not start a business only to get disillusioned in a few months and close it down. Nor would you simply close one business and start another because it looks like a more attractive proposition. When you are in business, you are in it for the long haul.
Having got the business right, one also needs to buy at the right price. A great business bought at an exorbitant price may not result in the desired “returns” from the investment.
Lastly, Investors need to build a diversified portfolio. For all the research you have done, the future can totally surprise you. Putting all eggs in one basket have never been a great strategy and investment management is no exception.
What style suits us (trader vs investor)?
Well, the world is full of traders, investors, traders thinking of themselves as investors and investors behaving like traders. It depends upon our personality, our skillsets, the amount of time we have at our disposal and more importantly, our risk profile.
My experience, which is obviously an inadequate sample, suggests that retail traders are better off as investors rather than investors. Most “investors” I have known have made money in the long run.
However, the challenge has been to remain an investor when your instinct tells you to be a trader. There is an itch to do something, every time the market throws some data or news at us.
This is not to suggest that Investors are not bothered about what is happening around them. An investor also needs to review his/ her portfolio periodically. Any development that fundamentally alters the base assumption with which the investment was made should trigger a review with respect to such investment.
How to Invest? How to Trade?
The best way to invest is through the direct mutual fund route. A professional is managing your portfolio. You are unlikely to beat him/her, at least not consistently period after period. If you are a trader, mutual funds may not be the best route, unless you are trading in Exchange Traded Funds (ETFs). You can either directly invest or take the help of a professional fund manager.
To be a trader to be an investor is an individual’s choice. However, one needs to know if one is a trader or an investor. Understand the game that you are playing. Both Cricket and Baseball involve hitting the ball with the bat, but as they say, it is a “different ball game”.
Happy investing! And for a change, Happy Trading too. But not both!