Investor vs Trader
The basic idea behind sharing this blog is to make the thin line difference clear between the two interrelated and generally confusing terms “Investing” & “Trading”.
One must have a view point before taking any step to land their capital into any kind of financial instruments like equities, bonds, government securities etc…
In ideal terms there should be solid research done which is required by an individual before landing their capital into any financial instrument with a time period in the mind, but in reality it is exactly the reverse part of it i.e. we infuse our capital and then do the research over it and then keep on changing from an investor to a trader and vice versa.
For example, an individual trades on an XYZ stock and if the price movement does not favour the trade, then he/she becomes an investor and as soon as the price moves back to the traded price then exit the so called investment, and becomes a trader.
Investing and trading are both ways to grow your capital or make profits in financial markets. The aim of investing lies in building one’s wealth over a time horizon i.e. a period of time by holding a diversified portfolio of different financial instruments. Trading on the other hand involves more frequent buying and selling of the same instruments with a view of generating higher rate of returns.
Investing is generally for a longer period of time enjoying different perks along with like dividends, interests, stock splits, bonus etc… Trading on the other is an attempt to buy an instrument at a lower price and sell at a higher price and vice versa which is termed as a “short sell” which is useful during southward movement of the markets.
Investing generally involves having a solid research on the market fundamentals and financials by analysing different financial ratios, management vision etc… Investing returns are said to have good performance in the range of 15% – 20% annually. Trading is having research over an instrument by the way of technical analysis tools like Moving averages (MACD), Oscillators, Bollinger bands etc..
Types of Investors
Some of the types of Investors are:
- Short Term Investor
- Short term – Couple of years
- Invests in bonds
- Basic Investor
- Medium-term investor. Time frame of 3 or more years
- 80% bonds, 20% equities
- Growth Oriented Investor
- 65% bonds, 35% equities
- Willing to take a loss of up to 6% per year
- Careful Investor
- Longer term horizon
- 90% bonds, 10% equities
- Plus Investor
- Looks to invest in a 3 to 5 year horizon
- Willing to take a loss of up to 4% per year
- 65% bonds, 35% equities
- High-Growth Investor
- Looks to invest in a 5 to 7 year horizon
- Either 40% bonds, 55% basic equities, 5% growth equities
- Or 45% bonds, 35% in basic equities, 20% in growth equities
Types of Traders
- Position Trader – Positions held for some months
- Swing Trader – Positions held for some days to weeks
- Day Trader – Positions held within the day with no overnight positions
- Scalp Trader – Positions held for some minutes for a very fast trade
Sample Trading Pattern for an Investor
Here’s an example of an investment in Infosys from IPO to this year.
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Sample Trading Pattern for a Trader
Here’s an example of a trader looking to buy and sell within 3-4 days.