What is the Difference Between an Investor and a Trader?
A buy-and-hold investor will buy stocks when the stock is low and hold it for a long period of time, for years or even decades. In contrast, a trader will buy a stock when it is going up and sell as soon as it starts going down. They will usually hold the stock for only a short period of time, sometimes as short as a few minutes.
In real estate, there are both long-term investors and short-term traders as well. The long-term investor buys properties when prices are low. And they hold them for decades. The short-term trader is known as a flipper. They like to go into a fast growing market, buy houses that need little bit of work, fix them up and then sell. Unfortunately this strategy only works when the market is going up. As prices start to fall, all the flippers lose their money and go back to their day job.
Both strategies have benefits and drawbacks. One of the benefits of long-term investing is that once you’ve taken a position, it requires very little work on the investor’s part. Regardless of whether the market goes up or down, they usually hold their position. And, as the market goes down, they tend to buy more. Warren Buffett is the most famous long-term stock investor.
The main drawback with buy-and-hold investing is that the net worth of an individual can fluctuate wildly. For example, long-term stock investors have seen their net worth drop as much as 50% in the last six months. However, for the savvy and rich long-term investor, this drop does not bother them. They know enough about the markets to understand what is happening, and they have enough money so that short-term fluctuations don’t affect them.
Short-term trading is quite different. Short-term traders buy and sell quickly, so this type of trading typically takes more of the trader’s time. It also requires greater sophistication, knowledge and intelligence. That’s why there are much fewer successful traders compared to successful investors.
One of the main advantages of trading is that if it’s done correctly, the account value should not drop significantly. The trader is constantly getting feedback on whether their system is working, so it’s immediately obvious when there is a problem: as soon as they start losing money. And that’s one of the differences between the inexperienced and clueless trader and the successful, accomplished trader. The beginning trader keeps on losing money and wonders why. The successful trader stops what they are doing and figures out why it’s not working.
Related posts:
- What’s the Difference Between an Investor and a Trader?
- A Volatile Economy is Great for Traders
- Automated Trading and Investing
- Automated Trading and the Economy
- Automated Trading and the Value Investing
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is one of my favorite financial books of all time. It's an allegory about a guy who has a terrible job, and how he overcomes challenges to achieve his dreams.
I am mostly a Trader and sometimes an Investor. But I like to trade mostly because I make bigger profit.
@Chiko777
Hi Chiko777,
As always, thanks for your comment. And, you make a good point. Is it better to be a trader than an investor if you can make more money? I think so. And, I think that being a trader requires better skills as well.