The words “trading” and “investing” are often used interchangeably by many people.  Is there a difference between the two styles in the market?  Which one do you prefer?  This article discusses the differences, and how they affect you.

Trading and investing are primarily distinguished by timeframes.  An investor usually holds investments for the long term (from 1 year to 10 or 20 years), while a trader can hold an asset for timeframes ranging from minutes (for a futures trader) to months (for a longer term stock trader).

Investors are therefore more hands off.  Once they have made the initial investment, they may monitor progress from time to time, but will generally ride out short term market fluctuations as long as the long term trend goes their way.  A trader must be more hands on.  Trading is a matter of picking shorter term trends and being able to either take a profit or a loss at the right time is more important.

There are some differences in leverage as well.  A trader will typically look for more leveraged assets in order to enhance short term returns.  For example, a trader may choose futures, leveraged forex, options or other derivatives.  An investor will choose stocks, or will use minimum leverage to allow for long term fluctuations.

Transaction costs are more significant for traders.  Where an investor might make 3-4 trades per year, a trader may make 60.  This means that a trader needs to carefully select a broker that offers a fairly low round turn transaction cost.  Since the trader tends to make his or her own decisions based on tactical responses to market movements, the trader will not generally require broker research but will need an accurate and current data source.  Many brokers that cater to traders will offer a trading platform (typically web based) and access to comprehensive real time market data.

Trader or investor?  It is really down to what your beliefs are about the market, and your own trading personality and skills.  If you can pick the ups and downs of the market, then trading will make more money for you.  Also, long term investors can be exposed to huge market movements that traders can avoid.  The flipside is that most traders don’t do that well, so if you want to be a trader and prosper, it is important to develop your skills.

Tags: investors, trader vs investor, traders

This entry was posted on Monday, March 17th, 2008 at 12:13 pm and is filed under Trading Basics. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.