Definition of Trader and Investor
When it comes to participants in the financial markets, they are usually classified under two categories: trader or investors. Despite the fact that they both intend to profit from the market, these two parties are distinct.
Generally, traders aim to benefit from short-term changes in the prices of financial assets (e.g. stocks and bonds). This approach is known as timing-the-market. On the other hand, investors aim to benefit from long-term changes in the prices of these same assets. This approach is known as time-in-the-market.
That being said, let us further evaluate this dichotomy:
1. Time Frame (Minutes vs Years)
Trader | Investor |
i) The goal is to obtain quick and short-term gains | i) The main goal is to gradually accumulate wealth over a longer period of time |
ii) The average period is seconds to a few weeks | ii) The average period is a few months to decades. |
Traders view the market as a place to make quick and short-term gains. Their primary goal is to find a way to rapidly buy and sell financial assets whilst obtaining maximum profits.
On their part, investors seek to gradually and steadily accumulate wealth over an extended period of time. They purchase and hold financial assets through periods of either severe or modest price fluctuations, with the expectation that, over time, the market will stabilize and profits will be earned.
NASDAQ Composite Index – 13 Year Daily Chart
Illustration. Over the last 13 years, the investors who bought all the shares (stocks/equities) listed on the Nasdaq stock exchange have seen their portfolio values grow by 521%. Source: www.macrotrends.net
2. Returns and risk
Trader | Investor |
i) Earn high-risk capital growth over a short period | i) Earn medium-risk capital growth over a long period |
ii) High risk, high return | ii) (Short-run) Low risk, low return, (Long run) Low risk, high return |
Traders’ main focus is usually on the price movement of financial assets in the market. If the price of an asset grows significantly higher than its purchase price, traders take this opportunity to sell it and gain a profit.
Investors are typically more concerned with market fundamentals such as growth opportunity, profits, sector outlook and management forecasts.
What do you think of this breakdown? Do you have any differences or similarities of your own to add? Please mention them in the comment box below and we will include them.
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