If you are a new entrant in the stock market, you will come across some stock market jargons which will confuse you. One of them is related to the identity and the behaviour of the stock market participant.
Sometimes a participant is referred to as a stock investor and the next day same guy becomes a stock trader. These two terms are often used interchangeably, resulting in a lot of confusion. We will try to keep this confusion at bay by figuring out the personality and behaviour of stock investors and stock traders here.
Stock investor vs stock trader
We can differentiate between the two on the following parameters:
Return objective and number of transactions
Stock investors and stock traders basically approach the stock market with same objective but employ different modus operandi. Both of them want to maximize their return, but the stock investor tries to achieve this through a single transaction, whereas the stock trader chooses multiple transactions, but in quick succession. The stock investor just buys and holds the stock while the stock trader buys and sells stocks on a continuous basis.
A stock investor has a longer time horizon and is ready to hold stocks in multi-year time frame. A stock trader, on the other hand, has a relatively shorter time horizon and is not willing to hold the stock for more than a month or two. There is a large proportion of traders who do not even hold the stocks post one day or one week.
Selection of stocks for investment
Stock investors consistently look for undervalued stocks for investment. They are very patient and have the tendency to hold stocks till the market realises their actual worth. Stock traders, on the other hand, are least worried about the valuation of the stock. They are simply concerned about the price movement. They are ready to buy an overvalued stock if the price movement suggests so. Similarly, they can short sell undervalued stock if the price movement is in downward direction.
Market segment they are active in
Stock investors are interested in taking delivery whereas traders are not interested in taking delivery. This constraint makes the derivative market more suitable for traders and cash market for investors.
Stock investors rely heavily on fundamental analysis for identifying investment avenues. They employ top down and bottoms up approach together with ratio analysis for stock selection. On the contrary, stock traders use technical analysis to maximize their returns. They are only concerned about historical and current price movements. Based on the price movement, a lot of indicators have been defined using which traders place their bet.
Why should you know the difference?
One should use the above parameters to understand his or her psychology before entering the market. Identifying your personality at the very beginning will enable you to employ the right tools and techniques to be a winner. It's difficult to say which technique is better as we have trend-setting examples in the form of Warren Buffet and George Soros from both the fields. Both of them have made a great fortune following two different paths. Hence, it's not recommended to judge the path as both lead to the same destination. It's only about choosing one based on your psychology. If you are comfortable with speculation, be a trader, and if you are conservative, choose to be an investor.
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