When I was in elementary school I was constantly trying to get attention from other kids. I craved it like a basic bitch craves a pumpkin spice latte on October 1st. One day I took my mom’s prescription glasses so everyone would ask me questions about them. Near the end of the day, the glasses had made me so dizzy that I puked all over my desk. Nobody sat by me for weeks.
It wasn’t a fun experience but it did teach me a good lesson about being true to yourself. When people talking about the stock market, they often use the terms “trader” or “investor” to describe themselves. Many people consider these terms to be one in the same. In today’s article, I am going be explaining how they are actually quite different and by the end you will know how to classify yourself.
First and foremost, traders do NOT really care about the fundamentals of a company. Their time frame for the trades they are looking at are often only a couple of weeks long at the most. For this reason, they do not worry about what they company’s growth looks like in the long-term and they also do not get into the nitty-gritty details of the company’s business model. You will often hear the trades they place being called “swing trades” or “day trades” because they only last that short period of time.
Traders rely on technical analysis and charting patterns for the bulk of their trades. They look at price history combined with technical studies such as Bollinger Bands, SMA, and EMA to give them a better indication of when to enter and exit a trade. If I am a trader, I will invest in a company solely off of technical charts, even if I absolutely hate what the company does and think it has no future. For now, I want to take advantage of a short-term move in price. Being a trader can be riskier than being an investor because your time-horizon is so small.
Investors are all about long-term trades in value companies. They look for companies that they believe will have massive growth over a period of years. For this reason, they aren’t not as emotional to the short-term price swings in a stock. Think of investors like Mark Cuban from Shark Tank. He is looking for companies that will make him lots of money over a period of many years. This means that investors are looking for solid fundamentals in a company. They carefully analyze their business model, financial statements, and expected growth to see if this company has the potential to be a major player in its industry over time.
|Fundamentals||Low Concern||High Concern|
|Technicals||High Concern||Low Concern|
So which are you, a trader or an investor? Can you be both? Yes! In my article, How to Make an Extra $5,000 per Year, I introduce the core and explore strategy. The core of your portfolio is your nest egg (80%) and it is where you want to be an investor! You have your long-term plays that are slowly growing and compounding over time. Then you have your explore portion of your portfolio (20%) in which you try out short-term strategies as a trader! These can be riskier investments but give you the potential to achieve higher returns.
Homework: Think about if your personality suits you better as a trader or an investor. Are you comfortable seeing short-term swings in the price of a stock? Looks at 3 stocks and determine which ones would be good “trades” and which ones would be good “investments.”