One thing that confused me at the beginning was understanding the difference between a trader and an investor. There are many similarities and cross overs, but there are some fundamental differences.
The below image illustrates the basic differences, and below I will explain a little more about each one.
An investor is a person or organisation that puts their money towards an asset (such as company shares, gold, property etc.) with the aim of receiving financial gains over time. The financial gains can be either an increase in the capital value over time, or to get a regular income from it…..or both.
The investor will have undertaken research to understand the asset they are investing in. They will have confidence in its long term strength and it’s ability to return them more than their initial contribution.
There are two different types of investor, an Active Investor or a Passive Investor. An Active Investor manages their own investments and portfolio and does their own buying and selling. A Passive Investor puts their money into a professionally managed portfolio and pays a fee to have it looked after by a manager.
There are a number of different assets available to an investor which all provide their own types of risk and reward. Some common ones include:
Stocks & Shares (Equities)
An investor needs to understand their GOALS and RISK LEVEL to help them determine the strategy that best suits their needs.
A trader looks for the short term moves in price with the aim to buy and then sell for a profit. Traders can also sell and then buy for a profit, called shorting, but that is another topic.
They will mainly focus on the price and the technical analysis (chart patterns) to try and predict when a price will move in a specific direction. They are less interested in the fundamentals of the business or asset as they have no real interest in it’s long term qualities.
There are many different variations of trading. The easiest way for me to break it down is into 3 main categories:
Day traders do not hold a position over night, in fact they could buy and then sell within a few seconds. The day trader will be looking at chart patterns but will usually be focusing their efforts on trades with a catalysts, such as news events (i.e biotech stocks with a recent successful drug trial). Day traders also tend to trade on margin (borrowed money from the broker) to increase the size of their positions and maximise their profits.
Swing Traders can hold a position from a couple of days to a couple of months. Swing traders similar to day traders, are looking for a specific time when a price is about to move in a specific direction but this time over a longer period of time. They will use technical analysis, but will also need to understand some of the basic fundamentals to. The longer the period you are likely to hold the position, the more fundamental analysis you will probably need to do. Swing Traders can also trade on margin, but this can get expensive if there are over night borrowing fees.
Position Traders hold positions from a couple of weeks to several months. A position trader will use more fundamental analysis than the swing trader and day trader and will be less bothered about short term price movement. This style of trading is longer term, but still very much with the intention of selling for a profit after a specific price move or time period.
There are many variations and different names for traders due to the different time frames and strategies, some examples below:
Small Cap Trader
Large Cap Trader