Investors vs Traders

Are you an Investor or a Trader? 

Many people use the words "Trading" and "Investing" simultaneously & interchangeably when, in reality, they are two very different activities. While both traders and investors participate in the same marketplace i.e Share Market, they perform two very different tasks using very different strategies. For the market to operate smoothly there is the need for both the market participants


Who is an Investor? 

An investor is the market participant that the general public most often associates with the stock market. Investors are those who purchase shares of a company for the long term with the belief that the company has strong future prospects. Investors are basically concerned with two things - 

• Value - Investors must consider whether a company's shares represent a good value or not. For example, if two similar companies are trading at different earnings multiples, the lower one might be the better value because it suggests that the investor will need to pay less for the value of earnings when investing in Company A relative to what would be needed to gain exposure to the value of earnings in Company B.
• Success - Investors must measure the company's future success by looking at its financial strength through the different accounting books like Balance sheets, P/L Accounts and evaluating its future cash flows. 

Who Are the Major Investors?

There are many different investors that are active in the marketplace. In fact, the vast majority of the money that is at work in the markets belongs to investors. Major investors include:

• Investment Banks - Investment banks are the organizations that assist companies in going public and raising money. 

• Mutual Funds - Many individuals keep their money in mutual funds, which make long-term investments in companies that meet specific criteria. 
• Institutional Investors - These are large organizations or persons that hold large stakes in companies. Institutional investors often include company insiders, competitors hedging themselves and special opportunity investors. These people are very experienced and they carefully watch the balance sheets and other financial statements of the companies and analyse how are they conducting business.

• Insurance Houses - Insurance Houses are one of the largest investors. Eg: LIC

• Retail Investors - Retail investors are individuals that invest in the stock market for their personal accounts. A retail investor can be anyone like us. 

Common Characteristics of Investors

• Investors buy and hold and also for a long period of time.

• Investors enter long (or buying) positions.

• Investors focus on fundamental analysis.

• Investors are not concerned with short-term losses.

• Investors let profits accumulate and not just take out the profits quickly.

Who is a Trader?

Traders are market participants who purchase shares in a company with a focus on the market itself rather than the company's fundamentals. Markets that trade commodities lend themselves well to traders. After all, very few people purchase wheat because of its fundamental quality - they do so to take advantage of small price movements that occur as a result of supply and demand. Traders are basically concerned with the following - 

• Price Patterns - Traders will look at the price history data in an attempt to predict future price movements, which is known as Technical Analysis. Technical Analysis can be used for forecasting and thus minimize risk of monetary loss.
• Supply and Demand - Traders keep close watch on their trades intraday to see where the money is moving and why. Through the analysis, they keep a watchful eye on supply and demand of stocks

• Client Services - Market makers (broker -dealer firm) are actually hired by their clients to provide liquidity through rapid trading. 

Who Are the Major Traders?

Among the most popular types of Traders are - 

• Investment Banks - The shares that are not kept for long-term investment are sold. During the initial public offering process, investment banks are responsible for selling the company's stock in the open market through trading. 

• Proprietary Traders/Firms - Proprietary traders are hired by firms to make money through short-term trading. They use proprietary trading systems and other techniques in an attempt to make more money by compounding ( generating earnings from previous earnings) the short-term gains than can be made by long-term investing. 

Common Traits of Investors

• Traders enter a position to make money. 

• Traders will short sell a currency.

• Traders will hold for a short period of time.

• Traders use technical indicators and charts for Technical Analysis

• Traders cut losses.

• Traders take profits quickly.

Thank You !