Investors and traders both appear in financial markets to make profits on the buying and selling of securities—the difference between the two lies in their approach, strategy, and duration of holding a financial commodity. But why are traders smarter than investors?
Traders are considered smarter than investors because they do what investors do, albeit at a faster pace, by capitalizing on present opportunities as they come. However, both traders and investors need to be smarter than the average individual to be successful.
In this article, you will learn about traders and investors, what their professions entail, what makes each different from the other, and the advantages and disadvantages of each.
IMPORTANT SIDENOTE: I surveyed 1500+ traders to understand how social trading impacted their trading outcomes. The results shocked my belief system! Read my latest article: ‘Exploring Social Trading: Community, Profit, and Collaboration’ for my in-depth findings through the data collected from this survey!
Table of Contents
What Do Traders Do?
Traders have a faster, more focused approach. They enter and exit markets fast, making sure to buy stocks only when it benefits them in the present without regard for long-term investment plans. They pay more attention to the technical factors, using chart analysis and tools such as pivot points or moving averages to figure out where a stock will be soon.
Rather than looking at a company’s future prospects, they work on where the company is now, where their stock will be, and when is the right time to enter the market for it. Hence, traders will buy stocks at a low price, hold them for a short period—sometimes even less than a day—and then sell it as soon as the price hits a target for which they will gain profits.
Ultimately, traders have different strategies due to their fast trading approach. Often traders will buy and sell stocks within minutes, making use of short-term price fluctuations. Many of them will even set a daily target of profit, which they will achieve with the stock market’s volatility.
Compared to investing, a trader may set a 15% return for a month while an investor will be content with an annual return of the same amount.
Traders also use different techniques such as short selling, which consists of selling stocks at a low price and then repurchasing them at an even lower price. This is because traders speculate its price to fall or the more commonly seen strategy of buying at a low price and selling it for a higher one.
Traders also prefer to stop loss at a determined price where they know profits will start to fall. One of the main things to distinguish a trader from an investor is the time-frame within which they buy and sell stocks.
- A scalp trader will hold positions for minutes and seconds without holding any stock for overnight durations.
- As the name suggests, a day trader holds and trades stocks throughout the day with no overnight positions.
- A swing trader will hold stocks for more than days, sometimes even leading up to weeks.
- At the other extreme of the spectrum, a position trader will buy and keep stocks for months and years.
Advantages of Trading
Listed below are the primary advantages of trading when compared to investing –
- Trading ensures capital growth and a faster return on profits. When a trader buys a share at a lower price only to sell it within a few days at a higher price, they are outperforming the market. Consequently, traders will earn a return of 10% or 15% per month, making profits regular.
- For a trader, even a falling market works for their benefit; in fact, they apply one of their best-selling strategies through this price drop. Traders do not shy away from the volatility and fluctuations of the stock market. Instead, they use them to their advantage. By short selling or selling at a higher price, traders pocket the difference of their transaction for themselves.
- Traders make better use of their time. While some people prefer a more relaxed approach, the nature of a trader allows them to make the most of their day and the price fluctuations that occur during it. This leaves them more time to focus on other types of security trading; furthermore, their risk is minimized as their ‘stock’ is fairly limited and kept for a short duration.
Disadvantages of Trading
Listed below are the primary disadvantages of trading when compared to investing –
- Due to the market’s fast-paced movements, traders need to have exceptional amounts of focus and vigilance. They need to be quick with calculations and analysis so that points of entry and exit into a market are determined before it is too late.
- If you are a trader yourself, costs may not be too high. However, for those who use a broker to trade, transaction costs such as brokerage commissions can eat away a portion of your earnings. Given the market’s unpredictability, profits are not always generated; hence these costs may be challenging to cover.
What Do Investors Do?
An investor’s primary goal is also to generate higher returns. The difference is that they prefer to accumulate wealth over a long time rather than through quick trading. Investors will often manage portfolios and buy a well-researched combination of securities to ensure maximum profit for the far-off future.
Once they purchase a stock or any type of security, they do not take advantage of any price fluctuations because they expect the value to rise significantly over the years. Instead, they reap advantages in other forms such as dividends, bonus issues of share, and stock splits, which a trader cannot benefit from.
Investors like to take things slow—whether this results from their own personalities or the nature of their work is tough to distinguish. While a trader uses technical indicators and analysis, an investor will also pay attention to market fundamentals, industry analysis, financial reports, and more, using other tools such as compounding growth and reinvestment of profits.
They take more time to make decisions because they prefer a well thought out, thoroughly researched plan to ensure high profits. Even if the market for their held securities dip, they stick to them, focusing on riding out the downtrends knowing that the prices predicted towards the end of their investment will not only cover any costs but also make larger profits.
Advantages of Investing
Listed below are the primary advantages of investing when compared to trading –
- For investors, slow and steady wins the race. They make use of compounding. As the security or company being invested in grows, their profits will grow with it as well.
- Dividends and bonus shares are something traders do not get. As investors hold shares for years, they can earn annual cash flows in dividends and extra shares issues; if their research is done right, they will achieve profitability in the future.
- The relaxed pace of their income results in a passive source of income. Even if they invest, they can sit back and focus on other things while the profit gradually grows.
Disadvantages of Investing
Listed below are primary advantages of investing when compared to trading –
- With the investment, money tends to stay tied up in one place for a time. An investor also requires a larger capital to invest as they consider forming a portfolio and buying in larger amounts hence exposing their money to risks.
- Returns are slow, much slower when placed next to a trader. What a trader earns in a month is what an investor makes in a year.
- Investing is capital-intensive. The phrases “the rich get richer” and “you need money to make money” are more accurate for investing than trading. To make good money trading, you can produce stable returns on a small amount and pivot to trading for friends and family. This isn’t how investing works, and your biggest value as an investor is your access to capital. Unfortunately, this is oftentimes also your biggest barrier to entry.
Author’s Recommendations: Top Trading and Investment Resources To Consider
Before concluding this article, I wanted to share few trading and investment resources that I have vetted, with the help of 50+ consistently profitable traders, for you. I am confident that you will greatly benefit in your trading journey by considering one or more of these resources.
- Roadmap to Becoming a Consistently Profitable Trader: I surveyed 5000+ traders (and interviewed 50+ profitable traders) to create the best possible step by step trading guide for you. Read my article: ‘7 Proven Steps To Profitable Trading’ to learn about my findings from surveying 5000+ traders, and to learn how these learnings can be leveraged to your advantage.
- Best Broker For Trading Success: I reviewed 15+ brokers and discussed my findings with 50+ consistently profitable traders. Post all that assessment, the best all round broker that our collective minds picked was M1 Finance. If you are looking to open a brokerage account, choose M1 Finance. You just cannot go wrong with it! Click Here To Sign Up for M1 Finance Today!
- Best Trading Courses You Can Take For Free (or at extremely low cost): I reviewed 30+ trading courses to recommend you the best resource, and found Trading Strategies in Emerging Markets Specialization on Coursera to beat every other course on the market. Plus, if you complete this course within 7 days, it will cost you nothing and will be absolutely free! Click Here To Sign Up Today! (If you don’t find this course valuable, you can cancel anytime within the 7 days trial period and pay nothing.)
- Best Passive Investment Platform For Exponential (Potentially) Returns: By enabling passive investments into a Bitcoin ETF, Acorns gives you the best opportunity to make exponential returns on your passive investments. Plus, Acorns is currently offering a $15 bonus for simply singing up to their platform – so that is one opportunity you don’t want to miss! (assuming you are interested in this platform). Click Here To Get $15 Bonus By Signing Up For Acorns Today! (It will take you less than 5 mins to sign up, and it is totally worth it.)
Conclusion
While some people may consider traders smarter, it all comes down to how a person perceives profit, risk, and, most importantly, time. Those who enjoy stability will opt for investing as they rely on research, while those who are quick in decisions and want frequent earnings will enjoy trading.
BEFORE YOU GO: Don’t forget to check out my latest article – ‘Exploring Social Trading: Community, Profit, and Collaboration’. I surveyed 1500+ traders to identify the impact social trading can have on your trading performance, and shared all my findings in this article. No matter where you are in your trading journey today, I am confident that you will find this article helpful!
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