Welcome back to another post in my how to invest in stocks series. One of the topics that had been suggested to me to cover was the idea of the differences between what is considered an investor versus what is considered a trader. While it may seem like there is not a whole lot of difference between the two, there really is and you do yourself a disservice by not knowing which camp you’re in. Investing in stocks can be confusing for many, though by doing some simple analysis you can cut down on that confusion and get on with investing in the stock market. If you’re interested in reading other posts in this series, you can check them out below:
- How to Invest in Stocks When You Do Not Know Where to Start
- Is Investing in the Stock Market Really That Easy?
- When Should You Start Saving for Retirement?
Ask Yourself What You Want
When you start investing in stocks, or anything investment-related (I am using this very generally as it can apply to anything from stocks to real estate) you first need to determine what your goal is. Are you looking specifically at investing for retirement or are you saving for your children’s college tuition? Or, are you trying to reach multiple goals? All of that needs to be looked at and considered before determining what your investment goal is.
If you find yourself with multiple goals, one great way to attack this is to think of your investment portfolio as a pie which you can divide up into pieces. Then, you can assign those pieces to the specific goals you have, making it possible for you work towards achieving them.
We have one part of our portfolio where I am heavily investing in stocks and trading more often – which is through our accounts at Optionshouse, but also have a very large portion of our portfolio in more traditional buy and hold investing where we’re in index funds and a few solid dividend paying stocks – which is through our accounts at Scottrade that is geared towards our retirement planning.
This requires a bit more work, but it works with our needs and goals. One big key is determining what your goals are and realizing that these goals will likely change over time. In fact, I can pretty much guarantee it in most cases. It is therefore very important to keep a somewhat active eye over your investments. That does not have to mean watching it daily, but it also does not mean buying and forgetting.
What is a Trader?
Now that we have addressed goals we can move on to the distinction between what constitutes a trader and an investor. Keep in mind that I am speaking generally here and am not intending to criticize one over another, just trying to give a basic description of each. That said, a stock trader is someone who is actively trading stocks on a regular basis.
Whether they’re day trading a handful of stocks or dozens of stocks, their approach is much more short term in nature and they’re seeking to grow their investment portfolios by taking advantage of short term swings while holding stocks from as little as minutes at a time to maybe a day or so. They’re generally professional traders, or at the very least, someone who is somewhat well versed in regards to investing in stocks or options.
Ultimately, a trader is someone who is much more speculative than the average retail investor and is much more comfortable with the inherent risk of being in the stock market. I will say that if you’re investing in stocks and wanting to be more of a trader, make sure you know what you’re getting yourself into to make sure it fits with your risk appetite, not to mention the costs associated with more regular stock trading.
What is an Investor?
If the stock trader is the hare, then an investor (generally speaking) is the tortoise in the stock market. Whereas the trader is looking at the short term view of things, the investor is keeping their eye towards the end result. They choose to view investing in stocks, or mutual funds/ETFs, as a marathon and not a sprint.
They’re generally going to be someone who is closer to a buy and hold investor, or someone who is more apt to stay the course when it comes to their investments.
Ultimately, an investor is someone who is going to look at the nuts and bolts of a company and stick with them, not being spooked because something changes, but will roll with the punches because they have a good feeling about the given investment choice they’ve made.
Think of an investor as someone who is investing in stocks for retirement and actively adding to their positions on a regular basis while rebalancing their portfolios to best allocate their investments.
Investing in Stocks Takes Work, Regardless of Your Approach
My desire to not really paint one or the other in a bad light as they both have their shortcomings and benefits. Whichever you consider yourself, investing in stocks takes time and work – it just might look a little different depending on your approach. If you’re uncertain which camp you fit in to, then I encourage you to go back and analyze your goals, nail down what helps you sleep at night and determine what your knowledge level is.
The sad fact is that too many retail investors fail to do any of this analysis, open a brokerage account and just blindly start investing in stocks on a whim. I spoke with too many investors to count on a daily basis who did not know which they were and unfortunately too many betrayed their ultimate goals as a result.
I guess part of that goes back to not having a solid investment plan and allowing fear to be their guide when it comes to making investment decisions.
I know that if you’re just starting out investing in stocks that it can be overwhelming to determine what you should do or where you should start and that is fine, though do not allow that to hold you back. Sit down and spend some time educating yourself on investing, determine what your goals are and determining if you’re more of an investor or trader. That time spent will serve you well as you start down the road of investing in stocks and will benefit you and your portfolio in the long run.
What’s your approach when investing in stocks? Are you more of a trader or an investor? Could you ever be a day trader?