The Difference Between Trading and Investing

July 21, 2014

Before we put any money into the stock market, we need to define our trading personality. The first step in this process is to determine whether we are traders or investors. Investors usually hold positions for a longer period of time than traders. This can be a matter or weeks, months, or even years. Traders usually hold positions for days or weeks, and in some cases for just a few hours.

Investors and traders use many of the same tools and techniques, but they adapt them to their trading personality and time frame. The time frame used is sometimes chosen for us. For example, if your profession or job does not allow you to monitor the market during the day, it will be very difficult to function as a trader, even though your personality may predispose you to active trading.

The key to successfully investing is of course the quality of the stock we chose. This is particularly important to investors, because they will hold their positions for longer periods. Fundamental analysis is very important in helping investors to select stocks that have strong ratings and a good long-term outlook. Investors are not concerned with the daily fluctuation of the prices because they know that they own fundamentally strong companies that in the long run should eventually go up in price.

Traders on the other hand can chose a style that matches their own personalities and risk tolerance. A day trader is one who is in and out of a stock in one day and never carries a position overnight. Relatively few traders can function in this stressful environment for very long. Most traders fall into the categories of swing, momentum, or position traders. These individuals usually hold their positions from a few days to a few weeks, depending upon the market. They let the prices determine entrances and exits. The fundamentals are not as important to a trader as they are to an investor; price movement takes precedence

Both the traders and investors can make good use of technical analysis to determine the timing of their entries into the market, as well as accurate exits. However, precise entries and exits are of more importance to traders than to investors.

Both investors and traders should monitor their positions on daily basis. Neither needs to spend more than thirty minutes each day tracking and evaluating their portfolio. Of course traders who decide to trade full-time to make their living must decide whether they are willing to make the time commitment to follow the market intra-day. This does not mean that they are glued to the computer following every stock tick. However, there are decisions that often must be made during the course of the market day that will affect their positions. The fact that we follow the market on an intra-day basis does not mean that we are day traders.

Most traders are also investors, although the reverse is not necessarily true. Even traders who normally hold positions in their trading accounts for a few days at a time typically also manage their retirement funds in an IRA or other retirement plan. These accounts are normally not actively traded, so you might say that those of us who have both types of accounts have “split personalities.” This is not a bad thing; both disciplines have much to offer.

The investor who does no active trading might do well to learn the disciplines of active trading, particularly in the area of technical analysis. The time may come when their investments will grow large enough that they can quit their day job and trade full time. The ability to monitor the market during the day may allow them to reap the benefits of active trading, provided their personality allows for it.

Whether you consider yourself a trader or an investor, make sure that you learn well how to make good entries and exits. When we teach investors, we emphasize the importance of this discipline. It does no good to buy the right stock or option if you buy it after it has made its run, and sell it at close to the same price.

The other discipline we teach that applies to both traders and investors is proper money management. It is impossible to overemphasize the importance of the use of stop loss orders. It is also vital to know your targeted exit point before you enter any trade.

Investor or trader – which is better? Whichever fits your personality, risk tolerance and lifestyle. Don’t let anyone tell you that you should be one or the other. Examine yourself, and do what allows you sleep well every night.

Copyright ©2014

Dr. Tom Barrett is a pastor, teacher, author, conference keynote speaker, professor, certified executive coach, and marketplace minister. His teaching and coaching have blessed both church and business leaders. He has been ordained for over 40 years, and has pastored in seven churches over that time. Today he “pastors pastors” as he oversees ordained and licensed ministers in Florida for his ministerial fellowship.

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