The purpose of investing is to gradually build wealth over an extended period of time through the buying and holding of a portfolio of stocks. Investors often enhance their profits through compounding, or reinvesting any profits and dividends into additional shares of stock. Most of the time, investors are not bothered by minor price fluctuations due to day to day trading.
These investments are often held for a period of years, or even decades, taking advantage of perks like interest, dividends and stock splits along the way. While markets inevitably fluctuate, investors will "ride out" the downtrends with the expectation that prices will rebound and any losses will eventually be recovered.
In a very board sense, investors are typically divided into 3 types:
- Defensive investors: invest in non-cyclical sectors, generally buying into companies with very stable earnings every year. They do not like surprises or any big changes to the company. They would prefer the company to do the same operation of business every year with no fluctuations in demands of goods and services. Examples of such SG companies would be: ISOteam, Starburst, Hafary, etc.
- Aggressive investors: invest in cyclical sectors such as technology, oil and gas or even shell companies. Aggressive investors can accept a high degree of risks. They are ok with mid cap to penny stocks. They do not mind having an exposure in stocks that may be RTO (reverse take over) by other companies or companies that are dependent on seasonal demands. Examples of SG companies: Memstar Tech, Mirach, Artivision, RH Petrolgas
- Balanced investors: A balanced mixture of defensive and aggressive investing.
Investors are typically more concerned with market fundamentals, such as price/earnings ratios and management forecasts. They will be eager to read and research on the recent developments of the particular company, attend AGMs to speak to appointment holders of the company, and to calculate out the possible logical scenarios that may happen to the company of the particular stock.
Traders, on the other hand, have a higher frequency of buying and selling of stock. Their goal is to generate returns that will outperform traditional buy-and-hold investing.
Trading profits are generated through buying at a lower price and selling at a higher price within a relatively short period of time. The reverse is also true: trading profits are made by selling at a higher price and buying to cover at a lower price (known as "selling short") to profit in falling markets.
However, please note that for SGX, short selling positions must be covered back on the same day. That is to say, if I were to short sell today, I must buy back the stock within today. Failing to do so will incur a penalty of S$1000/-.
When buy-and-hold investors wait out less profitable positions, traders must make profits (or take losses) within a specified period of time, and often use a protective stop loss order to automatically close out losing positions at a predetermined price level. Traders often employ technical analysis tools, such as moving averages and stochastic oscillators, to find high-probability trading setups.
A trader's "style" refers to the time frame or holding period in which stocks, commodities or other trading instruments are bought and sold. As such, traders generally fall into one of four categories:
- Position Trader – positions are held from months to years
- Swing Trader – positions are held from days to weeks
- Day Trader – positions are held throughout the day only with no overnight positions
- Scalp Trader – positions are held for seconds to minutes with no overnight positions
Traders often choose their trading style based on factors including: account size, amount of time that can be dedicated to trading, level of trading experience, personality and risk tolerance. Both investors and traders seek profits through market participation.
In general, investors seek larger returns over an extended period through buying and holding. Traders, by contrast, take advantage of both rising and falling markets to enter and exit positions over a shorter time frame, taking smaller, more frequent profits.
To summarise, investors and traders have a common goal of making profits through different trading actions. It does not mean that investors will be able to outperform traders, or vice versa. Based on their characteristic and preferences, one may choose to be a trader or an investor. Ultimately, it is the perspectives and judgement that makes the difference.
By understanding the above dissection on the differences between traders and investors, it helps you to understand yourself better. With a better understanding of yourself, you will be able to pick a better stock which may suit your playing methods; be it trading/ or investing.
More importantly, you can also understand other players that are involved in the same stock. You will be able to tell:
- Why is there a massive sell offs normally after T+3 day?
- What time of the day is better to buy or sell a counter?
- How is it that there are always more sellers than genuine buyers after 4pm?
So with all that in mind, are you able to tell if you are an investor or a trader?
