What is the difference between investing and trading? You ask different people and you will get different opinions. And if I ask you if you are a “trader” or an “investor”-you might promptly say that I am “long term” investor without even understanding what it means.I will just give you my opinion on this.
An investor is usually a “buy and hold” types. He lives in the realm of “hope”.He buys a security and hopes that the price will go up.He does his “fundamental analysis” and falls in “love” with his/her investment. Even when the price of security is going down,he doesn’t believe in selling it because he is convinced about his analysis. He doesn’t believe in timing the market but a strong believer in “valuation” and “growth” of companies whose securities he owns.His edge lies in his “analysis”.If his analysis turns out to be true, he makes money in the “long term”.Otherwise,he ends up losing badly.Check Infosys Fundamental view post to see how and where a “fundamental guy” can go wrong.
A trader is usually an “opportunistic ” person who believes in inefficient market theories. He believes that markets are driven by human emotions like “greed” and”fear”,so no stock is fairly priced at any point of time. He tries to take advantage of these mispricing and tries to profit from the excessive “greed” and “fear”.
A trader lives in the realm of “probability”.He never uses words like “should” or “will”.Like the markets “will” do this.Or the markets “should” do this. It is always something “might” happen and it “might not”. He is always optimistic that a trade might work out but turns into a “realist” when it doesn’t.Thats how he always manages his risk and believes in cutting his losses. Traders take ‘directional” bets and also use some “leverage” to enhance their returns.Traders also use “market timing” techniques to get an edge in the market. A trader can choose to trade a “single market” or “multiple markets” like stocks,commodities, currencies,bonds etc. Trading multiple markets helps him reduces his risk.
Usually when we hear the word trader “trader” we start thinking of “short term traders or intra day traders ” who buy and sell 50 times in a day. I would like you to go back to Infosys Trend Analysis post where we have a “long term” trading system that just produced 5-6 trades in 10 years. So difference between a “trader’ and an “investor” is not dependent on time frames.It is rather the difference in their “thinking” and “attitudes”!
Next comes the category of people who calls themselves “investors” or “traders” but are actually gamblers. They say that they are in the markets to “make money” but actually they are in the market “for excitement”. They treat markets like a “casino”.They DO NOT have any EDGE in the markets.They look for new ideas everyday, they buy and sell lots of securities everyday. They DO NOT understand risk! They get on a “high” when they are winning and then they start to overtrade. This results in heavy losses and they get into “depression” when they lose money.In order to “recover” their money, they double their bets and lose even more! In the end,the market throws them out and they lose their money and confidence.They were never in the markets to “make money”,so they get what they come for!
So you fall in which of the above categories? What is your “edge” in the markets? Think over these questions before you commit money.