What’s the Difference Between a Trader and an Investor?

What’s a trader on the stock market?

Trading is the act of profiting from differences in price. This is usually done in a matter of seconds, minutes, hours, or days. Traders attempt to time the market and buy a security when it is undervalued, in hopes that current events, earnings releases, or public psychology will the drive the price of that security upward. A trader will then realize his/her gains by selling the security for a profit. Traders do not hold their stocks long-term, they are interested in short-term gains.

Much like investing, trading is not for the faint of heart. However, being a trader magnifies this risk and uncertainty tenfold. A trader will face magnificent variance in his/her career. Some months he/she will be up 270%, and others he/she will face bone-shattering losses of -75% or more. Many traders do not even trade for weeks at a time because the market is not offering attractive prices or opportunities. This extreme variance causes many traders to face sleepless nights, worried profusely about their dwindling portfolio. While trading can be incredibly profitable, it can have high operating costs. To even consider day trading, the Financial Industry Regulatory Authority (FINRA) requires individuals to have $25,000USD in their accounts at all times. This rule is a roadblock for many casual individuals looking to quit their jobs and take a swing at day trading.

Simply put, trading is the frequent buying and/or selling of securities on the stock market.

How does trading differ from investing?

Investing on the other hand is somewhat of an all-encompassing term. A trader is technically an investor, but most traders are called — traders. An investor more commonly subscribes to the buy-and-hold principle. Someone that buys-and-holds will purchase a stock that they feel will rise over the long term, not necessarily in the near future. A long-term investment can last for 5, 10, 25, or even through multiple generations. Trust funds and accounts that do not require Required Minimum Distributions (RMD) can be held for centuries and supply children with dividend payments and other compensation after the investor has passed away.

Simply put, investing is the purchase of any item or product [stock] in the hope that it will appreciate in value. Once the value has appreciated over the purchase price, the investor can then sell the item or product at the new market value for a profit.

Final Thoughts

Yes, traders are still considered investors, as they are purchasing a stock at price x and selling for price y (x being less than y). However, the term trader is colloquially known as someone that is not concerned with the long-term horizon of a stock; the trader is prepared to enter a position and exit within minutes to days. A traditional investor will hold their purchase and allow for it to appreciate over the long-term. This will not produce star-studded short term riches, but it is often accepted as a safer and more practical method of accumulating wealth over time.

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