Whenever discussions turn towards a finance industry topic such as the stock market, you oftentimes hear the terms “investing” and “trading” erroneously used to mean the same thing. Most people cannot differentiate between the two. The reality is that there’s a considerable difference between them. While both of them participate in the same investment arena, they try to accomplish some very different tasks and goals. Additionally, there are different strategies that they utilize. However, the market must have both in order to function properly. Here is a breakdown:
Stock investors are specific entities or individuals that use their own funds to purchase equity securities or stocks. Therefore, the stock investor’s goal is to realize a return on their investment whether it’s in the form of capital gains that appreciate in value or either income or interest.
Stock traders are specific entities or individuals that engage in trading equity securities or transferring of financial assets. Some traders work for someone else as an agent, a hedger, an investor, or a speculator while others are self-employed.
A closer Look at Stock Investors
Stock investors are stock market participants who make informed investment decisions using a technique called Fundamental Analysis (please see “Fundamental Analysis – the Investment World’s Rock of Gibraltar”). They treat their stock shares like they own them, rather than seeing them as income generating opportunities. Furthermore, they base their decisions on price fluctuations and not a single other factor.
For many members of Investors Hangout, the two most important elements of the decision-making process are:
- Success – investors typically look for companies who have the potential for being successful in the future. Their decisions are measured by examining certain facts or characteristics such as a company’s financial strength and their cash flow.
- Value – investors will look for the best value (price) rather than longevity when buying stocks. A good example of this would be two companies that offer the same products or services yet they are trading at different P/E multiples.
Investors and traders are both essential to a properly functioning stock market in that they have a symbiotic relationship. Investors rely on traders to provide them with the liquidity to purchase and sell their company’s shares while traders rely on investors to provide them with a foundation for purchasing and selling.
A closer Look at Stock Traders
Stock traders purchase shares in a company. They’re more interested in the stock market rather than company fundamentals. They will attempt to gain a profit from price fluctuations over the short term. In fact, their trades may last for only seconds and up to 4 or 5 weeks at other times. Stock traders focus on the following 4 elements:
- market emotions
- price patterns
- supply and demand
- trader support
Markets that include commodities trading are a key component of the trader’s strategy so when they buy wheat for example, they expect to capitalize on smaller price fluctuations that are driven by supply and demand. It is for this reason that the stock trader focuses on the above 4 elements when developing their trading strategy. When users register on stock message boards and forums, they are introduced to a lot of useful market information. This helps them make an analyzed decision, which in the long run, yields better profits.
Disclaimer: This content does not necessarily represent the views of IWB.