Several people rely on the stock market as their primary means of income. The stock market allows you to make money by being a stakeholder in the success or failure of the companies that are listed on the exchange.
There are numerous ways of making money from the stock market. However, there are two broad classifications that we need to know about. You can either be a trader on the stock market or an investor.
Both ways of making money from the stock market can be highly lucrative if you understand how the market works and have the necessary practical and theoretical knowledge.
The most famous example of an individual who has made vast sums of money through investing in the stock market is Warren Buffet, whereas the most famous example of a stock trader is George Soros.
These two luminaries have both made billions of dollars from investing and trading respectively. However, their approach to making money has been quite different.
Trading in the stock market requires you to predict short-term market movements by relying on technical charts, whereas, investing requires you to understand the fundamentals of valuation regarding companies listed on the stock exchanges and make long-term investments in their growth.
Here are some of the main differences between being a stock trader and a stock investor.
Difference in Methodology
Trading and investing require completely different approaches to the way you want to make your money in the stock market.
Trading relies on using technical analysis based on which a trader makes the decision to buy or sell a stock. Whereas, investing relies on the fundamentals behind the company that allows investors to predict whether the stock price of a company will rise in the future.
Technical analysis involves using graphs and charts to predict the future movements of a stock’s price. Traders analyze historical patterns in the movement of stock prices. They do not look at the fundamentals or the economic reasoning behind the change in the value of a company.
Instead, they study the movement of price, the change in the volumes of trading, and the moving averages over a particular period of time. The trader does not know what a company does or what the growth prospects of the company or the industry are when they make buying or selling choices.
People who invest in a company rely on the company’s financials and analysis of the growth in the industry to which the company belongs. They also analyze the macroeconomic situation of the country to try and predict future growth.
Stock investors only buy stocks of companies that have strong fundamentals and have a good chance of growing in valuation in the long-term. They do not concern themselves with the short-term volatility of the market.
Difference in Time Period
There is a vast difference between how long a stock trader holds a position and how long a stock investor does. Usually, a stock trader will enter a position and close it within the course of a trading day. This is called intraday trading. However, a stock investor may buy the stock of a company and hold it for decades.
Let us use an example to try and understand it. A person can buy a piece of property just before the property is completely built and then sell it for a profit once the house is complete. This is similar to stock trading.
Whereas, a person can buy a house in a good locality and keep the same house for several years and then sell the house for double or triple the original price. This is similar to investing.
Hence, you should understand that trading is done based on short-term predictions, whereas investing is based on long-term predictions. For a trader, short-term volatility and fluctuations in the market are of paramount importance.
Traders use these fluctuations in the market to buy a stock at a low price and then sell it at a high. Unlike traders, investors do not worry about the short-term market fluctuations but are concerned about the growth prospects of the underlying company.
Difference in Risk
You know that all market-linked instruments are subject to market risk. Both trading and investing in the stock market are of a risky nature. There is no guarantee when it comes to the stock market, and stock prices can fall as quickly as they can rise. The pricing and valuation of stocks are based on numerous factors and can be unpredictable in nature.
Between stock investing and stock trading, the latter carries more risk than the former. This is because short-term market fluctuations are even more unpredictable than long-term growth. Short-term trading decisions may go in your favour, but they can also go extremely wrong.
With short-term trading, there is always a risk of losing a large portion of the money that you have put in. Hence, stock traders can experience highs and lows quite quickly. This is different from investing because investing takes time and only provides risk or rewards over a much longer period of time.
For investing, the risks are lower when the period of investment is smaller. There are more risks to the valuation of a company as the time period grows longer. However, you also stand to make a higher profit because of the compounding effect of interest and dividend.
What is Better Suited to an Individual Investor?
For an individual investor who is looking to make money from the stock market, choosing between stock trading and stock investing can be a source of confusion.
You will find that being a stock investor is more suitable for someone who does not want to spend their entire working day analyzing the movements of the stock market. For those who want greater exposure to the stock market, being a stock investor may be a more advantageous approach.
To be a stock investor, you need to analyze the fundamentals of the company. You need to check whether the management of the company is reliable, whether they are responsive to customer needs and market trends, and whether its industry has long-term growth prospects. Being a stock investor or a stock trader is not easy, but it may be worth the effort.
There is a difference in the attitude of a stock trader and a stock investor. A stock trader needs to make decisions on a minute to hour basis, whereas a stock investor can take weeks or months to make a decision.
Depending on your attitude, it can be a good way to choose between being a day trader or an investor. If you are looking to being either of the two, you can always take advantage of free stock trading.