Are you investing or are you trading? Know the difference!
Trader Tom and Investor Ian
Imagine Tom, a 30 year old guy sitting in front of his six screens checking charts, energetically typing on his keyboard, once in a while cursing or screaming yes. Tom is trading. Now picture Ian in his 50s sitting at home in the evening checking on his portfolio. He made his last transaction 6 months ago and now he compares his portfolio with his long term financial goals. Ian is investing.
The three behaviors with money
Chances are you are neither Tom nor Ian, but somewhere in between. Now that you decided you want to handle your money on your own it is a good time to figure out which direction you are leaning to. There are three behaviors on the markets which you can follow
Work for your money
If you are reading Brokerchooser in some time of your life you most likely imagined that you will be a trader, make a lot of money with brilliant trades. The truth is trading is work. To be a trader you need to
- know a lot about the markets
- dedicate significant amount of time to this activity
- be very diligent
- handle stressful situations very well
Still, trading can be a viable profession and there are a lot of people doing this as a professional. A trader mostly makes money from smoothening out the irregularities in the market. If you want to do this, there is a long road in front of you. And some of this road will be tough.
Play with your money
If you ever bought a paper on the market we are sure you know the chill in your backbone when you are checking the current prices and see if you are making or losing money. This is fun! And yes, this is a just way of having some excitement. However, you should very much know, that this excitement is the most likely going to be your doom. If you want to handle your money on your own to have some excitement it is very wise to be honest with yourself and know this is why you are doing this.
Make your money work for you
If you have some money and you might want to risk a little bit more and gain a bit more than your plain vanilla bank deposit. This is smart in general. Studies show that stock market outperforms bank deposits on the long run. Wait, didn’t we just say that you can’t outperform the market. In that sense a smart way would be to ‘buy the market’. You can do this, this makes sense and this is the most straightforward way to invest. It is not easy because you need money for it on the midterm. To be an investor you need to:
- be very patient
- have money to invest which you do not need on short/mid term
People see the world differently
The three behaviors with money is nice and simple, but the truth is people see the world differently. With other words they have views. You might think that China will do well in the future, or that oil prices will drop, or that XY stock will bounce back this morning etc.
Economics theory claims that the current market price reflects all available information. With other words if it is known that China will do well, people will have already bought China, hence the price is higher. You buy it, because you do not believe what all other people says. Look at it this way:
When you start to have views and buy something because you think its price will go up in the midterm you end up somewhere between ‘make your money work’ and ‘play with your money’. These guys are usually called investors. It is a common mistake to think that you are full investor when in reality you are also playing a bit with your money.
When you are having views on short term price movements (in the next minutes or day) you are somewhere between work for your money and play with your money. These guys are usually called traders. It is a common mistake to think that you are full trader when in reality you are also playing a bit with your money.
Fine, but what is the point? The point is you should very much know about yourself what you want to do. All behaviors are fine (yes, even the play with your money). You just need to know what is what and what you want to do.
Sum up questions
Ask these questions about yourself and think about what it means?
- How often do you want to trade and for how long want you to hold the papers? Is it more like investing or trading?
- How much of your overall investment will you handle on your own? What are your main motivations behind these investments?
- Will you be doing trades which you want to close in the next few hours/days? How will you select these trades? Which behaviors do this look like?
- Will you be doing trades which you want to hold to see how far it can go up? How will you select these trades? Which behaviors do this look like?
Do not worry these are tough questions, and we bet your answer will change throughout time. The interesting bit is that you will need different skills for being an investor and a trader. Here are first 10 steps for both.