What’s the difference between a trader and an investor?
What’s the difference in the styles between Paul Tudor Jones the TRADER vs Warren Buffet the INVESTOR.
Being a trader and being an investor requires different qualities and necessities. Trading and Investing is massively different. In this article we show how mixing them both is dangerous and how to approach both differently.
Lets take an example for both.
Case 1: Banana
Imagine person A who owns a fruit shop. He sells bananas. He bought a bunch of banana for $10 . His aim is to sell the banana for anything above $10. For the next couple of days he needs to sell this banana no matter what. Because banana gets bad and nobody will buy it, if its rotten, he might even have to sell banana at a cheaper rate say $8 just to get rid of it. Person A is a trader. In fact he is a banana trader. For him external noises is a factor. If its raining today he will have to sell cheap and fast because the number of buyer’s today could be less.
Case 2: Real Estate
Imagine person B. He loves property. He decides to buy a studio apartment in Dubai for $200’000. He then decides to hold on to this property. After year 1 the value of this studio apartment goes down to $150’000. After year 2 it goes up to $220’000. After year 3 it goes up to $270’000. At this point he decides to sell this. Netting a profit of $70’000. He doesn’t sell it after year 1 or year 2. Instead he waits for the market to go up until he makes a decent profit. Person B is an investor.
Now lets come to the major differences of both.
- TIME: For the banana trader, time is a very important factor. For the trader time is a threat. The longer he stays in the trade the more difficult it gets for him. For the real estate investor time is an advantage. He can choose to stay longer on his investment until he sees decent returns on his investment.
- PRODUCTS: In finance the products for a trader and investor is and should different. If you intend to be a trader you should be looking for products like Futures or Options. If you choose to be an investor Stocks or Exchange Traded Funds(ETF) would be the way to go. This is because of multiple reasons. When you trade futures you are trying to buy and sell the same day or maybe next few days. On the other hand when you buy stocks as an investor the idea is to hold for a few years. Futures enable you to use leverage but this intra day leverage given by the brokers and exchange is no longer applicable once the market closes. This is the reason why he closes his position the same day. Hence the term “Day trader”. For an investor he has to put up the whole amount. If he decided to by 100 shares for a stock trading at $10 a share. He has to pay up$1000. No leverage will be applicable here unless that person is a big hedge fund.
- STRATEGY: The strategy for day trading is massively different from investment. If you use the trading strategy for an investment or vice versa it will lead to massive losses. For trading, small noises like rumors are an opportunity. A rumor of low crude oil inventory numbers can be a great opportunity to buy Crude Oil Futures. This opportunity only last for a few minutes and a trade should be placed asap cos the rumor can be wrong. In this case there are 2 trading opportunities. One to buy oil when the rumor comes out and the second to sell the oil when the rumor happens to be fake. This trade is famously know in the trading community as “Buy the rumor, sell the fact”. Other strategies include technical day trading strategies using math as an advantage. There are many other trading strategies used by traders around the world. For investors, these little news are simply noises as you’re looking at a longer time frame. But for a good investment in stocks, timing is of massive importance along with other factors like the company’s general performance. If you intent to buy a stock or ETF you should buy it when its cheap. There is no point in buying it at all time highs. Buy when the market is crashing and when its cheap, hold on to it for years and see the returns. Yahoo stock bought at $8 per share post Dot com bubble crash at 2002 will have given you a profit of $24 in 2004 when it was trading at $32. Remember the rise from $8 to $ 32 was just in 2 years. Timing is of important in stock investment. If you had bought the same share of Yahoo before dot com bubble crash you would have lost a lot of money.
- PERSONALITY TRAITS: Trading and Investment requires completely different characters. Being a trader is a full time job. He should be watching the markets closely when the market opens until it closes that day. You cannot be a part time trader. For a trader skill and experience has to be acquired over time. This will take at least 2 to 3 years of commitment. A person can be a part time investor. If you intent to be involved in the financial markets but you have a separate full time job then being an investor is the best choice. You can make your investment with good research and forget about it for a few years. just like you would buy an apartment in Dubai. Famous trader Paul Tudor Jones traded on Futures market and tripled his money shorting the markets during the Black Monday crash on 1987. Traders rely on these kind of specific days to make huge amounts of money. An investor like Warren Buffet made more money the older he got.
These are the major differences in being a trader and an investor. There are many other differences which will require a massive page . Find whether being a trader or an investor suits you the best and stick to it. You will understand the nuances and opportunities in due course when you are actively involved.