In the investment world there are generally two types of investors, namely: a trader and an investor.
As in everything in life,this is not a black and white description, there is a lot of grey but there is general distinction between the two. I will explain these and explain the overlaps.
TRADER:
1. They a generally investors looking to make an income from switching positions in investment vehicles.
2. They are short term investor(short term is trader specific, but generally a trader holds a position for a month or less).
3. A trader is usually someone who starts with a relatively small base(usually R10000-R200000).
4. They trade in highly volatile instruments. More often then not they buy into the price of a share, commodity or asset and rarely buy into any equity.
5. This type of investor is one who can take an active role in their trading, someone who can trade everyday or follow up everyday. This for the person who finds fun in trading.
6. Ironically, most traders are people who would enjoy playing poker, or other system based casino games(like blackjack and roulette). The impulsive people of the world.
7. A large percentage of traders are people with an interest in analytical subjects like mathematics and who enjoy algorithms. This is partly due to the fact that traders usually use graphs to determine whether to enter into a trade(this is called the analytical approach).
8. Traders understand that numbers alone cannot determine movements, hence they have to understand the politics and economical background behind movements(this is called the fundamental approach).
9. A trader starting out usually starts trading on the alternate index or something called penny shares( name comes from the idea that these shares a less than a dollar! Loose translation into Rands would be shares that are less than R10.) Movements in these prices account for a larger change in wealth of the investor than a movement in Blue chips(more on that later). As he/she progresses he/she moves onto futures, options, indecies and spreads.
INVESTOR:
1. This an investor looking for wealth growth and as minimul income as possible(the latter is arguable). They do this being in the same position for large span of time.
2. They are long term investors, usually staying in the same position for no less than Three years.
3. An investor is usually someone with a large base, usually R500000 or more. This is not cast in stone though.
4. More often than not they trade in actual equity, less volatile stock and instruments.
5. This type of investor has an active role in the research of an investment, scrutinizing it for long periods of time, usually making less than five trades a year.
6. Investors usually are very thorough people, sometimes considered obsessively compulsive. They consider the things that can go wrong, often wrongly called persimists.
7. Investors are usually people who are thorough, who look at the fundamentals of an investment, the economists, lawyers and political students.
8. Investors may usually use the mathematics behind their position to check for unforeseen market changes but don't rely on it.
9. Investors are usually people who start trading in Blue Chip stock( these are well esteblished companies, most of which are the top40 on the JSE). They usually trade using the old adage,buy low- sell high
OVERLAPS:
1. A lot of investors are also traders. When the opportunity arises, they will get involved in a short term trades and vice versus.
2. The amount for each indinidual investor is character specific so a trade and investor can start with the same amount.
3. Some traders trade in actual equity and a lot of investors trade in non-equity instruments
4. The amount of positions an individual takes is character specific, both scrutinize each trade, though they do use different instruments and tools to do this
5. If a character archtype was what determined what investor you are then writing this blog would be pointless as a lot of people do not fit into either of the above mentioned. A good charcter mix would be ideal for either trader and investor
7. Using technical analysis for trading and using fundamental analysis for investing is not mutual exclusive. An overlap needs to exist to become successful at either.
8. Where you start trading should not be determined by what you want to be classed as but rather what you find the most comfort and interest in. Let your choices determine what you are rather than what you want to be to determine your choices
So in conclusion, a lot of negativity is associated with traders(general public calling them gamblers), but this does not have to be the case, even Warren Buffet( arguably the best long term investor of all time, richest man on earth so the stats speak for themselve) trades in short term positions on currencies. Trading is generally for risk seekers who see it more as a game and less as a source of income, ironically, and investors are risk averse people who would prefer slower growth. Let your choices and risk profile determine who you are. Thank you.
In the next blog we discuss the vast array of investment instruments available to investors. Please feel free to leave comments on this blog and any queries and open a broker account as soon as possible!!!
A Universal Primer For The Future Warren Buffets
