What is the Difference Between a Saver, Investor and Trader?
Why is it important to know the difference between a saver, an investor and a trader? In a previous blog, I wrote about the importance of mindset. How different types of mindset reflect the way we look at investing. That mindset also affects what you do with your spare cash or how you prepare for your future.
There are different opportunities available for what you do with your cash and the strategies you use. Understanding the difference between savers, investors and traders will help you to take advantage of the best strategies to suit you.
Your set of personal values, the way you look at things and your nature towards risk will determine if you are a saver, an investor or a trader. If your nature is that of a saver and you decide to trade then it is almost certain you will lose your investment as you will have a battle with your conscious over whether or not to put the money into savings or trade. It is therefore, important you understand who you are and find out which option suits you best.
Starting as a Saver
A saver is someone who takes a proportion of their wages or income each month and sets it aside in a bank account or a managed fund. For example, you might put aside £100 per month. You can put that into any type of savings account or ISA and leave it making some money for the foreseeable future. You could go to a financial company and invest into one of the funds that they manage. The type of funds they offer cover property, business or share markets. Each month you receive a receipt, a share or some acknowledgement that the fund manager has used your money together with other people who are doing exactly the same thing and bought some units in an investment.
There are various names such as Asset Managers, Managed Funds, Index Funds, Mutual Funds etc. The key being, you give someone else control of your money with the expectation that when you want it, it will still be there. There are thousands of different ways to put your savings into these types of funds.
So, a saver trusts someone else’s skills and knowledge to look after their money.
Why Become an Investor?
Investor or an investment are words frequently used out of context. You often here the expression “invest in your future” when you are being encouraged to buy something that has a high price tag. Investing, however, is taking responsibility for finding and managing your own money. Making the decision about where it goes and for how long. You accept total responsibility for the performance of your investment.
As an investor, you buy income producing assets and hold them for a long time. The assets provide income and capital growth. There are only 4 categories you can invest in – business, property, paper and cash. Within each of those categories are thousands of opportunities. I have clients who when I mention property as an investment category say they don’t want to hold residential rental property, which is understandable in the current UK market. But there are alternative ways to invest in property such as garages. They are a cheap way to start a property investment and bring in regular income. Other clients have built holiday lets and some have purchased land and are using it for camping grounds. This shows some of the different ways to invest in property/land. Equally, the other investment categories also have a wide range of different ways to invest in them.
As an investor, you make the decision about the type of investment you want to hold. You control and manage the investment. You make the decision when to buy and when to sell it.
What are Contrarian Investors?
Contrarian Investors tend to go against a market trend. It could be said that applies to most investors. They are looking to get into an investment at the lowest possible price to get the best capital growth opportunities. When markets a going down and everyone is selling a contrarian investor is the one buying. On the other hand, when markets are going up a contrarian investor is selling their investment and taking their profit.
Investors rely on their own skills and knowledge to make investment decisions. They are totally responsible for where they invest their money and when.
Is Trading More Your Style?
A trader is someone who identifies an opportunity and moves it on quickly. Traders do not like owning an asset, they simply see a way to make money from it. You can trade in any of the 4 investment categories – property, business, paper and cash. For example, a property trader is someone who will find a deal then for a fee give that deal to an investor. The trader makes their money from the fee the investor pays. Business Trading works in a similar way where businesses are bought and sold through a middleman (trader). The trader finds the business and works on it until they have a deal they can on sell. They can build a business and create additional value in it or they can split up a business and sell parts of it to buyers who only want part of a business. When it comes to shares or cash there are trading platforms such as Forex, where the trader doesn’t hold any assets but earns their income based on the price movement.
Traders are very market orientated, as they follow trends to ensure they have someone to sell their deal to.
As you can see there is a big difference between Savers, Investors and Traders. Understanding your Mindset, the way you think about money, will determine what you do with your money. Once you identify whether or not you save, invest or trade you can then look at the different strategies that apply to each type to get the best result for you and your future financial goals.