Over 400 years ago, 1611, in Amsterdam, the Dutch East India Corporation became the first company to list shares on a Stock Exchange. Today, there is a stock exchange in almost every country with trillions of shares traded every day. Fortunes are made and lost on a regular occurrence. In today’s modern world there are many ways to make money from the share markets. The key is to understanding if you have the mindset of a trader or an investor and how getting the strategy wrong will cost you a lot of money.
The difference between Trading and Investing
Never before have two words been so misused. It is no wonder there is confusion about the difference between trading and investing.
Traders are people who follow trends as they make their money on the price movement of a share and the volume of shares traded. The more people buying or selling, the greater the price movement, the more opportunity to make money. They are able to make money in up or down markets as long as they get the trend right. A trader’s strategy relies on chasing markets and short-term trades.
On the other hand, an investor is contrarian to the market. Contrarian meaning, they go against the trend. They are buying long-term preferably when the price is low. They sell when the price is going up. Receiving dividends on their shares is a key part of the investment strategy allowing their investment to grow through reinvesting the dividends back into their portfolio. The more dividends they earn the faster the investment grows.
Investors are very patient as they let the market come to them to take advantage of the opportunities. Investors can quickly make profit going into and out of the market.
Know Your Own Mindset
Understanding the different mindsets of a trader or investor is key to getting the best results from the shares. Using the wrong strategy for the person’s mindset will only guarantee losses.
Traders operate from two mindsets. One of fear and one of greed. Understanding which mindset the trader uses will determine the strategy that suits them best. If the trader is predisposed to greed and uses strategies based on fear (or vice versa) they are setting themselves up for failure.
This is one of the reasons, many professional traders will work with trading psychologists who can help them understand the way they think in a given situation. This helps the trader to identify the right strategies for them and improve their risk/reward returns.
Investor traditionally waits until they identify an undervalued asset. The goes then goes on a watch list where the investor will monitor the price until conditions are perfect to buy it. The asset can be shares, bonds, cryptocurrency, property, business and bullion.
With shares when the prices go down investors are buying more shares. They are looking to buy the share at a low price so that when the markets recover, they can sell at a high price and take a good profit from their investment.
Understanding your own mindset should not be under-estimated as it is the make or break of building wealth.
Short Term vs Long Term Gain
Traders operate in the market short term. They follow a trend and know the trend does not last for long. They get into the trade and back out very quickly then move on to the next trade.
Investors will acquire assets. They acquire them long term. Long term being decades if necessary before they achieve the peak the investor is looking for before selling and taking profit.
Markets operate on investment cycles which can last many years or in some cases just days. The cycles indicate when the investor buys or sells and forms part of the overall strategy to acquiring wealth. Investors will analyse data to determine where they believe the investment cycle is for each market. They retain cash ready to take advantage of the low in the cycle.
Where traders operate on short term strategies, investors operate long term researching and preparing to take advantage of the opportunities when they arise.
Who Makes the Most Money?
The University of Chicago Booth School of Business (MBA Finance and Statistics) did a comparison between Traders and Investors. The findings showed that good traders would make 10% – 15% returns per month on a trade. In the short term they make more money than investors. However, they clarified there are very few good traders and trades are short term so 10% – 15% tends no to be sustainable over a year.
Investors on the other hand are happy over the long term with returns of 10%-15% per year. As they hold assets long-term they benefit from the compounding effect which will increase the annual return.
The other main difference between investors and traders is that investors are creators. They create many of the investments which help them grow their wealth such as businesses and property portfolios.
Globally, traders will make around $100 billion per year. Compare this to investors who make around $10 Trillion a year. Overall, investors will make 100 times more money than traders over the longer term.
Credit Suisse recently released its annual report on wealth stating there were 54 million millionaires at the end of December 2020 and that figure is likely to go up to 83 million millionaires by 2025. This is purely down to investors acquiring assets and holding long-term.
Can You Trade and Invest?
While trading and investing are different strategies and require different mindsets, there is no reason why both trading and investing strategies can’t be used hand in hand.
Traders and investors often use the same data and tools but interpret the information in a slightly different way depending on whether they are trading or investing. They use the same charts. Traders are likely to use charts over 1 minutes; 5 minutes, 1 hour etc. Investors will use charts over 1 month, 6 months a year or longer. Yet both are looking at the same information just from a different perspective.
Traders can use a strategy of putting a percentage of their profits into acquiring assets so they can benefit from trading short term and investing into long term assets.
However, the question will always come back to whether the trader has the right mindset for trading and is prepared to put the time into learning the skills. As there is little point is using a trading strategy if the trader keeps losing money.
Trading vs Investing – Which is Best?
A good trader who has spent years learning their craft and have a consistent record of doing well as a trader will over the short term make more money than the investor.
However, investors over the long term will always outperform a trader with the average being that investors make 100 times more than traders.
It doesn’t really matter which is the best. The key to building sustainable wealth is to create a strategy that works around understanding the individuals mindset; skills and knowledge.
For more information on the courses we run around investing and investing strategies visit Karen Newton International Courses