It seems like the two terms are used interchangeably these days. Can an investor be a trader or vice versa? Absolutely. But explicitly investing or trading is a completely different ball game in terms of day-to-day activity and financial goals. While investing used to be the default way to play the stock market, trading has gained popularity. This is especially true now that the stock market and brokerages are completely accessible online. So trader vs investor?
Is Trading More Profitable Than Investing?
A good majority of people today are likely some hybrid of the two schools.
It’s completely normal to have elements of both long-term investing and short-term trading in your portfolio.
Is there one method that works better than the other? It all depends on personal preference and what your financial goals and timeline are.
Let’s dive a little deeper into the differences between a trader vs investor.
What Is Investing?
Let’s take it back all the way to the fundamentals: what it means to be an investor. First, investing has a long-term investing horizon.
How long? Long-term investing is a common way for people to set themselves up and prepare for retirement.
It can be your source of income after employment is over or it can be an inheritance you leave for your children. The one united goal of long-term investing is making substantial gains over a period of years or even decades.
You know the saying: time in the market beats timing the market? This is the motto for long-term investors. Is it a guarantee that your investment portfolio will rise over time?
History dictates that it will, especially if you track the S&P 500 which has returned about 10% on average on an annual basis. So even if you just throw all of your investment money into an S&P 500 index fund, over time you’ll gain an average of 10% each year.
Of course, if you are a buy-and-hold long-term investor, that means you aren’t in the business of selling your stocks either. So ideally investors will buy when there is a dip in the price of the stock they want.
There are also those that know they will be holding that position for decades and believe the company will grow its valuation over time. If that’s the case, then nearly any price today will be a bargain a few decades from now!
What Is Trading?
Trading has a bit of a broader definition. In general, traders are short-term investors who aren’t looking to hold their positions for very long. This could mean anywhere from a few days to a few hours to even a few minutes.
Rather than waiting for gains to accumulate over a number of years, traders like to make multiple smaller gains within a short-term period. Trading definitely requires more time at your computer each day and a bit of higher risk tolerance.
Is trading profitable? It can be! Traders generally use a mix of both fundamental analysis and technical analysis to find entry and exit points. Long-term investors will likely focus more on company fundamentals that could potentially lead to future growth. Let’s take a look at a couple of different types of traders.
Trader vs Investor: What Is a Day Trader?
Exactly what it sounds like: traders who open and close positions within the same trading day.
The goal of a day trader is to watch for specific price movements in stocks or indices. By taking advantage of these, the day trader can make small, incremental profits throughout the session.
The most important part of being a day trader is to stick to a system. There is never any shame in taking profits. Once greed or emotions enter the system things can go downhill in a hurry!
What Is a Swing Trader?
A swing trader is kind of a hybrid of a long-term investor and a day trader. Swing traders generally hold their positions for anywhere from three days to a month, and sometimes even longer.
Swing trading is a little bit less intense than day trading for obvious reasons. Not only can you time your entry point, but you can also mitigate losses. Setting a stop loss can easily help secure a profit, and the longer window allows you to exit at any point if you don’t like the way the markets are behaving.
What Is a Scalp Trader?
Scalp trading is probably the most advanced style of trading the markets. It’s kind of like extreme day trading if that makes sense.
Scalp trading consists of dozens or even hundreds of micro trades throughout the day.
Each incremental gain can be sold for a small profit, and scalpers accumulate these throughout the day.
Scalp trades can be executed as often as several seconds to several minutes apart. It is like day trading on a completely micro level.
Trader vs Investor: What Is a Position Trader?
Position trading doesn’t get talked about a lot, but it is the closest thing to a bridge between trading and investing. This type of trader can hold a position in their portfolio for weeks, months, or even years.
It’s close to being a long-term investor, although position traders can sell for profit at any time. This means that the goal is still to make a short-term profit, rather than decades of holding for gains.
Invest Like You Are Warren Buffett
If you are going to invest like any long-term investor, take a look at Warren Buffett.
Whether you are an investor or trader, there is no doubting what Buffett has accomplished as head of Berkshire Hathaway.
Buffett has famously made billions of dollars off of his long-term investments in stocks like Coca-Cola, Apple, and Bank of America. Not only have these all grown in price over the decades, but they return billions of dollars in stock dividends each year.
Buffett doesn’t sell often, which has allowed his dividends to reinvest, growing his wealth even further. He is selective about his stocks as well. Buffett believes in backing strong, American companies and generally stays away from sectors he does not understand fully.
Buffett might catch flack from a younger generation of YOLO traders, but he will undoubtedly go down as the greatest investor in history.
Trade Like You Are George Soros
The Hungarian-born Soros was an avid trader before he started his hedge fund. He famously worked as an arbitrage trader in his early days, and in 1970 he founded Soros Fund Management which is worth upwards of $8.5 billion.
The fund has become one of the gold standards for hedge funds, and even owns some Bitcoin, showing that Soros is not fearful of risky assets. If you want to learn how to invest, follow Buffett, if you want to learn how to trade, follow Soros.
Trader vs Investor: The Case For Investing
There is a strong case to be made for investing. For starters, there is far less stress involved in holding stocks for a long period of time.
In fact, long-term investors barely have to log into their portfolios at all.
They say that compounding is the eighth wonder of the world, and if you are able to let time do its job, your positions will grow from seeds into trees. Using that analogy your portfolio will eventually be a forest of growth.
Long-term investing works for most people, especially those who have full-time jobs. This obviously makes it more difficult to monitor the markets throughout the day.
Most people also don’t want the stress of having to make multiple trades in a short period of time. If you have a long-term investing horizon and you don’t need the funds right away, then letting your stocks grow is the best way to guarantee future wealth.
Trader vs Investor: The Case For Trading
You’re young, motivated, and looking for fast profits. Well, you don’t necessarily have to be any of these but this fits the profile of most day traders. Day trading can bring immense profits in a short amount of time if done correctly.
It requires a solid system, patience, and higher risk tolerance. Trading also requires some knowledge of technical analysis if you want to best set up your entry and exit positions.
Trading also requires some upfront capital that you will need to use to execute trades on a daily basis. Other things to consider are income taxes for capital gains (or losses) and brokerage fees if you do not have commission-free trading. As well, it takes up a lot more of your time to sit at the computer and constantly monitor the markets.
Trader vs Investor: And the Winner is
Your personal choice! I will say that most people simply do not have the time, knowledge, or motivation to trade every day. For the vast majority of people, long-term investing is going to be the best way to grow your investment over time.
It has the lowest amount of time dedication, lowest fees, and a near guarantee of 10% per year if you simply invest in an S&P 500 index fund. If you are determined to get into trading, I would suggest starting with position or swing trading before diving into day trading.