Broadly speaking, we can argue that there are two types of people that are active in the financial markets; traders and investors. This is true whether we are talking about the forex, crypto, commodities, or stock market, although the difference between these two groups is perhaps more pronounced in the stock market than it is in the forex market.
As most of us, you may have heard the words ‘trader’ and ‘investor’ used more or less interchangeably. However, apart from the common objective of making a profit, these two groups actually have very little in common.
To help you understand more about the difference between these two groups, and to figure out which one you should identify with, here are 4 of the most fundamental differences between traders and investors in any financial market:
1. Time horizon
The first and most important difference between traders and investors is the amount of time they hold any given position in the market.
Generally speaking, traders hold positions just to turn a quick buck, while investors are in it for the long haul. However, there are a lot of important nuances between these extremes, many of which have been explained thoroughly in our previous article about forex trading styles.
As you probably know, it is trading we focus on here at Learn to Trade. As traders, it’s not uncommon to hold a position for a day or even less, which is referred to as intra-day trading or simply day trading. More often, however, we employ so-called swing trading strategies, which involve holding the position for anywhere from a day to a couple of weeks.
An investor, on the other hand, invests and stays invested for considerably longer periods of time – months, years, and in the stock market often even decades! For investors, short-term market fluctuations are of little significance, as they are only looking for the really long-term gains.
2. Capital growth
As traders, we are always on the lookout for the latest price movements or any new trends forming in a particular trading pair. The moment the price has gone up by a pre-determined amount, a trader will sell his or her position, thus making quick profits. In this sense, timing becomes an incredibly important factor for traders.
Investors, on the other hand, invest a share of their net worth in securities, and sometimes generate cash flow by collecting dividends (if they are in the stock market). In addition, they are of course also hoping for a price increase of whatever asset they are holding. But the crucial benefit here is that the investor has time on his side, which the trader usually does not.
Another major difference between investing and trading is the frequency at which trades are made in the market. For a short-term day trader, tens or even hundreds of trades can actually be executed within a single day.
For an investor, on the other hand, only a very limited number of transactions are made. Sometimes, only a few transactions per year will suffice, of course depending on specific circumstances.
4. Risk factor
Like any business, both trading and investing involves putting capital at risk. This is simply the way it is in all financial markets. In order to make returns, one must be willing to accept at least some risk.
However, some would argue that trading exposes you to greater risks than investing, although it may also give you the opportunity to earn much bigger returns.
And while it is true that trading is often perceived as a riskier activity than investing, trading also allows for risks to be controlled and contained through proper risk management techniques like the ones we teach here at Learn to Trade.
Investing, however, is often seen as the safer choice among the two. But we would actually argue that investing without a real plan – which is what most people do – can be a far riskier endeavor than learning to trade with right risk management tools at your disposal…
As you have now seen, both trading and investing have their own pros and cons. And because of this, some people are more suited for one of them versus the other. There is no definite answer as to which is better, but as you have seen, trading does not need to be as risky as many people perceive it to be.
With that said, we wish you good luck as you figure out whether you want to be a trader or an investor.