In the past few years, you can increasingly find ads about the exchange business. In some promos there is a clear character “trader”, but not everyone knows who it is. And even more so, not everyone understands the specifics of its activities. The closest analogy for a trader is a stock speculator. Today I will tell you how their activities differ from investment activities.
The main differences between trading and investment
There are a number of factors that clearly distinguish traders from investors. Of course, their goals and objectives are similar-to earn money. But the approach and basic postulates differ radically. Therefore, I offer my list of distinctive characteristics.
- Term for holding an open position.
- Number of transactions per day.
- Loss limit limits-risk management.
- Strategies for market growth and decline.
- Investment horizon.
- Expected return.
Life time position: This is one of the determining factors of the type of investor on the exchange. An active trader has a large number of trades within a single trading session. The range is so wide that it can be from a dozen to several thousand. Often the duration of holding an open position is several minutes or several hours. Intraday trader tries to catch short movements of price changes. Therefore. many of them take volumes and get a solid result.
Investors, as a rule, do not like active exchange trading. Their strategy is to buy “cheap” and hold for a few months or years. They ignore all small fluctuations. And on small corrections, they can afford to “buy back” and average the price. By the way, the number of transactions is always a big question. Very often, the “buy and hold” strategy can show better returns over several years than a few thousand short trades.
Risk management in trading
This topic is very important in earning money on the stock market. Risk management and money management are very closely related to diversification. You always need to divide your trading account virtually into 10-20 parts and buy different assets. These can be stocks from various industries, bonds and ETFs for metals.
As for the risk parameters, there has long been a big dispute on the stock market. How do I do it correctly: trade with stop losses or without stops?! There is probably no correct answer. There are a lot of supporters of both theories. Here the role of emotional state and overall strength of spirit is very important. Often, emotions can control the mind and the trader can make mistakes. Therefore, stops are designed to disable the emotional component in trading.
Of course, long-term investors do not use stop loss and take profits. They are always mentally prepared for a possible drawdown of 20%-50%. But they understand that investments can grow several times over a long horizon. Scalpers and intraday traders almost always trade using stop loss. Therefore, the topic of risk management is especially important for them. This is due to the fact that margin lending is used.
What is the investment period for a trader and investor?
Here we will talk about global things. Investors are always focused on the horizon of 5-10 years or more. But active traders want to make 50% per annum in half a year, so their approach to risk is different. Therefore, investors cannot afford to trade derivatives or volatile instruments. Large capitals often sit in bonds and Eurobonds. Even if it is only 5-10% per annum, but it is stable.
Speculators always want to earn the same 10% only per month. Therefore, they are “forced” to make trades with the shoulder, on volatile stocks and futures. It is the difference in this approach that explains the lack of short positions in short positions for investors. But more aggressive traders like to “mess up” an asset that has grown in price too much. By the way, working in a brokerage company, I am surprised that most investors do not know that it is possible to work in short. This probably explains why stock markets are rising 3/4 of the time.
What is the profitability of trading?
The most important goal for all investment funds, private traders and management companies is to overtake the benchmark. If a Fund manages to overtake the index, which showed a conditional 12% return, then this is good. Therefore, long-term investors are guided by these indicators. Short-term speculators are guided by their own logic and feelings. The main thing for them is that their brokerage account will survive after another gap in the market or a crisis. Active traders may have drawdowns of 10-30% in some months and 30-50% in others.
As a result, in General, the same 15% per annum can be obtained. I hope this material has put everything in its place a little bit. Now you know perfectly well what category of a stock player you belong to.