People, including myself, get quite frustrated when they get bombarded with different financial terms and theories. In fact, the frustration is enough to deter some people from the investment world altogether. In this post, I’ll try to explain the difference between two key terms of the investment world. They are, investing and trading.
These two might be dealing with the same financial products but they are actually very different. Different meaning and different techniques employed. Let’s talk in the context of shares/stocks where you’ll have share investors and share traders.
Share investors generally buy shares in order to keep them for the long-term. Usually, investors plan to keep the shares that they own for the long-term of 12 months or more. They do this for the capital growth and for the dividend payments. In other words, they employ the buy and hold strategy. The most famous share investor that I can think of is Warren Buffett.
Share traders on the other hand are people who buy and sell shares for a relatively short period of time. Some hold their shares for less than a day and some of up to 6 months. The rule of thumb is, share traders hold the shares for only a short while. Most of share traders employ technical analysis as their research method and guess what? Sometimes, they don’t even know the full name of a company that they’re trading and what the company actually does. As long as the charts look good, then it’s an opportunity for them. However bear in mind that fundamental analysis is also practised by share traders. Names of a few famous share traders are Richard Dennis, Paul Tudor Jones, and and Ed Seykota.
So, to sum it up. Investors = long term. Traders = short term.
If you were wondering what is fundamental analysis and technical analysis, here are some short explanations:
Fundamental Analysis = Research method based on the companies’ financial reports. Investors/Traders look at things like the companies’ financial health, balance sheet, business model, and the management.
Technical Analysis = Research method based on the companies’ share price chart. Investors/Traders look at things like the price action, the volume, indicators, and etc.