Monday, April 14, 2008

Traders VS investors, what is the difference and why should you care?

There are 2 different types of stock market experts out there. These are the traders and the investors. So what is the difference? Well the simple answer is that traders look for short term profits while investors look for long term profit.

The investors are the ones who try to find a group of high quality companies. They try to find companies that are underpriced and have the potential to grow in the next few years.

The overall goal of this is to put their money in these high quality stocks and then let it sit for years. By the time they want the money it should have grown quite a bit.

This is a safe way to invest. After all in the long run stocks go up. The S&P goes up on average 10% a year. If you just want your money to grow for 20 years long term investing in good quality companies can certainly help.

Investing in the long term can help weed out stress from short term volatility. You don’t care what happens to the stock in the short term because you are in for the long term.

The disadvantage of long term investing is you will miss ut on a lot of opportunity. For instance say you buy a stock for $46. Then a market crash happens, the stock goes down to $27 and when the economy recovers it goes back up to $50. You look at this like a good trade because you bought it at $46 and now is at $50. You made 4 points.

However you missed out on bigger moves. The stock moved 19 points down and 23 points up. That was 42 potential points you missed. Now you will never be able to get all 42 points but you can get the majority of them.

This is the goal of a trader. They are in the market to make money when the stock market goes up and when it goes down, and hopefully make more than a long term investor can.

Because traders are in the business of making money weather the stock market goes up down or sideways trading can often lead to consistent monthly cash flow. Unlike long-term investing which will typically only lead to gains after years in the market.

One of the biggest misunderstanding between investing and trading is that investing will lead to bigger gains in the long term. This is simply not true. Because of compound interest a short term trader can often lead to larger long term gains then an investor.

Most successful traders make trading decisions based on technical analysis rather than fundamental analysis. This is simply detecting patterns in the stocks that can lead to predicting price movements.

To learn more about trading in the stock market visit

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