Are you an investor or a trader?  These two have very different mindsets and methods. I’ll be covering four key differences:

• Time an investment is held
• Mindset when there’s market fluctuation (which is a normal thing)
• How each considers profits
• How investments are selected

The time an investment is held

Investors build their wealth over a long period that expands over years or even decades. This is similar to your 401K. When you pick the funds that you want, for the most part, you just leave it alone and let it grow until it’s time to retire.

Traders have a very short time horizon. It could be as short as a few minutes, a day, a month, or a quarter.

Mindset when there’s market fluctuation

Market fluctuations, the highs and lows, are a normal thing and are necessary. 

Fluctuations occur throughout the day, or bigger and more dramatic highs and lows can be extended for longer periods. When dramatic fluctuations occur, regardless of the length of time, investors ride it out as long as they have solid investments, and fluctuations that occur throughout the day are less important. Think of a 401(k), investors are not buying or selling when the market goes up or down. 

For traders, fluctuations are important and needed. Their work is to figure out at what low point to buy a stock and at what high point to sell it, which would then mean that they have an interest in price movements and have more frequent transactions.

The 401(k) investor may have 2 transactions a year, but traders may have 1,000s of transactions in a very short time.

How each considers profits

Since investors hold investments for a long period, the profit comes from the growth of the investment, dividends, and interest.

A trader’s profit is based on the price movement, whether it be throughout the day or with those more dramatic shifts discussed earlier. For example, they’ll buy a stock and then turn around and sell it for a slightly higher price (sometimes just pennies more than what it was bought at). That slight price increase done with thousands of dollars is where profit comes from.

How investments are selected

Both investors and traders use a specific kind of financial analysis to determine what should be added to the portfolio.

When an investor is looking for a stock, they’re using fundamental analysis, which means that they’re going to be looking at the financials of the company, the market it’s in, and other metrics to evaluate if the company, and its stock, can grow. This is ideal for investors since profits are recognized from growth, dividends, and interest. It’s important that the company is a quality and solid investment that has the potential to withstand economic downturns.

Traders look at technical analysis. They’re using trading activities to identify patterns and trends, and from that create buying and selling opportunities. To go back to how a trader makes a profit, a trader would see a pattern or a trend, buy the stock before the price goes up, when the stock price goes up because it did follow the pattern they expected to see, that’s when the stock is sold.

When you hear people are “getting out of the market”, that’s a trader mindset because they’re using the trends and graphs to determine when to sell. 

Here at RADIANT Wealth Planning, our investment philosophy is to buy solid-quality investments and hold them for the long term. We know that investments will drop in value throughout the time we’re holding them as the market ebbs and flows.

RADIANT Wealth Planning, LLC is a fee-only financial planning and investment management firm located in Newport Beach, CA