Are you an investor or a trader?

If you are like many investors during these current economic times, you may not trust the stock market or brokerages in general.  This is logical – the stock market dip turned the public into a mass hysteria during the latter half of 2008 when most people’s savings had appeared to vanish.  With that said however the markets have since staged an incredible comeback and left many people by who were scared to re-invest their money into something which they believed had failed them. 

Some people are wading back into the markets but are confused on what certain market terminology means and how to invest their money.  Those people have decided that they want to do investing on their own terms, without the help of a broker.  One of the goals of my blog is to help those people out who are becoming budding investors or traders. 

When putting your money in the stock market – there are two types of people, investors and traders (or 3 if you have heard the old adage ‘bulls make money, bears make money, and pigs get slaughtered’).  Investors tend to keep their money invested in securities for the long haul and do not tend to care about day-to-day fluctuations of the market.  Traders on the other hand live for these day-to-day and week-to-week fluctuations.  It’s worth noting that you can make money both ways, but there are far more successful investors than there are traders, because timing the market is a very hard thing to do. 

I myself was a trader for a small proprietary trading firm for a small stint but have also been an investor for a much longer period.  When asking yourself what you want to be, there are several questions you need to ask yourself, such as:

·         Do I have enough disposable income to trade?

·         What is/are the objective(s) of me saving money?

·         Do I have the time to invest in getting a feel for the markets?

Upon answering these questions, you should get a feel to determine whether you are an investor or a trader.  To be able to trade, disposable income is needed because traders tend to speculate based on market movements and individual stock movements.  You do not want to trade with money that you need to pay your mortgage with or pay your kid’s tuition costs.

Speculation can cause you to lose all your money, and I have seen it multiple times while working at E*TRADE Financial as well as with other employees at the prop trading firm where I worked.  The key is always risk management though.  Allocate a certain percentage that you feel comfortable losing with each position you enter into.  A typical percentage is 5%.  For example:  if I enter into a position and the position moves adversely to what I wanted, I will sell the stock off, no questions asked, when I lose 5% of the value of the position.  There are even ways to set this up so it will happen automatically on most online brokerage sites without you having to watch the market every second.

For an investor however, they are viewing the market on a much longer timescale.  A 5% decline over a small period will not (or should not) cause an investor to panic.  If the investor feels that their position is solid, they might hold onto it even if the stock drops 50% because they feel it may go back up.  Even investors need to learn rules of minimizing risks though.  Investors should and do tend to check their statements yearly for any drastic changes to the valuation of their portfolio.  Some investors even check quarterly for these changes and make decisions on their investments based on that time period. For both timeframes it is a wise decision as it takes the emotion out of the daily swings in the market.  If they check their statement for fluctuations any more than that it would be overkill.  However if a mutual fund, ETF (which I will explain in a later blog and highly recommend), or stock is suffering from a long decline in performance, it may be time to re-allocate your portfolio at the end of that year.

Whether you are an investor or a trader, risk management is a key objective in investing money into the stock market.  For the budding person entering the stock market, ask yourself the aforementioned questions, and then decide upon a suitable route.  One is not better than the other, and neither ways are perfect.  Always make sure to read as much as possible upon making financial decisions. 

My next update will focus on the investors as it is much easier to explain their terminology and modus operandi.  It also provides a solid foundation for moving to trading securities.  I hope everyone is studying hard for finals and getting all their Holiday shopping done!

Disclaimer - I am not advocating any method of investment and will not be held responsible for losses made when using the information in my blog.