Traders and investors are both people who make money from the financial markets, but they do so in different ways.
Traders buy and sell assets rapidly, trying to profit from short-term price movements. Investors, on the other hand, take a more long-term approach. They buy assets and hold onto them for years or even decades, benefiting from appreciation in asset prices and dividends and other forms of income.
In this article, we will explore the factors that separate traders and investors. Despite their many similarities, they are after all not the same in the way they trade and their approach and perspectives.
Risk appetite
Traders are generally more willing to take on risks than investors because they are often looking for quick profits and are less concerned about the long-term outlook of a particular investment. Investors, however, may have a lower risk appetite and look to stick with the same investment over the years to gain a steady return.
Time horizon
Traders typically have a shorter time horizon than investors because they are more focused on short-term market movements and less concerned about an investment’s long-term prospects. Traders may open and close positions in seconds, minutes, days, or weeks. Investors, however, can focus on investing on one asset for years and even decades.
Investment goals
Traders often have different investment goals than investors. For example, a trader may be more focused on generating immediate profits, while an investor may be more focused on building long-term wealth.
Trading style
Traders often adopt a more active trading style than investors, meaning they are more likely to buy and sell investments frequently to take advantage of short-term market movements. This then involves monitoring markets closely, utilising indicators and charting tools to find opportunities in the short-term and striking while the iron is hot. Investors, on the other hand, may not need to monitor charts and price movements as quickly and often and choose to ride out any immediate bumps in markets, focusing on the overall trajectory of an asset instead.
Use of leverage
Traders are more likely to use leverage than investors. Leverage allows them to control a more significant capital with a smaller investment, which can magnify profits (or losses). Investors, on the other hand, have a lower risk appetite and tend to use leverage less, preferring to focus on stable gains.
Use of derivatives
Traders are also more likely to use derivatives than investors. Derivatives are financial instruments that derive their value from an underlying asset. They can be used to speculate on the future price movements of an asset or to hedge against risk. They are leveraged products, and they can be convenient for opening and closing positions and benefiting from both rising and falling markets. Investors mostly stick to purchasing assets directly and holding them while waiting for their value to appreciate over time.
Tax implications
The tax implications of trading and investing can be different in Australia. For example, investors may be subject to capital gains tax on their profits when they hold onto assets they invest in, while traders may not, if they speculate on price movements of underlying assets without actually owning anything.
Regulation
Trading and investing are regulated differently in Australia as well. For example, the Australian Securities and Investments Commission (ASIC) regulates financial markets and products, while the Australian Prudential Regulation Authority (APRA) regulates banks, insurers and superannuation funds.
Cost
Trading can be costly due to the fees and commissions charged by brokerages, often accrued with each trade that is made. On the other hand, investors may only incur costs when buying or selling an investment, which is not all that often.
How to start trading
Decide what you want to trade
The first step is to decide what assets you want to trade. It will depend on your investment goals and risk appetite. For example, if you’re looking for quick profits, you may want to trade stocks or commodities. If you’re more concerned about long-term wealth building, you may want to invest in property or shares in a managed fund.
Choose a broker
After deciding what you want to trade, you’ll need to choose a broker. A broker is a firm that facilitates the buying and selling of financial assets. Many different brokers are available, so it’s essential to compare their fees and services before deciding.
Open an account
After you’ve chosen a broker, you’ll need to open an account. The process will vary depending on the broker, but you’ll usually need to provide some personal information and documents, such as your ID and proof of address.
Fund your account
Once your account is opened, you’ll need to deposit funds into it before you can start trading. You can do this via bank transfer or credit/debit card, or through other avenues, depending on your broker.
Start trading
Now you’re ready to start trading by placing an order with your broker. An order instructs your broker to buy or sell an asset at a particular price.
Risks of investing
Market risk
Market risk is the risk that the price of an investment will go down. It can happen due to several factors, such as economic recession or political instability.
Inflation risk
Inflation risk is when the buying power of your investment may decrease over time. It happens when the prices of goods and services rise faster than the return on investment.
Interest rate risk
Interest rate risk is the risk that the value of your investment will go down when interest rates rise. It happens because investments that pay fixed interest payments become less valuable as interest rates rise.
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