Difference Between Investor and Trader – How What We Know is Completely Wrong

When opening first account with any brokers in India, the sales person that comes to open the account gives you a tag of whether you are trader or investor (based on some guidelines) and most of the time it is “investor” tag that they prefer giving for a simple reason – most people like to hear that.

On top of that people tend to open an account when they have very little knowledge about market and so for sales people it is safe to let you know what you are more of an investor mindset than of a trader mindset but the dilemma is their salary depends on how much you trade and so they prefer if you trade more and so convince people that investor is one who invest for few months and it is completely wrong thing that is what we know.

The  actual question is are you really an investor or a trader and how do you know for sure if you are an investor or trader?

Before I answer the above question let me clarify the misconception about individuals being either investor or trader but it is the portfolio of stocks or set of stocks that are in investment mode or trading mode. So if anyone says you are more of a long term investor it is utter nonsense because it is those set of stock that you have in your that particular account will be in investment mode and you can be fine trading as well.

As an example let me explain why the term Investor or Trader is for the stocks and not for individuals. I am an investor when I am investing for my kids into some stocks and mutual funds but I am more of a trader in my other trades. So I am always an investor or always a trader is wrong and it is investment objective decides what that investment is for me.

How do you know if you are trading or investing?

When investing you look for stocks that are cheap and can have big gains in few years down the line depending on the investment and business competition. Traders are more inclined towards the current movement in the stock and look for flipping the money for gains. So according to me If you are plan to sell stocks you bought under 3 years, you are trading.

At times people consider themselves as long term investor when investing for 6 months to 1 year and this is reference to the sales person who helped you open your brokerage account. No business can turn things around in 6 months to one year. Any business needs time and so according to me it is at least 3 years (at times even more) and so if you are buying an undervalued company for investment, it should be given few years to turn the things around and to reflect the same in the stock price.

So investment in market under 3 years is trading.

The 3 year time frame also confirms that Investors should be using Fundamental Analysis and Traders Technical Analysis because technical analysis for 1 year can still be applied but for 3 years time frame, most of the technical analysis will fail.

So now the question to you as well – Are you a trader or investor? Were you the investor of the sales person? Share your views in comments below.