The Hindu Business Line : Traders vs investors

ARE you a trader or an investor? Most are of the opinion that those who buy a stock based on fundamentals and hold it for more than a year are investors. And those who buy the stock based on technical analysis are traders. There appears to be a flaw in this argument.

You may, for instance, buy 100 shares of Sesa Goa. Your objective is to sell the stock at a higher level and profit. You are a trader.

Who then is an investor? Suppose your father had bought 1,000 shares of Hindustan Lever in the late 1980s. His primary intention would have been to earn dividend income. Such buy-and-hold strategy is an investment.

Investors are not overly concerned about a decline in the stock price. They may willingly buy more shares if a stock declines, as that would increase the dividend yield.

The difference between investors and traders is to do with the objective with which the shares are purchased.

You are a trader as long as you want to profit from a price increase. The holding period does not matter. Nor does it matter whether you pick the stocks based on fundamentals or technical analysis.

Most of us want to become investors when our trading decision goes wrong! But why is it important to distinguish between investors and traders? They have different perceptions of risk.

The only risk that an investor perceives is in identifying a company for investment. A trader perceives risk in the price movement. He normally gets nervous if the price moves against him. The reason is that entry and exit prices are important for the trader to generate profits.

(The author is Head, Research, Navia Markets)

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