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18 October 2013

Trader and Investor



A noticeable trend to those who are familiar with the stock market. There are two groups of people. The traders and the investors. If you thrive in volatility and frequently ride onto positive momentum with the aim of making a short term profit, then you are a trader. If you look more into the balance sheet of a company and is willing to hold on to your position for medium to long term than you are an investor. There is no right and wrong in this two positions, but rather there are differences in perception.

Investors accept the efficient market hypothesis(EMH) which suggest that no investor will have any advantage in predicting a return on a stock price as no one has access to information not already available to everyone else. Traders on the other hand rejects this.

Traders treat stocks as a medium to be exchanged for profits, which means sectors, cap size and growth pattern are less important for them. Investors however, treat stocks as a share of ownership in a company and that each shares represent a percentage of their claim on assets and earnings.

Investors do comparisons between stocks of the same sector to assess their value and look into their revenue, cash flow, earnings and other fundamental criteria before making their decision, but traders predominately look at the sentimental indicators and judge primarily on how the charts behave.

Since the 1980s, the time horizon of virtually all market participants has shrunk considerably, Mainly due to the technological revolution. The shortening of the time horizon means that the position of long term investors may not be as smooth sailing as before mainly due to more random noises. Paradoxically this also means that technical indicators are not as effective as before(bad news for short term traders).

Both positions are by no means easy, as initial success can lead to overconfidence and then failure. Charles H.Dow, the father of technical analysis, once wrote that "Pride of opinion caused the downfall of more men on Wall Street than all the other opinions put together" I agree with this statement. As I believe ultimately, markets are reflection of peoples action. Whether you are a long term investor or a short term trader(especially), there is a need to adjust our attitudes as changes in the market emerges. Not giving up too much to random chances makes us learn a little more about our own makeup, don't you think?

2 comments:

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