Trading Vs. Investing

By Nathan Mercieca

There has been a constant divergence of opinion of what constitutes a Trader, as opposed to an Investor. These two categories have just as much to do about the inherent psychological aspect of a person, as well as the financial aspect.

Emotional Needle

What pivots your emotional needle? As we go about our day, we are bombarded with numerous situations that bring forth a plethora of emotions. However, some people may remain neutral and abstain from overreacting to such occurrences. This is due to their knowledge that selfishly reacting in an uneducated way culminates into further complications, thus creating a snowball effect.

Therefore, it is imperative that as a person interested in purchasing securities and other financial instruments, you identify the characteristic of your emotional needle. If you desire the excitement of feeling euphoric when good news presents itself to you, but at the same time, very pessimistic over a general inconvenience, then your needle would be quite sporadic. On the other hand, you may actually remain neutral during the course of a day, despite the challenges thrown your way.

Now, I am not saying that by being neutral, you suddenly have no emotional feelings to another human being and/or life event. However, by being neutral, your emotional needle does not abruptly swing from side to side like a wrecking ball. Instead, it shifts ever so slightly from the beginnings of euphoria and pessimism, but never actually reaching the end of the two extremes.

This leads us onto the following sections whereby we will discuss the psychological tendencies of having short term and long term objectives in the market. These contrasting parts will dictate whether you resonate with a short term or long term financial timeline and hence bring forth the categorisation of either being a Trader or an Investor.

Short Term Financial Objectives

Having a short term view of the future is predicated upon the yearning for instant gratification. Some people get excited about experiencing short bursts of energy as opposed to prolonged and consistent levels of success. This desire to constantly aim for ‘quick fixes’ is indicative of a Trader. A person who identifies as such, enjoys observing the prices of securities fluctuating into the red (i.e. loss) and more importantly, into the green (i.e. profit). Moreover, the impact of transaction costs would further eat into the profits that a Trader would otherwise earn, hence further depleting their long term success. Being a Trader can also be categorised as speculation upon securities because there may not be actual analysis of the financial statements of a company but instead, analysis of pure price patterns (i.e. technical trading).

However, the positions that would be in profit would be few and far between if such a Trader does not have a robust risk management framework in place. This requires copious amounts of discipline to draft and execute. If that discipline is not present, then the Trader would present the psychological attributes described above whereby their emotional needle swings so violently that their emotions take over their trades, as opposed to their risk management rules dictating their next move.

Therefore, I am not discrediting becoming a Trader because I know some that have consistently made a profit with a disciplined approach to risk management and dedicated an abundance of time to the craft. However, it must be noted that if one is not willing to put in the hours upon hours of research and practise (such as back-testing), then being a Trader would best be left aside.

Long Term Financial Objectives

In contrast, a person whose ultimate goal is to have financial security on a consistent and less variable basis, then they would value long term financial objectives more highly. Such personality traits would encompass the on-boarding of less risk, yet with adequate enough returns to permit their long term commitment towards such investments. A person who establishes themselves as not being swayed violently in either direction (to buy or sell a security) is an individual who does not concern themselves with the opinions of the masses and that of the news, but instead trusts their own investment strategy.

Therefore, if you fall within the above depiction of someone who prioritises long term success over short term contentment, you fall into the category of an Investor.

Furthermore, the trust in the investment strategy would encompass the acknowledgement that there will invariably be losses along the way. However, such losses are indicative of prices becoming cheaper for the Investor, hence creating value in the market. Therefore, an Investor would view such losses not as a time to sell, but instead as a time to buy because of the increased affordability of a company’s share price. The concept of value investing is not within the scope of this article, but it is interesting to note such view here for a greater understanding of Trading Vs. Investing.

Moreover, an Investor analyses the underlying financial position of a company by reading financial statements, even court proceedings (if applicable) and most importantly, the notes to the accounts, amongst other financial information.

There are a plethora of other strategies for Investing such as Dollar Cost Averaging, however, this is best left for an article on its own because it requires an in depth analysis on portfolio management as well as consideration towards fees, taxes etc. Investing is also considered passive if the Investor does not dedicate a large amount of time to research into a security but instead purchases an Exchange Traded Fund (ETF) for example. Such ETF would be passively managed for a small fee in return, whilst the Investor simply monitors their position.

However, it must be noted that if you are not willing to remain committed to constant results through investing even when times get tough in the markets, then being an Investor is also not right for you. You need to accept the inevitable loss here and there, and enjoy the journey that lies ahead.

Lastly, an Investor is someone who looks out over the horizon, as opposed to where their feet touches the water. Therefore, Investors are in it for the long haul.

Concluding Remarks

Your emotional needle is imperative in dictating whether or not you are an Investor or a Trader. If you prefer to say “well, I resonate with both categories, thus I am a Trader and an Investor”, then I would say be careful what you wish for. Once again, such a situation (being a Trader and Investor simultaneously) is able to be executed, but with a very disciplined approach and commitment to a robust risk management plan.

The reason why you should tread with caution if that is your view (i.e. being both a Trader and Investor), is that you open yourself up to rules and mental deliberations specifically applicable to each category that contradict each other, hence proving for a difficult stint in the financial world.

Written By: Nathan Mercieca