There is a fine line separating investing and trading. Where exactly that line sits in the divide is a topic for debate, but some common agreement on the matter does exist. Investors generally, are individuals who will buy shares in a company, and hold them for a long time. Far too often, these shares are held onto for far too long, allowing portfolios to lose value whilst sticking with a company that is on the decline. On the other hand, traders can buy and sell the same share in a matter of minutes. This is typically the preserve of day traders though, and the more commonly found traders hold onto these shares for longer periods of time. Anything from a few weeks to a few months is not uncommon. How aggressive an investor you will be, and how much risk you are prepared to accept will determine your exact trading patterns, and holding periods.
The sweetspot for an investor is a well balanced portfolio, incorporating growth stocks, bonds, and value shares. The bonds in particular, can be both domestic and foreign, as well as being short or long term bonds. The mantra is ’steady as she goes’, and investors will aim for predictable, but steady returns on their portfolios of anything between 6% and 12%, depending on the prevailing economic outlook and interest rates.
Buy and Sell Shares
The level of risk an investor is prepared to take with their capital typically spells out the split between stocks and bonds. Bonds are safer and offer more predictable earnings, while shares do have more volatility, but can generate very high returns. Aggressive investors might split their portfolio 80-20 between shares and bonds respectively. Conversely, a more conservative investor could split his portfolio 80-20 between bonds and shares respectively. Aggressive investment portfolios can generate returns of 12% or more, averaged over a period of say 10 or 15 years. It is key to note that the figures here are ‘average returns’. In some years, the portfolios might not earn as much, and could indeed lose value.
Conservative investment portfolios, whilst returning earnings on the lower end of the scale, are more predictable, and will have less volatility. As a result, the more agressive investment style is found in younger individuals who are further away from retirement, and so can afford to risk more of their portfolio’s capital in pursuit of the higher returns the stock market offers. Those nearing retirement, or living off their investment earnings are better off in gilt bonds (such as government bonds), which whilst giving lower returns, are both safer, and predictable in their earnings.
A trader on the other hand, looks to position their money in areas that exceed the returns an investor might expect to get with an aggressive portfolio. This means getting out of a stock when it shows signs of a long downward trend. Sometimes, the best thing for a trader to be invested in is cash, that is sitting on the sidelines, and not actually holding any shares whilst waiting for the market to bottom out before buying again. Investors will buy shares in a company based on a fundamental belief that the company has good products, and will be profitable over a long time. Traders on the other hand will more readily buy shares in a company on the belief that those shares will rise in value faster than the rest of the market in a rather short space of time.
Rather than ride out short term dips in share prices, as an investor might do over years, traders will close that position (i.e. sell the shares), and move onto the next trading opportunity. This in essence, marks the difference between a passive investor, and an active trader.
Investment/Trading