If you have any sort of involvement in shares, commodities, currency, or derivatives of these, then you will probably fit into one or more of the ‘investor’, ‘gambler’ or ‘trader’ categories. What is the difference between them and where do you fit into these categorisations?
Investor
An investor is someone who buys something in the belief that the value will rise over time. Unlike gambling and trading where bets can be on movements in either direction, an investor will always be betting on the price rising. In the case of buying shares in a company the investor is helping the company out by buying part of the company and hoping to benefit from the company’s success. This is in the form of both the rise in the share price and in the receiving of dividends.
In the case of investing in commodities the investor is buying in the belief that the value will increase in the long term.
Investors will buy the product whole – so if the shares cost £4000 they will pay £4000.
Investing is therefore buying something ‘real’ (i.e. not a derivative), in the belief that in a period of many months to many years the value will rise.
Trader
A trader has a much wider scope in what they do than an investor. They buy or sell (go long or short) in order to profit from the change in value. The trader will have an opinion on the direction that the price will move and will then place a trade based on their opinion.
The trader isn’t restricted to buying or selling shares or commodities. They can also trade in derivatives of these, and in a whole host of other financial products such as foreign exchange (forex), futures and even on thing such as interest rates.
The trader can do business on multiple timeframes. They may be willing to wait many months or years, but they can also have much shorter timeframes. Even down to minutes or seconds.
Unlike the investor who buys shares, the trader isn’t trading for the benefit of the company, the trader does what he/she does purely for his/her benefit.
Whereas the investor will generally pay in full the trader can use leverage to take advantage of movements of much greater value than the trader has. E.g. for share prices a trader may well be borrowing 20 to 50 times the value of the money that is being paid upfront. For foreign currency trading the amount being borrowed can be as high as 1:100 or 1:200.
Gambler
The gambler could be adopting any kind of tactics. The gambler could be buying or selling shares, derivatives or in fact anything he/she can think of.
What sets the gambler apart is the lack of real justification for the decisions that are made. Unlike the trader and investor who should be maintaining a cool head, the gambler is likely to get a big adrenaline rush out of each bet. The gambler is also likely to find it hard to control risk, and find it hard to control how many bets are being placed. Even when confronted with mounting loses, the gambler will still continue.
Which one are you?
Which of these characters best describes you? I hope you are either an investor or a trader. Unfortunately if you are a gambler you may still believe you are one of the other two. In this case I hope you discover the truth before it is too late.
