Awareness about stock market is on the rise in India. At this point, without much knowledge many people who are wanting to be investors end up being a trader and the ones who want to be a trader are stuck with their wrong choice and become investors.
Those who want to stay invested in their stocks for a longer period are known as investors.
Those who buy stocks and sell them in short span are known as traders.
Investors should not have the mind set of traders and traders should never turn into investors just because of situation.
Period of holding
A person is classified as investor or trader based on the number of days or months or years of holding the stock. When the holding period is a short span ranging from a day to a year, you become a trader. Whereas if you hold a stock for more than 3 years, you are an investor.
There are following types of traders
- Positional Trader – positions are held from a few months to years
- Swing Trader – positions are held from days to weeks
- Day Trader – positions are held throughout the day only with no overnight positions
- Scalp Trader – positions are held for seconds to minutes
Anyone who deals with stocks wishes to have good profit. Traders take advantage of small price changes and yield gains. Target is an important factor for traders. They should always have targets in mind before buying the stocks. Whereas investors never give priority for small price fluctuations. They aim at getting good returns from stocks over a period of time apart from enjoying benefits such as dividends and bonuses.
Traders select stocks only based on technical analysis. They analyze the stock charts and patterns and conclude whether the stocks should be bought/sold or to be stayed away from. Investors on the other hand perform fundamental analysis, study the financial records of the company as well as consider the sector performance. They consider various financial ratios and parameters in the financial statements before investing in the stock.
Traders not only rely the funds in their own hands but also take loans from the brokers and perform margin trading. The more loan they take the more they lose their rights on the share. But investors solely rely on their own funds and hence possess full rights on the stocks.
If a trader is good enough, he takes advantage of both rising and falling markets and yield small amount of profits more frequently. Whereas an investor, on choosing the right stocks will take huge profits but at the cost of waiting for a longer time.
There will a huge impact of market movements over the traders. Those who take advantage of these movements are efficient traders. Investors pay no attention to temporary fluctuations in markets. They often get good returns when they ignore the changes and wait for their long term benefits.
Traders never stick to a single stock or one particular sector. Based on the market trend, they choose sectors and stocks that are likely to give returns in short span of time. They trade merely based on the current situation. But investors often prefer some sectors over the other. They continue to hold the stocks for longer period of time and reap the benefits. Performance and leadership of the company, profit, Research cost allocation and Financial ratios are some the few factors that investors often consider before selecting stocks.
Traders never hesitate to take high risks. If they predict that a share is likely to undergo surge, they often buy the stock in huge volumes. But investors think twice and will not take huge risks. Investors sell their holdings if they feel that the company’s performance is not good.
Dedicating your time
To be an active trader, you should make yourself available during the entire market hours. It is important to watch the movements closely to avoid losses. Whereas investment is the best option if you have other full time jobs and you cannot afford much time to be a trader. You can track markets and watch news after market hours or over the weekend to keep track of your investments.
Investors have tax benefits over traders. Long term capital gains are tax free (more than 12 months) for the stocks listed on Indian stock exchange and sold through a stock broker. Even the dividends are tax free. But short term gains are taxed at 15% currently.
Before involving in stock market, first you should decide whether you are going to be a trader or an investor.