Are You a Trader or an Investor?

The concepts of ‘trading’ and ‘investing’ are often used interchangeably, but they are not the same. This piece will explore the differences between the two and show why investing is the better choice in almost every case. By the end of this article, you will see why trading should be left to the professionals, and how we can all win at the investing game.

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What is an Investor?

An investor buys part or all of a business. The owner of your high-street dry cleaners is an investor. As are the owners of a drinks brand. And so are your friends who bought part of a car dealership down the road. They have all bought a share of a business.

Some of those investors might also be entrepreneurs. Perhaps the owners of the drinks brand started the company from their garage. Perhaps the owners of the dry cleaners also work there. It doesn’t matter. Investors can be entrepreneurs, and entrepreneurs can be investors. What we focus on here is someone who buys part or all of a business because they believe in its prospects.

These individuals are buying businesses for the profits they generate. Their analysis is that the value of their investment will rise as the underlying business succeeds. They own the business to receive profits, not just to sell it the next month at a higher price.

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An investor can also buy publicly traded shares of companies on the stock market. Think shares of Apple, Microsoft and Coca-Cola. Or funds which hold shares in these companies.

By purchasing shares, the investor owns part of a business. They hold shares in these companies because they believe the underlying companies will perform well. That Apple will sell more iPhones, that Microsoft will sell more Cloud services, and that Coca-Cola will sell more drinks.

The investor will of course hope that the price of the shares they own rises. But a sustainable rise in the price of the shares will only happen when the underlying business performs well and increases its profits.

Investors are not buying shares of Apple because they think the price of those shares will rise in the next day or week. It is a long-term view on Apple’s business success.

A Deeper Look at Trading

Traders differ from investors. A trader’s view is unaffected by a company’s underlying business. Instead, traders gamble on movements in the price of securities (typically shares of companies), based on short-term news. Trading is speculation.

In recent years, traders have moved beyond the stock market, and have begun to trade cryptocurrencies. People buy in the hope that they can sell to someone else for a higher price. This is known as the greater fool theory – the hope that there is a greater fool than you who will buy your stake at a higher price, thereby giving you a profit. Traders don’t care about fundamental value. They are only interested in making a quick buck.

Why has trading become more popular? During the COVID lockdowns, the stock market initially fell, and then roared back. As such, those who had started investing in Spring 2020 felt they were trading rock-stars within a few months.

Over time, this became an addiction for hundreds of thousands of people who believed they were amazing traders and could not lose. This self-delusion meant that even when stock markets fell in 2022, these individuals thought they knew what to do. It is now clear that they did not.

In all parts of life, it’s important to fish in the right pond. In other words, you could do better by being average in one area that pays well than being excellent in another area that pays poorly.

It’s the same with trading and investing. 90% of long-term investors will make money, but 90% of traders will lose money. It’s clear which is the better pond in which to fish. Consistency, over time, beats short-term wins.

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Turning £1,000 into £2,000 in a week gives a dopamine rush – that’s why trading attracts in so many people. But the longer-term emotions of trading are damaging. Firstly, an addiction to dopamine leads to a preference for instant gratification. This causes many problems.

And secondly, it is stressful – the human brain is wired to be stressed when it loses something. When your trading portfolio fluctuates in value, your brain produces cortisol, among other negative hormones. These affect your wellbeing over time.

Trading involves many more decisions than long-term investing. You are constantly guessing and second guessing what to buy and sell next. It’s no wonder many traders have lose both their minds and their savings over time.

Short-Term vs Long-Term Thinking

The one thing that traders and investors have in common is that they want to use their money to make more money. It is proven time and again that in the long-run it is the investor who earns more than the trader, by far.

So why do some of us trade? Because of the self-delusion after one good trade that they are good, rather than lucky. Because of the dopamine rush from that trade. And because as humans, we always focus excessively on the short-run, at the expense of the long-run.

It’s very difficult to accept that a basic, beginner’s guide to investing will likely perform better than constant buying and selling through speculation. But it’s true. Investing is an example of where less work often yields better results. Simplicity is the ultimate sophistication.

So remember – trading and investing are different. You don’t need to learn how to trade. In fact, it would probably harm you if you tried. So focus on keeping it simple as a long-term investor and get on with the rest of your life. You can thank yourself later.