There are two main ways to make money on the stock exchange – investing or trading. Although the border between them is blurred, there are significant differences. How do traders and investors make money?
Trader. Profit, risk, stress.
A trader earns by trading securities. Trader’s profit comes from the price differences of the securities. In most cases, the price difference occurs when the quotes rise or fall over time, and the essence of the trader’s work comes down to speculation with securities. It allows achieving more profit than just investing, and may well be the only source of income. On the other hand, a trader (often they are just called speculators) takes more risks. One wrong decision and his losses will be enormous.
The trader often trades relying on the technical analysis of the market. With its help trader determines where share prices may move and at what moment to make a deal. However, fundamental factors are not alien to him. From time to time he takes into account the situation in the economy, corporate news and many other things.
A speculator opens positions, i.e. buys or sells stocks for a short period of time, from several seconds to several weeks. Such trading requires very quick decisions and is associated with high stress.
One of the world’s most famous traders is named Lewis Borselino. He devoted 18 years of his life to the Chicago Stock Exchange. All this time Lewis worked on the trading floor, where others did not last even two years. In his first eight years on the exchange, Borselino had already earned his first million. He was only 30 years old at the time. Now Lewis Borselino is a world-class expert in stock trading and is on CNBC’s list of leading traders.
Most traders are salaried employees and trade on their employers’ funds. These are professional market participants working for banks, investment companies, pension funds, etc., who receive a percentage of profit from transactions as remuneration. In this case all the risks are borne not by trader but by employer. The trader risks only with his reputation. Such work requires a special license
To trade on your own funds, as a rule, you do not need a license. In this case, the trader acts at his own risk, that is, he is responsible for both profit and loss.
Investor. Less aggression, more calculation
An investor invests money in securities. The investor’s profits come from price increases and dividends received over the course of the investment. An investor usually invests money in stocks for a long-term period of one year or more. The profitability of such investments is lower in comparison with trading. This is due to the fact that the investor makes much less transactions than the trader. However, the risk of investing is considerably lower: as a rule the long-term stock trend is always directed upward, so the investor, if he is patient, has no fear of losing money.
More often than not, an investor relies on fundamental factors in his calculations. They help him evaluate the long-term attractiveness of the chosen company. But, as in case of a trader, technical analysis can be a useful adjunct.
To make a final decision to buy a stock, an investor needs to consider two main parameters:
The relative value of the securities. By examining multiples, it is possible to understand whether a company’s stock is worth the money the market is asking for it;
a company’s prospects. It is important for an investor to get an idea of a company’s future success by looking at its financial strength and future cash flows.
Financial statements can help answer these questions.
With the right approach, investing can provide a comfortable retirement and a good passive income. But to really achieve this, you need an investment plan and regular investments. In this case, even the smallest money will very quickly turn into a large capital.