Online Trading vs. Investing in Shares Directly

For many people the terms trading in shares and investing in shares are synonymous. However, whilst both traders and investors transact business on the stock exchange they have very different psychologies and methodologies.

Investing

Investors see the market as a place to buy shares for the long term. With historic returns averaging around 10% per year, an investor is less concerned about market downturns, unless he needs to liquidate his portfolio, and more concerned about meeting his investment objectives over a period of years or even decades.

A prime example of this long term view is an investment made into a pension scheme. Such an investment could be started in the late teens or early twenties, even though the realisation of value will not happen until perhaps forty years or more into the future.

Investors may fear market downturns or prolonged bear markets, but they also see them as opportunities to buy undervalued shares. The reliance is on historic gains returning, and the bear market is part of a healthy market and natural investment cycle.

While investors will buy and hold shares for the long term, perhaps using dividend reinvestment strategies as a way to boost investment growth, they are also likely to invest in collective investment schemes, such as open ended investment companies and unit trusts, tracker portfolios and investment bonds.

Investment vehicles such as unit trusts allow the investor to rely on a professional fund manager to manage the funds within the investment. The aim is to beat a benchmark – perhaps the FTSE 100 Index, for example – and for the manager’s expertise the investor will pay a commission from his investment each year.

Trading Shares

Share traders have a far shorter time span for their ‘investments’ and do so through CFDs. Some traders may buy shares only to sell a few seconds later. They are far more proactive than investors, with most watching share prices and market news constantly and monitoring portfolio performance on a minute-by-minute basis.

Day traders tend to buy and sell small quantities of shares many times over, while position traders will buy larger parcels of shares and trade on price swings with pre-determined entry and exit levels.

While investors will buy and hold shares, traders may also sell short in anticipation of a short term fall in the share price and the hopes of buying the shorted shares back at a cheaper price. Share traders will look at price patterns rather than valuations, buying and selling as a share moves between perceived lower and upper ranges.

Methods of stock selection

Investors buy shares that they consider are undervalued. In determining such, they are most likely to use company balance sheet information, history of earnings and dividends, as well as the potential of new products or entry to new markets. This is called fundamental analysis, and is aided by a number of standard investor ratios to allow easy comparison of share values.

On the other hand, traders use mostly technical analysis to spot pricing patterns. They use this to create buy and sell levels, and strategise their trading accordingly.

Traders may remain very focused in their portfolio, perhaps trading only a handful of stocks, though they may take a broader view of the market and trade in index funds or ETF’s, and index futures and options.

While some investors will also have a focussed portfolio, the majority will invest across a number of companies or business sectors, perhaps even geographical regions. The view is that any downturn in one share or sector will be compensated by an upswing in another. The need for this diversification is a major reason that the majority of private investors use collective investment schemes as their stock market investment vehicle.

In summary

Share trading is short term, lasting from seconds to months, whereas investing is all about long term gain. The two philosophies could perhaps be best summed up as the difference between timing the market and time in the market.

Share traders are not just narrower in time focus, but also in portfolio spread. As a generalisation, an investor may hold 30 or 40 stocks or even more (whether directly or via a collective investment scheme), while a share trader will concentrate on building an intimate trading knowledge of a handful of companies.

An investor will look to buy shares when they become undervalued and hold for the long-term until they are valued correctly by the market, using fundamental analysis methodology to aid their stock selection. A trader will seek to buy and sell shares as a shares price moves between short-term upper and lower levels as determined by their technical analysis.

Finally, share traders make their money through capital gains: buying at one price and selling at a higher price. Investors buy shares for a variety of reasons, including capital gain. They may also buy shares for the dividend, or reinvest unwanted dividends. Investment portfolios could be built to achieve both income and growth.

Adam

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Adam is an experienced financial trader who writes about Forex trading, binary options, technical analysis and more.

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