In the process of investing in securities, an investor can adhere to an active speculative or passive strategy. Passive investment is one in which you retain ownership of assets for a lengthy period to receive income from your investments, such as dividends, coupons, and speculative. Those who practice a speculative approach are sometimes called traders, supporters of passive investing are called investors.
Who is a trader?
A trader is an investor who profits from fluctuations in the price of an asset by making frequent, short-term trades.
A trader can benefit from both rising and falling markets. The strategy in growing markets is based on the well-known principle of “buy cheaper and sell more expensive”. In a falling market, traders use margin trading: first, they sell assets that they do not yet own at their current value and then buy them back at a reduced price.
Traders of a growing market are commonly called bulls, and downside players are called bears. This is a conditional division within a specific trend: some participants expect a price increase, while others are confident of a fall. During one trading day, each trader can be both a bull and a bear.
Any financial commodity may be a trader’s asset. Traders are under time constraints, so they don’t mind the quality of their investments; all they care about is where they stand in the market now. Technical analysis is utilized for this.
Technical analysis is price forecasting based on data on how it has changed in the past. Proponents of technical analysis believe that price movement can be predicted if market signals are correctly read. To make a decision about a specific transaction, a trader analyzes the current situation in a special program — a trading terminal.
Tools for trading:
Charts. The trader keeps track of the data — repeated sequences of price growth and decline, as well as forecasts whether the curve will go down or upon them.
The stock glass-A t-bar is a table that shows the entire history of transactions on the market and aids in assessing supply and demand.
Technical indicators -Technical analysis indicators are used to identify and evaluate trading activity. Indicators calculate the volume of transactions, as well as other factors.
Trading bots- robots, in other words, a program code that automatically performs actions according to predefined conditions, on the Bitsgap’s platform you can find a big variation of trading bots like DCA bot and etc. Exchanges facilitate routine operations for traders, and they may even do analysis in some cases, so we may say that they already have artificial intelligence.
Who is an investor
The investor owns the securities for a long period of time and receives dividends and coupons.
The investor’s goal is to get the passive income that the asset brings. The potential growth of the asset by investors may be perceived as an additional factor in decision-making.
The basic principles of investing were formulated back in the middle of the twentieth century in the books of economist Benjamin Graham “A Reasonable Investor” and “Securities Analysis”. Since then, all investors in the world have relied on two pillars: portfolio diversification and fundamental analysis.
Diversification is filling an investment portfolio with different types of financial instruments. This approach helps the investor to reduce risks: if one of the assets drops sharply in price, then the profit from the rest will cover the loss.
To make a decision, investors evaluate the investment attractiveness of securities based on the company’s financial performance and external factors.
Assessment parameters for fundamental analysis:
The political and economic situation in the world and the country where the security was issued.
The state of the industry to which the issuing company belongs.
Assessment of the market value of the issuing company. It is determined based on the analysis of the company’s financial statements and financial indicators and multipliers.
While a trader studies the process of price movement itself, a fundamental investor looks at the company whose shares he is buying.
How an investor makes a profit
For an investor, the most attractive securities of companies that pay dividends to shareholders are percentages of profits. The amount and frequency of payments depend on the company’s dividend policy.
Bond payments are called coupons. The state or the issuing company must pay them every year. The coupon yield is 5-7% of the asset value.
- The growth of the exchange rate value
Companies that do not pay dividends to invest money in development. They are called growth companies. In this case, the investor is ready to give up dividends now for the sake of greater profitability in the future. If the firm improves its financial indicators as a result of development expenditures, the price of its stock will rise.
- Compound interest
Dividends are paid to investors’ brokerage or bank accounts, depending on the terms of the agreement. These funds may be reinvested and the investor’s earnings will increase over time as a result of compounding interest. This is how simple it is for you to generate money.
Investor or Trader?
Investing and trading on the stock market are two different techniques of trading. Both techniques have their benefits and drawbacks. Simultaneously, one element may be a benefit for one person but a disadvantage for another.
Trading is suitable for those who want to trade aggressively. This is a laborious job: a trader must devote several hours a day to the exchange, while an investor may not change the structure of the portfolio for months or even years. Some believe that the profitability of trading is higher than that of investing, although it is more difficult to obtain, taking into account all the risks.
Investing is suitable for those who want to receive predictable passive income. With proper portfolio diversification, the return on long-term investment in stocks exceeds the return on investment in bonds and other low-risk instruments. In addition, the investor does not have the risk of “going into negative territory”, since, unlike the trader, he does not use credit instruments. Investors’ risks are lower than traders’ risks.