To The Moon

Cult of personality – the trader vs the investor

By Greg Boland

Are you a trader or an investor? A trader sounds a little more rebellious and given the short term, higher risk nature of their investment behaviour they usually are.

An investor on the other hand is more focussed on long-term prospects.

If new research from Finder is anything to go by then New Zealand is a nation of investors. And a fair number of you may rate yourselves as traders.

The research found 56% of New Zealanders – that’s more than 2 million – were investing their money, ranging from buying property through to trading shares. More interestingly, almost two fifths (38%) have shares, making it the most common form of investment.

And it’s not just NZX shares being traded. A growing number of Kiwis are trading globally because of greater access to a diverse range of markets including the USA, Australia, Hong Kong, Singapore and China A-Shares.

Typically, a trader is someone who regularly buys and sells shares in order to profit from gains or to limit losses. Whereas an investor holds shares in a diversified portfolio, seeking long term capital gains and income from dividends with the future, and things like retirement, firmly in mind.

The difference between trading and investing can be reflected in someone’s personality. Not to stereotype, but the trader is similar to a rock star feeding off the cheers of the audience, whereas the investor is happier with their lot, and focussed on living a reasonably stress-free life.

Perhaps a more accurate representation of the distinction between a trader and an investor comes when a person’s risk profile is analysed.

Risk and reward are inextricably linked when it comes to investing. Risk tolerance is your ability and willingness to lose some, or all, of your original investment in exchange for greater potential returns.

So, knowing your risk profile is key as it helps to balance the allocation of assets in your investment portfolio.

An aggressive investor (one with a higher-risk tolerance) is happy to risk losing money in order to get better results. For example, they may choose a company with potential to make significant technological advances, or one that has recently listed on the stock exchange and seems under-priced.

Someone with a low-risk tolerance tends to favour investments that will preserve their original investment such as a 'blue chip' company that pays regular dividends and has low levels of debt (banks and utility companies).

Where the two personalities can meet in the middle is investing in an established, well-known company that has potential for continued growth (think Microsoft, Alphabet, or perhaps Apple).

Investing is not a flippant flutter. Yes, both investing and trading can be fun, and for some it’s a living so the ideal is for it to be enjoyable – and even entertaining. However, given the stakes and intricacies involved it also requires research, reasoning, and nous.

Traders require a trading platform or broker that is truly mobile, has live market data, access to a variety of global markets, comprehensive order types, and one which offers pre-market and post-market trading, especially for the US market.

Having an investing plan to nail down objectives is essential for both traders and investors.

Being realistic about profits is a good start, as is starting small and avoiding penny stocks which are often thinly traded with a wide spread between the bid and ask.

IPOs present opportunity but the stock price is often very volatile. Then there is the use of leverage to buy shares, and trading of futures and options, so do your research to understand the higher levels of risk that these products entail.

Part of this investment plan needs to factor in the tax implications of investing which are very different for trading and investing. A trader’s dominant purpose is clearly to buy and sell frequently, and often day trade so capital gains are taxable. Whereas investor’s key focus is long term capital gain and the receipt of dividend income. While dividends are taxable, capital gain is not, so getting professional tax advice is essential.

One thing’s for sure, for both traders and investors, the bottom line is all about the return on your investment. Yet markets are volatile, so work out your capacity for taking risk, and then get trading – or perhaps stick with investing.