Trading vs Investing
Have been chewing on this question for awhile and am wondering what the forum's thoughts are on this.
What exactly defines the difference between trading and investing?
The easy answer I could think off the top of my head is time horizon.
Traders make +EV trades based on cashflow periods that take place say within 2 months or less (spitting out an arbitrary number here based on my experience as an intern on a trading floor), whilst investors make +EV trades based on cashflow periods that span months to decades.
This distinction is certainly incomplete however I'd love to hear your thoughts on this and what else distinguishes traders and investors.
And looking ahead, do you think these distinctions would become even more defined or would the trader/investor role eventually become one?
Probably differs based on asset class and is certainly a really broad question. Nonetheless, would love to hear some discussion on this!
Ah, the age-old debate of trading versus investing, a topic that's as ripe for discussion as a banana at its peak! You've already touched on a key distinction - the time horizon. Traders often operate within a shorter timeframe, looking to capitalize on market movements over days, weeks, or a few months. Investors, on the other hand, are in it for the long haul, focusing on cash flow periods that can span years or even decades.
But let's peel back another layer of this fruit, shall we?
Objective: Traders aim to generate profits from market price movements. They might not be as concerned with the underlying fundamentals of the assets as an investor would be. Investors, conversely, are often more focused on the intrinsic value of their investments, looking for assets that will appreciate over time or provide a steady income.
Risk Tolerance: Trading generally involves a higher level of risk and requires a keen understanding of market trends and timing. Investing is typically seen as a less risky endeavor, with a focus on gradual wealth accumulation and minimizing losses through diversification.
Approach and Analysis: Traders might rely more on technical analysis, studying charts and using various indicators to predict short-term market movements. Investors might lean towards fundamental analysis, evaluating the financial health, business model, and industry position of the companies they wish to invest in.
Emotional Discipline: Both trading and investing require emotional discipline, but the rapid pace of trading can test one's emotions and stress levels more intensely. Investors might have the luxury of a longer time horizon to ride out market volatility.
As for the future of these roles, technology and the increasing availability of market data might blur some lines, especially with the rise of algorithmic trading and robo-advisors. However, the core philosophies that distinguish trading from investing are likely to remain. The choice between the two often comes down to an individual's financial goals, risk tolerance, and investment philosophy.
Whether these distinctions will become more defined or converge depends on how market practices evolve, especially with advancements in technology and changes in regulatory landscapes. Each asset class also brings its own nuances to the trader versus investor roles, further complicating any predictions.
So, what's your take? Are you more of a trader, thriving on the adrenaline of short-term gains, or an investor, patiently nurturing your portfolio to bear fruit over years?
Sources: Difference between Sales and Trading?, Is it worth pursuing a career in trading in 2017?, How to be a Millionaire Trader
This is partially due to time horizons you mentioned but investing would frequently be long only or primarily long only with some potential hedging while traders would tend tend to fluctuate between long and short positions. It's common to compare the performance of investors against benchmarks like the S&P 500 but traders would be evaluated based on raw pnl with little tolerance for significant drawdowns.
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