One of the biggest questions that people ask when they are starting out in shares is “Am I a trader or am I an investor?”.
Many people consider the words to mean the same thing, as they are both geared towards making a profit with shares, however, it is how you do it that constitutes you be a trader or an investor.
Firstly, if you have a superannuation account, regardless if you have much in there or not, you are an investor. However, according to the ATO, there is a big difference between shareholding as an investment or share trading as a business.
By definition, a shareholder is a purpose who holds shares for the purpose of earning income from dividends and similar receipts. Meanwhile, a share trader is a person who carries out business activities for the purpose of earning income from buying and selling shares.
This is a very important distinction, as the ATO doesn’t take a backward step if they feel you are making money or claiming deductions that you shouldn’t be.
Not only is the ATO something to consider, but also your investment goals and personal goals or the reason for investing or trading come into play.
There are four key elements or considerations that will assist you in working out if you want to be a trader or an investor. While clearly understanding which one of these you are will allow you to get the right sort of education, knowledge and skills to be successful whichever path you take.
What are your goals? Are they to invest into a range of companies, diversify your portfolio, and set yourself up for retirement and being able to rely on share dividends and capital growth? Then you are an investor.
Investors are looking at the long game, looking to invest in companies large or small that offer good opportunities. Depending on your adversity to risk, you may simply put your money in ‘blue chip stocks’ or those stocks that have a very solid track record of producing earnings over a long period of time, such as BHP or Commonwealth Bank.
Meanwhile, if you are looking to profit from buying low and selling high, looking to make a margin on the difference of trading quickly, even on the same day – then you are a trader.
A trader is constantly combing the market, looking for undervalued stocks or stocks that may soon fall, to bet against them using a range of share market tools.
Time spent on your trading platform
An investor is looking to play the long game, investing in companies that don’t need too much attention, and may check their balances once a week, or even less, just to ensure its ticking over in the right direction.
Meanwhile, a trader needs to have one screen on the share market and another on whatever else they may be doing – such as their day job – to ensure that any and all opportunities that pass their way are taken advantage of.
In addition, the trader does more research to understand where gains can be made, managing their brokerage costs and portfolio spread.
Adversity to risk
Do you love a risk? Do you love to gamble to ‘take a punt’ should an opportunity arise? Then trading is right up your alley.
Traders take on bigger risks to get bigger returns. Traders will often set a floor price, which when they purchase stock, they don’t let allow the stock to drop below that price and the trading platform automatically sells, ensuring they ‘cut their losses’ rather than waiting to see if the stock bounces.
Meanwhile, investors look to diversify their portfolios through a range of companies, industries and sectors all to manage the risk and ensure the long-term profitability of their portfolio.
Long vs. short term
Investors are playing the long game, thinking about how to ensure they have a meaningful and valuable portfolio that in many cases will have dividend payments allowing them to live comfortably from, while the capital value of their investment continues to rise – that is the ultimate goal.
A trader never holds on to shares for too long, they seek to buy low, sell high and take advantage of real or potential positive moves in the market at a moment’s notice. They play the short game to profit and move on to the next company.
So, which is best for you?
When it comes to an investment or trading strategy for you, personally, it all comes down to what your goals are: Are you looking to diversify your investment options to ensure you have enough money for retirement or keen to put some money away in an investment that will grow for a rainy day? Then investment is for you.
Or, if you love the chase and are keen to potentially start a new career in trading, a new business or simply do something to keep your mind active, then day-trading could be an extremely fulfilling and rewarding experience.
Remember, with any investment, there is a risk, a risk of a company collapse, industry changes, political influence, the economy or even another GFC that could have an adverse effect on your investment, so never invest more money that you can afford to lose.
The key is to understand if you want to trade or invest, but more importantly how to trade and invest.
If you’d like to know more, or discuss with one of our industry professionals about your choices between trading & investing, get in touch with us here at Smart Money Company.