Stock Trader vs. Company Investor
Some people get confused when they are asked whether they invest in a company or a particular stock. No matter what answer they give it will be the right one. However, the problem is when people don't make a difference between investing in a company and investing in a stock.
First of all when you invest in a stock you have no whatsoever interest in the company that has issued the stock. You have chosen the particular stock because you have noticed a movement in its price and you consider it possible to draw a benefit from this movement. As a result, you may buy the stock and after a period of time sell it to take your profit.
When you invest in a company you are interested in its activities and position on the market. That is why you make a preliminary research and analysis of the company to determine its long-term potential for growth and profitability. In case there is a decrease in the price of the company's stocks you are able to determine the underlying reasons. Additionally, you have the ability to identify whether this is a short-term occurrence and if not what the impact on the price of the stock will be.
So, having this information in mind, a person who buys stocks can be identified as a trader, whereas a person who invests in a company can be clearly defined as an investor. The first holds the purchased stocks for relatively short periods of time, whereas the second holds the company's stock over the long-term.
Traders vs. Investors
Under good market conditions in terms of rising prices neither the trader nor the investor has any problems with the stock s/he holds. However, if the market conditions worsen things change a lot.
Traders always have an "escape" plan when the stock is no longer profitable and its price starts to fall. This is so since the trader has no emotional attachment to the particular stock. S/he has purchased it because s/he has seen a potential for profit making. So, when a trader purchases a stock s/he sets a level at which s/he will sell the stock if its price starts to fall. However, some traders decide that they like the particular stock too much to give it up. This is the point at which a trader becomes an investor.
Here is also where the problems begin. Since being a trader at the beginning they have not done the research and analysis that investors do, traders are deprived of company's knowledge. As a result they cannot make a sound decision on whether they should keep the stock or sell it. They can make neither an intelligent trader nor investor decision.
On the other hand, investors are at a better position if market conditions worsen since they possess more knowledge about the company. They can make through analysis under the new conditions and see whether anything has changed or whether they have missed something.
As long as the investor has full confidence in the long-term potential of the company, s/he should not sell the stocks.
Final Piece of Advice
Investors are not better than traders and the vice versa. The important thing to remember is to try not to be both at the same time.
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