When investing in the stock market there are two main approaches that you could follow – become a trader or an investor.
The basic difference between a trader and an investor is that the trader buys shares to sell at a profit – whereas the investor buys shares to invest in the company and reap rewards over the long term.
Traders and Price Charts
To be a good trader you need to be able to study stock trading charts and research price trends and decide what to buy and what to sell. This purely depends on demand and supply of actual number of that company’s share in the marketplace. So to be a good trader you have to be able to predict what the future demand and supply situation will be. Predicting demand and supply conditions in any market is very difficult and those who do it use complex computer algorithms to determine at which point to buy and sell shares. Traders usually have lots of experience reading market trends and can predict future outcomes based on past data and price charts.
If you decide to become a trader it is important to get a lot if experience before deciding to make you first investment. As the jargon used by traders can be confusing reading and understanding what all the technical terms mean is important if you want to get ahead as a trader.
Investors and stock fundamentals
Investors on the other hand look closely at the performance of the company that they are investing in and how the company’s ROE will perform in the future. ROE refers to the Return on Investment or in other words by how much can you expect the value of the company’s profits to increase compared to the amount invested in said company. The company fundamentals also include the management quality, market competition, reputation, future projects, discontinued projects, suppliers, raw material market, cost of materials etc. The investor basically looks at all the factors affecting the company’s future financial performance before deciding whether to invest.
Typically the investor looks at long term investments as he is looking to reap a large reward by investing over the long run. So dividends receivable by the company and bonus shares are all considered important by the prospective investor.
The investor also looks at the tax status of the company as this inevitably affects the ability to pay dividends.