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Trading Psychology

Investor Vs Trader Mindset

Before we understand how the mindset of an investor differs from that of a trader, we need to understand how their actions differ in the stock market.

 

An investor is one who takes a long-term bet on the markets. An investment is considered long term in the stock market when the holding period is more than one year, whereas, in the debt market, it is typically seen as over three years. But a trader usually takes short-term bets on the market, such as for a period of a few days, weeks or months.

 

An ideal investor bets on the market after having done thorough research on the fundamentals of a company. Since they invest their money for a longer term, they must have more conviction on how the company will perform and for that, a thorough analysis of the company’s financial statements, debt structure, corporate governance, off-balance sheet investments, etc is absolutely necessary.

 

A trader takes a short-term view on the market which can range from a couple of hours to a week and even a few months. Now, their actions may or may not be directly related to the ongoings of the company. To explain this better, let us take an example: RBI announces that it is going to reduce the repo rate; a typical trader sees this as a decrease in expenses for commercial banks and an increase in business (think of this as Banks can now offer more loans to the public) that will eventually form a bullish opinion on the banking sector. This tells us that traders often trade on news which are more to do with macroeconomics than with the particular stock directly. Traders also try to form trends and patterns in price movements and trade on the basis of their predictions drawn from these trends and patterns. These are known as technical trading strategies.

 

After having understood the conative aspect of investors and traders, we can now evaluate their mindsets i.e., the cognitive aspect. It is not very difficult to derive the same after being aware of what was just discussed above. Of course, the risk appetite of a trader is way higher than that of an investor. Actions induced by short term news have a much bigger impact on gains and losses than those involving a long-term view. You must have heard the phrase: Higher the risk, higher the returns but nobody talks of “greater losses with greater risk”. Similarly, more the time to offset your trade, more the time for the prices to normalise which results in normalised returns.

 

A trader takes more risk as they work on predictions whereas an investor tries to beat the market by knowing the exact strength of a company’s fundamentals. If an investor does thorough research, he/she typically minimises the luck factor that plays in the stock market. Of course, some amount of luck will always be prevalent but in the long term, factors that do not directly impact the company or its sector will not impact returns on your investment either. One needs to understand that investment is for long-term wealth creation whereas trading is more of a day-to-day occupation.

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