You may wonder what would be the difference between an investor, a trader, or a speculator. While there is no exact border between these terms there are certainly some qualifications that make them distinct from each other.
As a general rule a speculator is a person who is willing to take high risk in business in the hope to get high reward. Speculators constantly look for potential risky opportunities in the market and the business world. For example they may buy stocks that rarely other people would invest in. Due to the high risk nature of Forex and Futures markets many of those who trade these types of derivatives are usually considered as speculators. So if you are actively trading Forex you could call yourself a speculator.
Investor is a general word which refers to anybody who has money to set aside in any form. An investor may purchase a house as an investment option or purchase shares of a corporation. There is virtually no limitations in what you can invest in. When it comes to the securities and/or derviatives markets an investor usually looks at long term opportunities. I will explain this in more detail when I compare Investors with Traders.
Trader is somebody who buys and sells stuff to make profit. In the world of securities and derivatives a trader usually looks at short term opportunities.
Comparing Investors and Traders
While these words are used interchangeably by many people I personally beleive that we can differentiate them from each other. There are a few qualities that can designate an investor from a trader.
Sense of Ownership
An investor is usually interested in the ownership. For example when you purchase a stock share as an investor you also consider the partial ownership of the company. In this sense somebody who constantly purchases and sells stocks is more likely to be considered a trader rather than an investor. The more you are interested in the ownership the more likely you are an investor.
An investor looks at long-term opportunities while a trader usually looks at short-term opportunities. For example a trader may buy a Futures contract at 10:00 am in the morning and then sell it at 11:00 am. This is very unlikely to happen if you are an investor. While we could see traders who look at long term opprotunities as well, the shorter you reverse a trade the more likely you are a trader.
Since the ownership is an important issue to the investor it is more likely for an investor to be more serious about the fundamentals of something he/she buys. In other words investors usually analyze the fundamentals of what they buy before they complete the purchase. I do not deny that there are many traders who also consider the fundamentals but in general fundamental analysis is more common between investors.
Reaction to the Market Movements
Investors are less sensative to the ups and downs of the market. In contrary traders are usually very sensative to such fluctuations. If a stock faces a dip it is very likely that traders get rid of it. On the other hand most investors may keep the stock in the hope that it will finally get back to its original price or even go higher.
These are not solid rules but they can help to find out who could be considered an investor and who could be considered a trader.
Both investors and traders could be speculators. The more risky a market you pick the more likely you are a speculator. For example if an investor invests in a new drilling company he/she could be considered as a speculator. As a general rule the speculation is more common among traders.
Why Is this Important to Know?
I personally believe one important step before trading forex is to know yourself. If based on these definitions you consider yourself as an investor who is not a speculator then I suggest that you avoid trading forex. This market due to its nature and especially because of the presence of leverage could get very risky. It is very difficult to stay in a Forex position for long if you are using leverage so Forex is more suitable for speculative traders. If you fall into this category. If you do not mind to lose money in short term. If you are a risk taker. Then you can probably trade forex. If not, it is better to stay away from forex.
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