The term investing has a certain tone of seriousness and long term financial planning in the minds of most people. People invest for retirement, to send a child to college, or to save up to buy a home. The psychology of this approach is a steady, consistent approach to building funds for a specific purpose for years down the road.
When people think of traders, they probably think of a hyperactive risk taker that is in and out of the markets constantly. You can probably envision an emotional trader yelling and screaming like his economic future is on the line with every trade. Attention getting outbursts and the associated chaos of the floor environment is actually very structured and efficient. Think movies like The Wolf on Wall Street and any others that you can think of.
For over a hundred years, securities and futures transactions were executed manually with astronomical monetary value over the years. Every movement and hand signal was streamlined for efficiency and to minimize mistakes. While it seems like mass confusion to many, the open outcry method of trading served the capitalist society well for many decades.
In reality, the stereotypes of both the investor and the trader may be flawed. There are good and bad executions of both methodologies and arguably they can be one and the same. Technology and market conditions have changed the manner in which people approach the stock market.
The instant access to information has leveled the playing filed for all participants. At one time, the traders at the physical exchanges like the NYSE or CBOE had an advantage over the off the floor investors. This immediacy to react to news or financial data was a major advantage. Not only did they have the ability to buy and sell at better prices but could respond to changing prices instantly. Others had to call their brokers who would in turn call the trading floor to execute orders.
The efficiency of electronic trading eliminates any favoritism or information delay for investors regardless of where they are physically. The internet provides the mechanism to distribute price data throughout the world instantly. Previously at the exchange, a pit reporter would monitor and signal current prices to be disseminated. That time lag, while on seconds or minutes, has been eliminated and the price discovery mechanism of the markets is viewed by everyone in real time.
The proliferation of trading platforms and self directed investing by individuals has led to greater trading volumes and market participation. Tens of millions of Americans now have online accounts with different strategies and investment goals. On any given day, thousands may be buying or selling mutual funds, exchange traded funds, bonds, options or futures.
At one time a popular buy and hold strategy was successful for some as companies grew steadily over time in a bullish stock environment. The days of buying a stock and placing the stock certificate in a safety deposit box for decades may have passed. With the technology revolution companies are forced to adapt or possible be passed up by competitors. From the buggy whip, to the Xerox machine, and Polaroid instant camera, technology changes the world at a continually faster rate.
The goal of investing is to make money grow or at minimum place it into safe instruments in time of uncertainty. The motivation and risk tolerance differs for individual investors. The investment time frame is an important variable in a trading plan. The process of investing and trading are the same from the standpoint of money management and discipline.
So let me ask again, are you an investor or a trader?
Alan Knuckman is the Founder and Chief Market Strategist for www.BullsEyeOption.com a subscription trading service for his inner circle members. He has over 25 years of market experience that began in the pits of the Chicago Board of Trade as a runner and progressed to a Treasury Bond speculator. Each trading day Alan is the video host of the Morning Market Stir from the CME Group and the Pre Market Pulse on CBOEtv. He is also a frequent financial commentator appearing on television regularly with CNBC, CNN, Bloomberg, and Fox Business Network.