The role of traders and investors

Many people use the terms “trading” and “investing” interchangeably, but in reality they are two very different activities. Although both traders and investors participate in the same market, they use very different strategies to perform two very different tasks. However, both of these roles are necessary for the smooth operation of the market. This article will introduce both parties and their strategies for profiting in the market.

Key points

  • Investors and traders have different goals, different strategies, and different methods of entering the financial market.
  • Investors tend to focus on the long-term, seeking to invest funds in securities that are both profitable and seem to have good value.
  • The largest investors are investment banks, mutual funds, institutional investors and retail investors.
  • Traders are also market participants, but they usually have a short time span and are looking for price fluctuations in stocks relative to the market, rather than long-term purchases of securities.
  • Traders get clues from price patterns, supply and demand, market sentiment and customer service.
  • Major dealers include investment banks, market makers, arbitrage funds, and proprietary dealers and companies.

What is an investor?

Investors are the market participants that the public most often associate with the stock market. Investors are those who buy company stocks for a long time and believe that the company has strong future prospects. Investors usually care about two things:

  • Value: Investors must consider whether the company’s stock has good value. For example, if two similar companies trade at different earnings multiples, the lower one may be the better value, because it indicates that when investing in company A, investors need to pay $1 in earnings relative to the required earnings exposure 1 USD in company B’s earnings.
  • Success: Investors must measure the company’s future success by looking at the company’s financial strength and evaluating its future cash flow.

Both of these factors can be determined through analysis of the company’s financial statements and industry trends that may define future growth prospects. At a basic level, investors can measure the current value of a company relative to its future growth possibilities by looking at indicators such as the PEG ratio: the ratio of the company’s price-to-earnings ratio (value) to growth (success).

Traders beat investors in terms of transaction volume and execution speed, but investors have advantages in terms of long-term goals and strategies.

Who are the main investors?

There are many different investors active in the market. In fact, the vast majority of funds operating in the market belong to investors (not to be confused with the number of dollars traded every day, this is a record kept by traders). Major investors include:

  • Investment banking: Investment banking is an organization that helps companies go public and raise funds. This usually involves holding at least a portion of the securities for a long time.
  • Mutual funds: Many people deposit money in mutual funds, which make long-term investments in companies that meet certain criteria. The law requires mutual funds to act as investors, not as traders.
  • Institutional investors: These are large organizations or individuals that hold large amounts of company shares. Institutional investors usually include company insiders, self-hedging competitors, and special opportunity investors.
  • Retail investors: Retail investors are individuals who invest in the stock market for their personal accounts. At first, the influence of retail investors may seem small, but as time goes by, more and more people begin to control their investment portfolios, so the influence of this group is growing.

All of these parties want to hold positions for a long time so that they can continue to work with the company while continuing to succeed. The success of Warren Buffett proved the feasibility of this strategy.

Investment banks are both active traders and investors, making up a large part of each group.

What is a trader?

Traders are market participants who buy company stocks, focusing on the market itself rather than the company’s fundamentals. The market for trading commodities is very suitable for traders. After all, few people buy wheat because of its basic quality: they do this to take advantage of small price fluctuations caused by supply and demand. Traders usually care about:

  • Price pattern: Traders will look at price history to try to predict future price movements. This is called technical analysis.
  • Supply and demand: Traders pay close attention to their intraday transactions to understand the direction of capital flow and why.
  • Market sentiment: Traders use techniques such as decline to take advantage of investor fears, in which they will be short with the crowd after large fluctuations.
  • Customer Service: Market makers (one of the largest types of traders) are actually their clients who are employed by them to provide liquidity through fast transactions.

In the final analysis, it is traders who provide investors with liquidity and always take the other end of the transaction. Whether through market making or decline, traders are an essential part of the market.

Who is the main trader?

In terms of trading volume, traders put investors far ahead. There are many different types of traders who can trade every few seconds. The most popular types of traders include:

  • Investment banks: Sell stocks that are not long-term investments. During the initial public offering process, the investment bank is responsible for selling the company’s stock on the open market through transactions.
  • Market makers: These are the groups responsible for providing liquidity in the market. Profits are realized through the bid-ask spread and the fees charged to customers. Ultimately, the group provides liquidity for all markets.
  • Arbitrage funds: Arbitrage funds are groups that quickly intervene when the market is inefficient. For example, shortly after the merger is announced, the stock always moves quickly to the new purchase price minus the risk premium. These transactions are executed by arbitrage funds.
  • Proprietary dealer/company: Proprietary dealers are employed by companies to make money through short-term transactions. They use proprietary trading systems and other technologies to try to compound short-term returns to earn more returns than long-term investments.

Bottom line

Obviously, both traders and investors are necessary for the normal operation of the market. Without traders, investors will have no liquidity to buy and sell stocks. Without investors, traders have no basis for buying and selling. Together, these two groups formed the financial market as we know it today.


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