Yesterday I had a conversation with my lovely friend Helyn about share trading. Helyn and I met a few years ago at a property seminar, since then, to her credit, Helyn has invested a lot of time building up her financial knowledge and using the knowledge to start building her wealth. We are both suppose to be attending a share seminar in London next weekend but due to a family situation I have had to cancel. Following our chat I thought it a good opportunity to clarify my definition of a trader and why I class myself as an investor.
What's a Trader?
A simple definition for me is that a trader is someone who will buy shares with the intention of selling quickly to realise a profit. Depending on what the sharemarket is doing they may buy a share and sell it a couple of hours later for a profit. They may hold the share for a longer period but are always looking for the best time to sell it and get a profit. If the shareprice drops all efforts will be made to reduce the loss, get the money out and get back into buying again.
Being a trader is very time consuming, you need to spend incredible time reading, research, following every move the share makes. Guage the right time to enter the market and the equally important time to exit. While they hold the shares they need to keep an eye on streaming prices and be alert as to how the price of the share is moving.
Being a trader is very intensive and can be quite stressful.
What is an Investor?
For me, being an investor is all about buying assets that generate income. When I buy shares, like a trader, I will research the share thoroughly to ensure I am buying into a good company but for me the emphasis is on dividend yield and holding the share as long as possible so the income continues to come in regardless of the share price. I am continually looking for good dividend yield with a preference of 7% or higher and company stability to ensure the dividends continue regardless of the economic conditions. When I find a good share to buy I am likely to hold it for years as long as it continues to provide a good dividend. I was disappointed recently when one of the long standing high dividend paying companies in my portfolio was subject to a takeover and will subsequently be delisted. I am now on the lookout for another company to replace it in my portfolio.
For me the best part of being an investor is the freedom I enjoy. Because I hold shares for such a long time, unlike a trader, I spend very little time in the office. Each morning I check the price of the shares and any news that might affect it. Normally, that takes about half an hour. I'm then finished for the day.
As an investor I hold different types of assets; shares, property, bonds, gilts, lending etc. they all have one thing in common. They provide a regular income. They build my cashflow and the cashflow continues to come in regardless of whether I work or not.
Where the Gambler come in.
Although I buy shares with income in mind, I also buy shares in what I consider to be up and coming companies. These type of investments I look at are referred to as penny shares. Again I will research a company to check that it is a valid company but this time I am looking to see how likely I think the company is to deliver on its promises and increase the value of the company. I am looking for the value of the shares to at least double in value but will stick with a share if I think it will go higher. Sometimes I achieve those objectives and sometimes I lose money because the share did not perform as expected. This is where the Gambler comes in. Some of the purchases I have made have been sucessful. For instance I purchased shares in a gold mining company for 4p and eventually after a couple of years sold those shares for 46p. A nice healthy profit. With an oil exploration company I bought shares for 2p sold at 7p. The shares then dropped in price and I bought back in at 4p and again the shares are now at 7p. If they keep going up I may sell at 8p or again hold them for longer. I've also had my losses. I bought into a company at 12p and the shares within a few hours dropped to 8p and have sat there ever since. With penny shares there are likely to be more losses than gains hence I refer to these shares as gambling.
So for me there is a big difference between a trader, an investor and a gambler. I am always an investor, sometimes a gambler but not a trader.
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