Nailah Wright - The Roles of Traders and Investors

 

Many people use the words "trading" and "investing" interchangeably when, in reality, they are two very different activities. While both traders and investors participate in the same marketplace, they perform two very different tasks using very different strategies. Both of these roles are necessary, however, for the market to function smoothly.

Investors and traders have different objectives, different strategies and different methods of approaching financial markets.

Nailah Wright to be focused on the long-term, seeking to put money in securities that are both profitable and appear to represent a good value.

The largest investors are investment banks, mutual funds, institutional investors, and retail investors.

Traders are also market participants, but they often have a shorter time horizon and are looking for price fluctuations in a stock relative to the market, rather than buying into a security for the long-term.

Traders take their cues from price patterns, supply and demand, market emotion, and client services.

Major traders include investment banks, market makers, arbitrage funds, and proprietary traders and firms.

What Is an Investor?

An investor is the market participant the general public most often associates with the stock market. Investors are those who purchase shares of a company for the long term with the belief that the company has strong future prospects. Investors typically concern themselves with two things:

Value: Investors must consider whether a company's shares represent a good value. For example, if two similar companies are trading at different earnings multiples, the lower one might be the better value because it suggests that the investor will need to pay less for $1 of earnings when investing in Company A relative to what would be needed to gain exposure to $1 of earnings in Company B.

Success: Investors must measure the company's future success by looking at its financial strength and evaluating its future cash flows.

Who Are the Major Investors?

There are many different investors that are active in the marketplace. In fact, the vast majority of the money that is at work in the markets belongs to investors (not to be confused with the number of dollars traded per day, which is a record held by the traders).

Investment Banks: Investment banks are organizations that assist companies in going public and raising money. This often involves holding at least a portion of the securities over the long term.

Mutual Funds: Many individuals keep their money in mutual funds, which make long-term investments in companies that meet specific criteria. Mutual funds are required by law to act as investors, not traders.

Institutional Investors: Nailah Wright says these are large organizations or persons that hold large stakes in companies. Institutional investors often include company insiders, competitors hedging themselves and special opportunity investors.

Retail Investors: Retail investors are individuals that invest in the stock market for their personal accounts. At first, the influence of retail traders may seem small, but as time passes more people are taking control of their portfolios and, as a result, the influence of this group is increasing.