You’re a Trader (and I Can PROVE It!)
Do you consider yourself an investor — or a trader?
Even if you consider yourself a long-term investor, I believe you act more like a trader than you might think.
Let me explain…
First, it’s important to note that 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 at a much later time.
On the other hand, a “trader” is often seen as a hyperactive risk taker that is in and out of the markets constantly. You can probably envision an emotional floor trader yelling and screaming like his economic future is on the line with every trade!
But the chaos of the floor environment is actually very structured and efficient. For more than a hundred years, securities and futures transactions were executed manually with astronomical monetary value. Every movement and hand signal served a purpose to streamline trading and 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. Why?
Because technology and market conditions have changed the way people approach the stock markets.
The instant access to information has leveled the playing field for everyone. At one time, the traders at the physical exchanges like the NYSE or CBOE had an advantage over the off the floor investors. Not only did they have the ability to buy and sell at better prices, they could also 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 located. 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 online 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 of Main Street “investors” are buying and selling mutual funds, exchange traded funds, bonds, options or futures.
At one time, the buy-and-hold strategy was successful as companies grew steadily over time. But the days of buying a stock and placing the certificate in a safety deposit box for decades are gone. Thanks to the technology revolution, companies are forced to excel or get gobbled up by competitors. From the buggy whip, to the Xerox machine, and Polaroid instant camera, technology changes the world at a continually faster rate. Timeframes are now shorter for companies and market participants like you and me.
Bottom line: the goal of investing is to make money, whether you identify as a “trader” or “investor”. While the motivation and risk tolerance differ for everyone, the process of investing and trading are the same from the standpoint of money management and discipline.
Keep it In the Money,
Chart of the Day: The coming stock split boom
For years, it seemed as though the most popular companies on the market had completely forgotten about Main Street investors as they let their share prices rise into the thousands.
But a surge of retail traders diving back into the market this year has apparently convinced tech giants Apple Inc. (NASDAQ:AAPL) and Tesla Inc. (NASDAQ:TSLA) to split shares. Apple has opted for a 4-for-1 split, meaning that you’ll receive four shares for every one share you own. Meanwhile, Tesla is going with a 5-for-1 split.
The Wall Street gatekeepers are rolling their eyes at the splits, of course. They don’t see the point. After all, a stock split simply creates more slices in the same pie — they’re just smaller.
But share price has a bigger psychological hold over investors than the pros like to admit. Sure, $1,000 of Tesla stock is the same whether that thousand bucks buys you one share or 100. But if retail investors want to feel like they’re holding a significant stake in a company, they probably prefer to have hundreds of shares in their account, instead of one or two.
Now, we’re seeing several high-profile pundits hopping on the stock-split bandwagon. Even Mad Money’s Jim Cramer has called for more of these big tech companies to split shares — and I suspect other popular stocks that trade in several-hundred to thousand-dollar ranges will also consider stock splits sooner rather than later.
— Greg Guenthner