Whether the markets are swinging wildly, as they seem to be doing daily, or whether they are placid as a quiet backyard pond, sometimes it’s helpful to take a step back at what we’re doing. Whether you are a serious micro-cap trader, whose right-to-the-minute decisions will determine your fortune, or a slow-as-a-tortoise long-term buy and hold investor, somebody whose time horizon for investing is not measured in minutes, hours or days, but in months, years or even decades—or if you fall somewhere in between, it’s not a bad thing once in a while to stop and look at not only the way you invest, but the way others around you do. After all, a market is made up of individuals and institutions, its traders and investors, large and small, all of whom taken together, with their buying and selling action, create the vast ocean of financial markets we all swim in.
Micro-Cap Traders: If you invest in penny stocks, pink sheet stocks, stocks with share prices usually below $5 and with a small market cap, it’s usually done for short-term trades as price action can be extreme and volatile. As true with any investing method, you should do your homework; here it is critical. You must be quick, nimble, informed.
Futures and Options Traders: From the relatively simple commodities trades or investments to the more sophisticated computer-model driven strategies, this also requires a highly informed investor, also one who is at home with the rapid turns of decision making needed.
Mutual Fund Investor: Usually a long-term investor who buys what amounts to a basket of stocks managed by an investment company. Dollar-cost averaging or systematic contributions are often used. The investor may not monitor the funds very closely. It’s considered semi-automatic investing by some.
Buy-and-Hold Stock Investors: The investor purchases shares in individual companies, usually on the basis of perceived fundamental value at what are deemed favorable prices by the investor, held for months or sometimes years, until sold at a greater price.
Stock Traders: This is a broad category that fits many investors who do different things. The trader may buy companies on the basis of fundamentals at perceived low share prices and trade them quickly after a price advance, or she or he may buy at higher prices on the basis of technical analysis and sell at a still higher price after the stock advances. Day traders have this time frame compressed into, as their name implies, a day, whereas other stock traders may take days, weeks, months, or in some cases, years, to complete their trade.
This is just a quick overview of some of the main ways people trade and invest stocks. Most investors use a combination of methods, usually assigning some assets to, say, fast trading while holding other assets long term. The line between a trade and an investment is sometimes blurred by the time horizon or the mixing or fusion of methods, as for example when a stock may be purchased on the basis of its fundamentals but is sold for a quick profit after a price run-up.
The key thing to stress is that there are risks in any and all methods. Know what these methods entail; learn. One risk you can control is the risk of not being informed. You can overcome this by learning—and continuing to learn– about investing and trading methods, especially the ones you are using.
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