Differences in Style

There are two main types of individuals who flock to the stock market.  There are those who look to make long-term investments, called value investors, and those who seek to profit over a much shorter time period, called traders.  There are many subcategories of traders including day traders, swing traders, and position traders.  While the terms ‘investor’ and ‘trader’ are often used interchangeably, there is a big difference in connotation.

A value investor doesn’t care about the daily ups and downs in the market.  This is considered par for the course.  These investors are looking much further down the road: a year or longer.  The popular misconception of value investing is that money is only pumped into ‘blue-chip’ businesses.  Blue-chip businesses are companies that are powerhouses in the world of business, and have been for a very long time.  These companies may not make have increasing share value every year, but are ultimately reliable over the long-term.  Unlike some of the more heavily traded companies that show major fluctuations in daily price, these companies are more stable and offer lower risk.  Some examples of current blue-chip stocks are IBM, Coca-Cola, and Wal-Mart.

Blue-chips are not the only thing that the value investor is looking for, though.  Benjamin Graham, considered one of the fathers of value investing, claimed that the key to gaining a return on long-term investments was to buy stock that was undervalued.  Often, this meant investing in a company that was not popular with the rest of the community.  It also meant hours of analyzing fundamental data, but history has proven that this method outperforms the market on a regular basis.               

The main separators between the different types of short-term trading are amounts traded and the length of time that trades are kept open.  Day traders hardly ever keep trades open over night.  Because the market (usually) does not vary by huge amounts over the term of a single trading day, they deal in much larger amounts of money than other traders do so that they may show profit when stocks rise only a few decimal points.

Swing traders have some of the qualities of day traders; they too often close trades before the end of the day.  But swing traders will, on average, hold positions for a few days before closing them.  This allows them to invest less money, since there is more stock market fluctuation over the longer period.

A position trader will keep trades open for up to a couple weeks.  They also hope for bigger percentage swings in the market so less money is at stake.

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