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Revision as of 23:09, 27 December 2006

A stock trader or a stock investor is an individual or firm who buys and sells financial instruments (such as stocks or bonds) in the financial markets.

Stock Trader vs. Stock Investor

The difference between stock traders and stock investors is that stock investors tend generally to buy great companies (blue chips). They tend to invest for the long-term and count upon compounded business growth to provide their returns. Stock traders, on the other hand, usually try to profit from short-term price volatility. Sometimes they try to rely upon the psychology of other investors.

Individuals or firms trading as their principal capacity are called stock traders or simply traders. The stock trader is usually a professional. Many people across the world can call themselves stock traders/investors or part-time stock traders/investors, despite having another profession in parallel with their regular trading activities in the financial markets. When a stock trader/investor has clients, and acts as a money manager or adviser with the intention of adding value to his clients finances, he is also called a financial adviser or manager. In this case, the financial manager could be an independent professional or a large bank corporation employee. This may include managers dealing with investment funds, hedge funds, mutual funds, and pension funds, or other professionals in equity investment and fund management. A very active stock trader who holds positions for a very short time and makes several trades each day is a day trader. Other broad or specific designations for different kinds of stock traders include the terms: speculator, hedger, arbitrageur and market maker.

Methodology

Stock traders/investors usually need a stock broker, such as a bank or a brokerage firm, as an intermediate. Since the spread of the Internet banking, it is usual to use an Internet connection to manage their own financial portfolios, including ordering the sell/buying orders, set stop losses prices and define buying/selling prices. Using the Internet, specialized software and a personal computer, stock traders/investors make use of technical analysis and fundamental analysis to help them in the decision process. They utilize also several advising and information resources based on the Internet and the media, such as financial/business news and data firms (Reuters, Bloomberg, Financial Times, Yahoo! Finance, MSN Money, AFX News, Newratings, Forbes, BusinessWeek, Hoover's). They exclusively trade on their own behalf, as a principal, investing money on a share or other financial instrument, which they believe will increase in price aiming to sell it later with earnings. According to the trading techniques and strategy adopted, or the investing profile of each individual, its trading style can be called value investing, growth investing, day trading, swing trading, or trend following.

Expenses, costs and risk

Trading activities are not free. First of all, they have a considerably high level of risk, uncertainty and complexity, especially for unwise and inexperienced stock traders/investors seeking for an easy way to make money quickly. In addition, stock traders/investors face several costs such as commissions, taxes and fees to be paid for the brokerage and other services, like the buying/selling orders placed at the stock exchange. According to each National or State legislation, a large array of fiscal obligations must be respected, and taxes are charged by the State over the transactions and earnings. Beyond these costs, the opportunity costs of money and time, the currency risk, the financial risk, and all the Internet Service Provider, data and news agency services and electricity consumption expenses must be added.

Stock Picking

Although many companies offer courses in stock picking, and numerous experts report success through Technical Analysis and Fundamental Analysis, many economists and academics state that because of Efficient market theory it is unlikely that any amount of analysis can help an investor make any gains above the stock market itself. In a normal distribution of investors, many academics believe that the richest are simply outliers in such a distribution (e.g. in a game of chance, they have flipped heads twenty years in a row).

For this reason most academics and economists recommend that investors invest in funds that follow an index in the market, i.e. long-term and well-diversified investments.

Dart Board Method

Financial journals and newspapers such as the Wall Street Journal have done articles on stock picking in the past. One famous article involved a stock picking contest between a panel of Wall Street experts, the public and a dart board. One member was elected to throw darts at the Journal's stock page in order to select a portfolio. At the end of the experiment, the public and the dart board both beat the board of Wall Street experts. Was the dart board more savvy? The dart board's triumph over the Wall Street experts can be attributed to chance (one could also attribute the dart board losing to the experts to chance as well).

Miscellaneous

Jimmy Wales, the founder of Misplaced Pages, was a professional stock trader before being known for Misplaced Pages. He was a futures and options stock trader in Chicago.
Jules Verne, the famous writer, was a stock trader at the Paris Stock Exchange (La Bourse de Paris).
Isaac Newton, the famous physicist lost some of his money in the stock exchange due to speculation (estimated amount lost by Isaac Newton in South Sea stock speculation in the 1720s: $2,000,000).
John Maynard Keynes, the famous economist, was a very successful stock investor.
David Ricardo, the famous political economist joined his father at the London Stock Exchange, where he began to learn about the workings of finance. This beginning set the stage for Ricardo's later success in the stock market.