Type of Investor
What type of investor are you?
This perhaps is one of the most important questions you will need to ask yourself before you begin this stock investing journey.
Why? Remember the great ancient Greek aphorism - "know thyself?" or even better remember the plaque above the Oracle's door in the Matrix film series, that said "thine own self thou must know?"
Well - Understanding your risk vs reward appetite is the first step in effective stock planning and trading.
Here is a scenario that should help bring this idea home:
Let's say you are given the choice between the following two scenarios - one has a guaranteed payoff and the other one does not.
In the guaranteed scenario, you will be given an amount - say $100.
In the scenario that is not guaranteed a coin will be flipped to decide whether you receive $200(double the $100) or zero.
Both scenarios have an expected payoff of $100. This means that if you the investor was not insensitive to risk you would not care whether you took the guaranteed payment or the gamble.
What would you do?
Here's how to analyze your decision:
If you are a risk-averse investor you would accept a payoff of less than $100 (say $80) since this comes with no uncertainty.
So rather than take the gamble or receive nothing, you would rather get a guaranteed $80 payoff.
If you are a risk neutral investor, you will be indifferent between the bet/gamble and the certain $80 payment.
If you are a risk-seeking investor, the guaranteed payment must be more than $100 (say, $120) for you to even consider taking the guaranteed option, rather than taking the gamble and possibly winning $100.
So what does this mean from a technical perspective?
The average payoff of the gamble, known as its expected value, is $100. The dollar amount that the individual would accept instead of the bet is called the certainty equivalent, and the difference between the certainty equivalent and the expected value is called the risk premium.
Did that help? I hope so.
But I promised I will not confuse you and I plan on keeping this promise.
Long-Term Investor - A long-term investor is considered a trader who tends to hold stocks for several years.
This kind of a trader is often referred to as a long-term investor instead of a stock trader.
If you think about it, long-term investing is what we have been advised as the prudent way to invest by many (including our parents).
I think that it is a great strategy if that is the kind of investor you are. Every successful investor has a process. What’s yours? Introducing tradeCYCLE from tradeMONSTER
It may also be a great option if you choose a diversified portfolio that combines more than one stock investing style.
It has worked for many investors (including Warren Buffet). The math is simple.
Consider the following:
If you invested $500 every month and received an average annual return of 10%, you would expect to make $1 million in about 30 years.
Is this the type of investment for you?
Short-term trader - A short term trader holds positions for days or weeks. The term often used for this type of trader is swing trader.
The Stock Market tends to move in one direction for a few to several days. During this period buying and selling will occur. Once the stock market power in that direction is exhausted, the market then moves in the opposite direction. This is the struggle that occurs between the buyers and sellers creating price swings. The short-term trader, or swing trader takes advantage of the price swings.
The short-term trader holds relatively small positions, and trades relatively less volatile range patterns. The short-term trader becomes adept at creating profit opportunities that can be exploited without a lot of risk. They have clear limits (stop and gain limits)in mind and will only play these strategies.
In my opinion this is the more promising stock investor type strategy. It is considered the more popular strategy for beginners.
In fact there are many who believe that short-term trading minimizes risks, and lets traders generate maximum returns while assuming only limited exposure.
We know that no type of trading is safer per se. But the short-term type of investor tends to maintain a smaller level of risk, especially if they are disciplined.
Day traders hold stocks several times within a single day. You may often hear them referred to ask intraday traders.
The goal for the day trader is that at the end of the day when the market closes, all their positions are closed.
Two major categories for day traders are the institutional traders - who work for financial institutions, and retail traders - who work for themselves or with partnerships with a few other traders.
Day traders use very expensive trading software, and access the market through direct access brokers. Their commissions are calculated by volume and you normally need at least $20-25k to open a day trading account
I hope this has given you a fairly good detail about the different type of investors. As an added benefit I discovered a great tool that provides you with an idea of what type of investor you are.I encourage you to take it.
Did you like the tool? Was it useful? Provide me some comments and feedback.