Are you a trader or an investor?
Make no mistake, there is a big difference between the two.
Investors tend to be passionate, dogged, and research-driven. They invest for the long term in a business model they believe in. They make money by buying and holding stocks.
Traders, on the other hand, are less passionate about the stocks they own. Instead, they make money by exploiting short-term trends until the trades stop working. And then they move on. They can stomach daily gains and losses and let go of bad — and good — days quickly.
Traders get in trouble when they start to think like an investor, holding onto positions hoping a bad trade can bounce back because it’s a “good business.” Investors get in trouble when they start to trade their favorite stocks, hoping to profit from short-term moves.
And just as they have different approaches, when it comes to buying and selling, they have different tools — in the form of different kinds of trades or orders types.
Investors mostly need only one kind: market orders. That’s an order to buy or sell a stock at the prevailing price in the market — with no conditions.
Investors, generally speaking, are in for the long haul. So even if their trade is completed a few pennies from the price they saw when they placed the order, that’s OK. Investors want to make dollars over many years. They don’t worry about pennies.
Traders care a lot about each penny. They hold stocks for days or hours – not years. Every penny counts a lot.
So traders can crack open a tool chest of order types depending on the situation. Limit orders, for instance, mean they will buy only at a specific price. Stop-loss orders help them ensure that if a trade goes bad, they’ll be able to sell out automatically before the losses get too deep. (Continue reading with Market Watch)