There are two main ways of profiting from the financial markets. The first is to buy and hold assets with the aim of achieving a reasonable and sustainable return. The second is a more high-octane approach, namely to trade in and out of assets for a quick profit.

Someone pursuing the former strategy could most accurately be described as an ‘investor’ while a devotee of the latter is essentially a ‘trader’.

WHICH ARE YOU?

A trader will seek to capitalise on short-term volatility, chasing share price momentum, looking at the key announcements and news flow likely to move the price.

Valuation is likely to be much further down the list of priorities.

The table below sets out in broad terms some of the key differences between traders and investors.

	Time horizon	Assets	Instruments	Platform
Trader	Short-term	Equities, commodities, forex	Exchange-traded products (ETPs), CFDs, spread bets, warrants, turbos, futures and options	Online
Investor	Long-term	Equities, bonds	Funds, ETPs, shares	Online/telephone

Not everyone will automatically fit into either of these two categories.

You might have funds accumulating slowly in an individual savings account (ISA) while at the same time playing the markets more actively through spread bets or contracts for difference (CFDs).

WHICH ASSETS TO FOCUS ON?

The broad category into which you fit determines not only your approach but also the underlying assets you are likely to take an interest in, as well as the tools, broker and platforms through which you gain exposure to them.

How does this apply to asset classes? Well, although it is possible to trade bonds, fixed-income as a market is much better suited to someone looking for a stable, consistent return.

Bonds are not generally volatile enough to generate a great number of opportunities for the trader, although some people do trade them to make small amounts of capital gain if the bonds are trading above or below par.

Investors and traders alike will be active participants in the equity markets but, while a long-term investor will concentrate on stocks offering generous dividends and stable, sustainable growth; traders are looking for something which can generate a substantial capital gain in the near-term.

An investor might therefore consider buying a nice stable company generating plenty of cash flow to fund dividends, while a trader is far more likely to seek exposure to a small cap resources company, capable of more than doubling or, equally, seeing its value crash, on the strength of a single set of drilling results.

The commodities and foreign exchange markets may interest traders because of the level of volatility and, in the latter’s case in particular, liquidity and transparency.

Here it is all about news flow, market sentiment and psychology as well as a clear understanding of the macro-economic backdrop.

WHICH TOOLS TO USE?

The way investors and traders access these markets will also differ considerably.

An investor may use funds, exchange-traded funds (ETFs) or may buy and share stocks directly - enjoying the rights of ownership associated with an individual stock.

They may also use two simple and accessible tax breaks offered by the Government: ISAs and SIPPs (self-invested personal pensions) where any capital gains or dividend income is not liable to tax.

A trader is very unlikely to make use of an investment fund, will rarely trade through an ISA or SIPP; instead they will often utilise leveraged instruments and particularly spread bets and CFDs to boost their returns.

Because spread bets are ‘bets’, any return derived from them is received free of capital gains tax and both instruments are exempt from stamp duty.

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