Stock market gets a life because of the price movements on the stock exchanges. These movements are the result of the buy-sell process of the market participants. Typically there are three types of market participants. This article details the difference among speculator, trader and investor.Article Content
Stock exchange is the main organism of the stock market eco-system. It brings fresh air and livelihood in the eco-system. There are currently 7 active stock exchanges in India as per the SEBI website. BSE Ltd. and NSE are the leading stock exchanges in India. Securities and Exchange Board of India (SEBI) regulates all the entities of Indian stock market including the financial intermediaries with the help of its 20 departments. Both BSE and NSE have a different perception to categorize their stocks. This categorization is decoded at BSE groups and NSE series.
Participants make money in the stock market because there is always someone willing to pay a price higher, in long trades. On the other hand, in short trades, a completely opposite scenario gets activated to make money. The point is, secondary market provides a huge opportunity to make money whether the bulls or the bears are in the charge.
In a long trade with delivery mode, if someone has bought the stock from you at a higher price (than your buy price), you get the profit and that person is now sitting with the highest price. If the price goes up and he finds someone else willing to pay a higher price he makes the profit but in case the price falls he has three choices viz.
- Sell the stock
- Buy more stocks
- Hold the stock
The participant is panicked or not disciplined or has got a feeling that the price will fall more, he may choose to exit the trade accepting the loss.
The participant is not bothered about the drop in the price. On the contrary, if he has some more money, he may choose to leverage this situation and buy some more stocks of the same company at this lower price.
The participant is sure about the price rise in near future but on the same scale, he is panicked because of the entry of the bears. He is in a dilemma whether he should buy more or not. He may choose not to buy more but at the same time not to sell the stocks. He decides to wait for the prices to go up.
This same situation does not apply to intraday/day trading. One has to either close the trade or it’s automatically closed by the broker at the end of the day.
Difference among speculator, trader and investor
Going back to the three choices available for the long trade, three types of market participants have been derived. All these three participants function with completely different psychology. This psychological difference is the basis for the price fluctuations and the life of stock market.
These three psychologically different participants are termed as the speculator, trader and investor.
Let’s understand them in detail.
A speculator is usually a new entrant who is so much fascinated by the stock market and his peers’ tales of their stock market profits. He has no rationale or logic to enter a trade. He basically follows the market movement or the tips provided by the broker/peers/experts. He doesn’t do his own research or develop his own perspective. He is motivated by the price movements and is usually a day-trader. As soon as the movement behaves against his expectations, he closes his trade, resulting in huge losses.
Speculator’s point of view:
Usually novice. Stock market is just one more adventure of life. Don’t have time or urge to learn, so depends on tips provider. Gets panicked in adverse price movements. Most trades are closed with losses.
A trader does his research before entering a trade. He applies a logic before buying. But even the most experienced trader can’t get a 100% success record. Markets do behave sideways or abnormally. In an unexpected situation, a trader even if not panicked may find himself in dilemma. He may not be sure about the price movements because of the entry of the bears. But he has learnt the rule “Never lose money in the stock market”. So he decides not to sell the stocks and wait for the bears to get exhausted.
Trader’s point of view:
Don’t lose money in stock market. Hold when prices go low, sell as soon as they rise.
There is yet another species of the stock market participant. This one is really not bothered about the stock prices. He believes that he has invested his money in the stock market instead of a bank. He actually perceives himself as a partial owner of the company. Just like someone does an investment in an FD or RD and doesn’t bother what’s happening inside the bank, in the same way, this species is assured about his returns. Of course, due to natural curiosity, he may check the price movements time-to-time but that is just to quench his natural curiosity.
He is actually not bothered about the price drop of his selected stocks. On the contrary, he finds it an opportunity to increase his stake in the company at a lower price. He thinks in long-term. He thinks about the compound interest that he will get from those stocks which a bank will never be able to give. He sees his trading account as a safer and more prosperous place than a bank account.
Investor’s point of view:
A bank may use deposited money to invest in the same stocks (which he has bought) and share just a portion of the profit as an interest. Why not bypass the mediator?
There are typically three types of market participants in the stock market. All these participants have a completely different psychology in the context of price movements. These participants are the speculator, trader and investor. Here is how these three behave when bears enter the market.
- A speculator gets panicked and tries to prevent himself from more losses. He closes the trades with losses
- An investor doesn’t bother about the price fall. In fact, he sees it as an opportunity to increase his stake in the company. He buys more stock at this low price.
- A trader is not panicked but is in dilemma about the price movements. He doesn’t buy more but at the same time, he decides not to sell the stocks and wait for the price to rise.