Are you a trader, speculator or investor?

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This would enhance how we approach risk and become aware of pitfalls that are associated with investing

Recently, I was going through one of the leading stock broking company's media release. It said that as much as 80 percent of their new clients are under 30 years and of them, a whopping 90 percent are from small towns. Higher retail participation is a good sign and at last we're now managing values equal to that of the FII (Foreign Institutional Investors) which is good for the stock markets' liquidity. Particularly, in the past one year, the retail participation has shot up and even eclipsed the share of FIIs in certain months and more importantly, the flows have remained consistent.

Last week while I was trying to explain when to sell a stock or an asset, I touched upon how one should first categorize themselves i.e., trader or investor. Here, I continue to spend a little further on that so that we make judgementswhen dealing with our investments. The word investor comes from the Latin word 'investire', meaning to dress in a clothe oneself, surround or envelop. The deeper understanding is that one doesn't wear clothes without looking at the colour, texture, size, etc. i.e., knowing most or many things of the clothes they wear. Investor thus could be attributed to the know-how what they're and where they're willing to funnel their capital into. The terms and risk of the investment they're venturing into.

Benjamin Graham in his book, 'Intelligent Investor' expressed that outright speculation is neither illegal, immoral nor fattening to the pocketbook.

The goal of investing is to gradually build wealth while accumulating assets and possibly creating a portfolio over an extended period of time that suits the goals and in conjunction with the risk profile. It, however, doesn't stop a speculator or a trader to emulate success by trading persistently at market opportunities and amass wealth. The contention is not in the definition but the means and how ordinary people could get distracted. One has to understand that the risk appetite for being a trader or speculator contrasts that of an investor. Also, it might require an access to skill, information and/or capital that is different from that of an investor.

One could achieve being both at any point of time but with clear characterization of the journey they've set for. It could also be pursued simultaneously where one could draw a core portfolio which is more strategic while an adventurous part could explore a tactical allocation within or outside the portfolio to take advantage of an evolving market situation. As mentioned earlier, the definitive requirements of distinct parameters to both the approaches are different and difficult.

Recently when Jason Zweig wrote to WSJ editor to not intermingle the trader, speculator and investor word, came the reply. 'Investor' has a long history in the English language as a catch-all term denoting people who commit their capital with the expectation of a return, no matter how long or short, no matter how many or how few investing columns they read. Back at least to the mid-19th century, 'invest' has been used to describe a 'wager' on horses - an activity surely no less divorced from fundamental analysis than a purchase of dogecoin." The editor could be completely right in the definition, but it somehow lacks the spirit.

It's, hence, tough for the regulator to create a distinction by book, but as market participants we could be aware of the traits we're exhibiting at multiple points of time and how would they be classified as. This would enhance how we approach to risk and aware of the pitfalls that are associated with in investing. It is imperative for the investor to recognize and outline these instances in their expedition which helps them to document the various emotions, expectations andexperiences that could serve as a ready reckoner. Such process helps in not only help in refining how they approach investments, but also avoid repeated missteps.

(The author is a co-founder of "Wealocity", a wealth management firm and could be reached at [email protected])

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