Are you an investor or a trader? Here's what to know.

First things first: there is nothing wrong with being an investor or a trader, or sometimes, being one or the other. There is space in the market for both to operate — and getting emotionally charged about traders banking quick profits when your long-term investment falls is not going to change the reality. 

Concomitantly, watching your account get eviscerated on a short which gets destroyed by one decent and unexpected RNS is on you.

The key thing to know is what hat you’re wearing when you enter a trade; going in as a short-term trader, seeing your shares go the wrong way, and then deciding to pretend it was a long-term investment after all is classic copium. Suck it up, take the loss, and move on.

Here’s what you need to know:

With investing, your objective should be the long-term accumulation of wealth over many years or even decades. You buy shares when you think they’re good value, and then hold them regardless of short-term fluctuations (unless materially negative news comes out, for example, the company loses its mining licence).

Your focus will likely be on fundamentals over anything else — company finances, industry position and wider economics — and therefore your risk should be lower all else being equal. Of course, in the junior resource sector, risk tends to be higher as a general rule regardless. Investing tends to involve a massive initial time investment to make sure the company is right for your portfolio, but thereafter it’s just a case of keeping on top of the investment case.

With trading, you’re looking to generate a short-term profit, buying and selling within time periods of a few seconds up to several months. Generally, you’re going to be using technical analysis (and some sentiment analysis) using charting, market trends and patterns.

Trading tends to be higher risk, higher reward as you are exposed to market volatility on a more extreme basis. Trading requires significant time commitment (you can do a full time job and be an investor, but the same is not true of a trader) and can also be psychologically really stressful — you need to be patient, disciplined and constantly alert to price movements. 

When I say constantly, I mean constantly. Because I guarantee that the moment you get up to make a coffee, the market will turn against you. Beware traders who publish their wins but never their losses — it is possible to generate large profits trading, but many inflate their winners and hide their losers.

Trading can be done over a few seconds or many months: scalpers hold for a few seconds/minutes, day traders hold positions no longer than a day and never overnight, swing traders for between a few days and several months, and position traders for up to a year. There is considerable overlap between these types of traders, and it can be difficult to distinguish between a position trader and an investor.

Often the only real difference is that an investors buys shares and considers themselves as part-owner of the underlying business — while a trader is working with leverage and only cares about share price movements.

It’s really common to start with a stock by trading it initially — especially in the mining sector. The Lassonde Curve tends to create natural peaks and dips and is to an extent a self-fulfilling prophecy as people act dependent on where on the curve, they think company is. Once the company gets into production, that trader may then become a long-term investor, and this is often their long-term intent, with the trading done to ensure they accumulate more shares for their capital to compensate for the inevitable dilution along the way.

Fundamentals vs Technicals vs Sentiment

Fundamental analysis evaluates an asset's intrinsic value by examining economic, financial, and qualitative factors. This involves a deep dive into a company's financial statements, including income, balance sheets, and cash flow statements, to assess its profitability, financial health, and growth potential — this includes asset value (for junior miners, their flagship project).

You also need to consider broader economic indicators like GDP growth, interest rates, inflation, and industry trends to understand the overall market environment. The primary goal is to identify undervalued or overvalued assets based on their intrinsic value, with fundamentals predominantly used by investors.

I'm a fundamental investor, by and large. I will use technicals and sentiment to determine an exact entry point, but my view is that fundamentals always shine through eventually. 

Technical analysis is more for the traders, focusing on forecasting future price movements based on historical price data and trading volumes. This means using charts, patterns, and technical indicators, such as moving averages, relative strength index and Bollinger Bands, to identify trends and potential entry or exit points. 

Traders use this approach to capitalise on short to medium-term market movements, often relying on visual patterns like head and shoulders, triangles, and support/resistance levels. The key premise is that studying past market behaviour can provide insights into future price actions. 

One of the key things to understand is that many small caps trade on very thin volumes; a few thousand pounds can move a share price by more than 10% in many cases — but these prices are paper only — any selling and the apparent rise will collapse without increased liquidity. It's also worth noting, similarly, that a good RNS can eradicate a bearish pattern in seconds, in a way that is not really possible with a blue chip.

Sentiment analysis gauges the overall mood and attitude of investors towards a particular asset or market. This approach involves analysing news articles, social media posts, and other forms of media to understand public sentiment. 

Tools like Telegram, the put/call ratio, and short interest data help quantify the market's emotional state, whether it’s in a state of fear or greed. By understanding the prevailing sentiment, traders and investors can make more informed decisions, often using sentiment as a contrarian indicator to identify potential market reversals. 

Some think sentiment is not its own class, but I disagree — the problem is that ‘mood music’ is not scientific enough to quantify — but anyone who has been in the market for more than a few months will instantly be able to recognise the feel-good factor.

Conversely, an unqualified lunatic raging on LSE, Twitter or Telegram can be enough to keep fear in the markets, which should not be the case, but here we are. Sentiment analysis is often commonly employed in the small cap sector - but sentiment is fickle. Be very careful, and if you are planning to use this tool to make profits as either an investor or a trader, consider trying with a demo account first as it's much harder than it looks.

Perhaps the most common mistake is to overinvest into a binary risk event where the chances of a positive outcome has been oversold. Everybody gets emotionally invested at some point - but the AIM market is a capricious mistress.

- Charles Archer, 25/7/24