Expert: Paul Henneman - 4/26/2004

Question
Hello:

I often hear the word "traders" used frequently when I watch the financial news. Financial news reporters will make comments about how traders sold on interest rate concerns or sold regarding some negative economic report.  Who are these traders? It seems that they trade on unimportant or short-term situations. They do not appear to be long-term investors.

I thank you for your reply and answer.

Answer
Thank you for your question!
Yes, you are essentially right. The general word 'traders' typically means short term traders. This is often also called 'day traders'.
The definition of Day Trader in 'Barron's Dictionary of Financial and Investment Terms' is "purchase and sale of a position during the same day"(p. 135)
These types of investors trade very frequently each day in order to try to capture small increases in return. Lots of small trades and profits equals big profits overall for a longer time period, particularly if their portfolios are large. Traders can be all types: individual investors that are very active, as well as institutional traders that are trading huge amounts of funds on behalf of large institutions.  They do tend to respond to short term situations very strongly, trying to capture those short term price movements.
Long term investors are not worried about one half or one percent price movements. You have to have a very large portfolio and be very active to make use of that. Instead long term investors look for long term gains over time, strong sectors or industries, some sort of longer term strategy. However, the number and amount of money that is moved by short term trading can move the overall market significantly in response to news events, interest rates, or other things. Over the long haul, this evens out and is not of concern to a long term investor. These two approaches to investing are certainly very different!
I hope this helps! Please do not hesitate to follow up if I can be of any additional service,

Sincerely,
Paul Henneman
President
ValuEngine, Inc.
www.ValuEngine.com