What Is a Stock Trader?

A stock trader is an investor in the financial markets. Stock traders can be individuals or professionals trading on behalf of a financial company. Stock traders participate in the financial markets in various ways.

Individual traders, also called retail traders, often buy and sell securities through a brokerage or other agent. Traders at the institutional level, on the other hand, typically have the greatest market influence, and are often employed by management investment companies, portfolio managers, pension funds, or hedge funds.

Becoming a stock trader requires an investment of capital and time, as well as research and knowledge of the markets.

New stock traders should look to the experience and strategies of successful traders, and shouldn't be afraid of making mistakes.

Understanding Stock Traders

Stock traders are people who trade equity securities. Their primary goal is to purchase and sell shares in different companies, and try to profit off short-term gains from stock price fluctuations for themselves or for their clients.

Traders play an important role in the market because they provide much-needed liquidity, which helps both investors and other traders. They tend to focus on several key factors including:

  • Supply and Demand: Traders observe their trades within a single day by examining how prices and money move in the market.
  • Price Patterns: Traders often use technical analysis to determine which way a stock will move. This is a tool that looks at past performance as an indicator for how stocks will perform in the future.

Traders can fall into three different categories: Informed, uninformed, and intuitive traders, which we'll examine a little further down. These categories can be further broken up into other groups. That's because many traders may not be married to just one style, combining multiple strategies into their trading philosophy.

Stock traders shouldn't be confused with stock investors. While the former trades equity securities, the latter uses his or her own money to buy securities. The investor's main goal is to generate interest income or to gain from the appreciation in value, also known as capital gains.

Individual Stock Trading

Individuals can be very successful at stock trading. There are a number of stock trading strategies and techniques that are targeted for individuals. Trading platforms include Nadex, E-Trade, Schwab, and Merrill Edge.

Trading penny stocks is one market strategy that can be highly profitable for individuals. Stocks with prices of up to $5 can be considered penny stocks. Traders can buy large quantities of penny stocks at low prices, generating significant market gains. Penny stocks usually trade on over-the-counter exchanges with transactions that can be easily facilitated through discount brokerage platforms. (See also: How to Invest in Penny Stocks for Beginners.)

Key Takeaways

  • A stock trader is an individual or professional who trades on behalf of a financial company.
  • Individual traders buy and sell through a brokerage or other agent, while institutional traders are often employed by investment firms.
  • Traders provide liquidity to the markets, and use a variety of methods and styles to define their strategies.
  • Stock traders fall into three different categories: Informed, uninformed, and intuitive traders.
  • Some of the most common traders are day traders, swing traders, buy and hold traders, and momentum traders.

Institutional Stock Trading

Institutional stock traders may have their own capital portfolios for which to earn profits. These traders are typically known for their market intelligence and ability to profit from arbitrage opportunities. This type of proprietary trading was a factor in the 2008 financial crisis, which subsequently led to new Dodd-Frank regulations and specifically the Volcker Rule.

Institutional buyside traders have much less latitude for market trading. Buyside traders are responsible for transactions on behalf of management investment companies and other registered fund investments. These funds have numerous objectives, ranging from standard indexing to long/short and arbitrage-based strategies. Buyside traders have expertise in trading the securities held within the fund for which they seek market transactions.

Numerous traders also work for alternative investment managers, which are often responsible for a significant portion of market arbitrage trading, as well. Alternative managers can include hedge funds and private capital managers. These investment companies are actively trading a wide range of securities and financial instruments on a daily basis.

Stock Trader Categories

As noted above, stock traders generally fall into three different categories: Informed, uninformed, and intuitive traders.

Informed traders make decisions they believe will help them beat the broader market. These types of traders can be further classified as fundamental and technical traders. A fundamental trader expects market reaction is predictable when it comes to certain events. This trader may predict bad news to mean a stock's price will drop, while positive news will make it rise. Technical traders, on the other hand, rely on charts, moving averages, patterns, and momentum to make key decisions.

Uninformed traders take the opposite approach to informed traders.

The third group—intuitive traders—hone and use their instincts to find opportunities to execute a trade. While they may use tools like charts and research reports, they generally rely on their own experience.

Types of Traders

Traders can also be classified into many different subgroups, which generally describe their trading strategies and philosophies. The following list of traders shouldn't be considered an exhaustive one because, as noted above, traders generally use a variety of methods when they execute their trades.

You've probably heard the term day trader—commonly used to describe someone who enters and exits multiple positions in a single day. These traders never hold a position from one trading day to the next, which is why they're called intraday traders. They tend to work with stocks, options, currencies, futures, and even cryptocurrencies.

A swing trader takes more time to monitor stocks while evaluating the opportunities available to him. This means he studies the market for days or weeks before making a trade. He tends to buy when the market is on an upward trend, and sells when he believes the market tops out.

The buy and hold trader is a long-term trader. This approach is the most common, where the trader buys stock in a strong company as opposed to one that is trending.

A momentum trader takes a long or short position in a stock, focusing on the acceleration of the stock's price, or the company's revenue or earnings. They take these positions on the assumption that the momentum will continue.

KISS traders believe that the simplest solutions are the best ones, and they follow the generic principle of “keep it simple, stupid!” in their trades (this is also the supposed origin of the name of this approach to investing, too). Of course, successful KISS traders don’t abandon all technical analyses and indicators, but they do tend to abide by Occam’s Razor: “the simplest explanation is the best one.”

Traders and Market Efficiency

The efficient market hypothesis is a theory that drives portfolio strategies across the market. Efficient market hypothesis states that the activity of market participants leads to efficiently priced securities with limited opportunity for arbitrage. However, market anomalies occur throughout the course of trading, which facilitates the efficient market hypothesis and can also allow for arbitrage when profit opportunities arise.