Investors are buying something they believe has strong leadership, a great business plan and a competitive edge that will continue to increase corporate earnings for years to come. These companies, in turn, will provide shareholders with a profit by returning dividends and an increase in company value, both which will contribute to increasing an investor’s net worth. But it’s easy even for an investor to get caught up in the hype of a hot stock or quick profit now and again and start to act like a stock trader. Investors have to remind themselves what their ultimate goals are and refer back to their investing rules.

As an investor, the most important thing is to protect oneself from losses. When they start to act like a trader to make a quick buck, investors put themselves at too high a risk of losing money. Just think, if you lose 50% in a trade, it will require a 100% profit in another just to break even. These percentages should be too much risk for an investor, who is generally careful to protect his/her downside. One temptation to ignore their investing rules and act like a trader can greatly impact their overall investment returns.

People who are not investors often think investors are the highstrung, fast-paced people in the New York Stock Exchange pits, or those that stare at stock charts all day long to catch a quick profit. These people are not investors. They are day traders who play markets for a living. Investors view stock trading behavior as the same as gambling.

Traders may not even care about the company they are buying, they just hope to accurately predict the direction of a movement in order to make a quick profit. They move in and out of positions quickly and try to make money off the short term ups and downs the market takes. Often they use margin balances, or borrowed money, in order to leverage their positions and make money on each up or down tick of the market. With this strategy, it doesn’t take much movement in the market to make money, but it also doesn’t take much to lose it all.

Investors often get excited about the potential income an investment can make and forget to consider fees and tax implications that can diminish their profits. When trading stocks, for example, a single stock purchase can cost you $10 or more, even with a low-cost, online brokerage account. If you are buying 10 shares of a $10 stock, that value of the stock will have to increase 10% before you can break even. Add capital gains tax you now owe on the appreciation of this asset, and you have actually lost money on your prudent stock purchase. How much you are paying in taxes depends on the type of investment and how long you hold the asset.

Secondly, if you buy mutual funds at the wrong time, you can get nailed with paying a taxable dividend that you didn’t actually receive. It’s always dangerous to buy mutual funds at the end of the year, since you may be buying right into a big taxable dividend. If you are purchasing shares of a fund in the fall, check the distribution date and wait until it passes before writing your check.