What makes trading different from investing?

Julie Brownlee, Fsp Invest, 27 Mar. 2015

Tags: trading, investing, difference between trading and investing, traders, investors, trading and investing,

If you’re new to the stock market, you’ll come across the terms trading and investing.

So what is the difference between these two terms? And what difference does it make to your stock market experience?

Read on to find out…

The main difference between trading and investing

The major factor that differentiates trading from investing is time in the market.

An investor is likely to have a longer-term view in comparison to a trader who’s likely to have a short-term view of the market.

For example, an investor may invest in a stock for a minimum of a couple of years. On the other hand, a trader could be in and out the market in a couple of hours depending on his strategy.

How investors and traders play the market

Another factor that separates the two is the instruments they use.

Investors tend to invest in shares, unit trusts and exchange traded funds. Traders will use derivative instruments like single stock futures and contracts for difference to gear up their potential trades.

The key difference here is risk.

When you buy a share, for example, you know that your maximum loss is limited to what you invest if the share price fell to zero. With trading geared instruments, a trader can lose a lot more than he initially puts down on a trade.

Higher risk has the lure of higher rewards.

SARS sees investors and traders differently too

If you’re a long-term investor, you could be liable to pay capital gains tax on any of your gains. If you’re a short-term trader, you may have to pay income tax on your gains.

Of course, you can be both a trader and an investor. You may have a long-term investment portfolio, but have a trading account for more speculative quick moves in and out of the market.

So there you have it, what makes trading different from investing.

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