How is trading different from investing?

Every year hundreds of companies around the world go public, selling shares on stock exchanges to raise funds that they can use to try and grow their businesses in the future.

The act of listing on the share market is usually preceded by a lengthy period of investor road shows and promotional material aimed at convincing investors of the company’s potential.

The art of investing

Ideally, those companies hope to secure long-term investors, ones that are willing to stay invested for several years, allowing the management time to enact their business strategy.

This style of investing, buying shares in a company that you believe will grow in the long-term and leaving your money invested through short- term ups and downs, might suit those looking to build future wealth.

This approach can also be described as ‘buy and hold’ investing.

But not everyone that buys shares is focused on the long-term.

The art of trading

Some are more focused on making a quick gain, buying shares ahead of an anticipated rise in price, taking a quick profit and moving on to the next opportunity.

This approach is better described as trading and is based around generating frequent, consistent financial gains.

A trader is less likely to concern themselves with the long term credentials of a company but more about whether its share price will rise in the coming days, weeks or months.

Trading is often based on technical analysis but also speculation, generated by rumour or headlines – anything that could support the idea of short term money-making.

Although it may appear to contradict the theory of investing, trading plays an important role in today’s stock market. The volume and frequency at which individual and, particularly, institutional investors trade increases the level of liquidity, so it’s easier for all investors to buy and sell when they want to.

What are the risks?

Both trading and investing carry risks because shares in a company could fail to perform as well as you thought they would over the short or long term and you could lose money both ways.

But if you’re serious about growing your wealth steadily over the long term, it is important not to get distracted by short term events and the idea of making a quick buck.

Trading costs can quickly add up if you are not careful, while the higher capital gains tax that you pay for selling shares less than a year after buying them also eats into your returns.

The information on taxation is of a general nature only and is based on the continuation of present taxation laws, rulings and their interpretation. As individual circumstances differ, you should seek assistance from your taxation adviser.