An Intro to Investing versus Trading

Everyone looks at investing in shares through the same lens as trading - and the confusion between the two makes sense. They both involve shares, they both happen in the markets, and both are ultimately meant to earn profit for the participant. However, there are major differences between the two.

Think Goku and Vegeta from Dragon Ball, Beyonce and Rihanna, Lionel Messi and Cristiano Ronaldo, theatre and cinema. Apples and oranges. Read up on the surface-level differences between the two, and tell us what you think.

• Time horizon

Investing tends to happen over the long-term, with investors usually having a time horizon of over five years. On the other hand, trading is a short-term game with traders looking to make quick profit over a shorter time outlook. Which brings us to the next point, tax. 

• Tax

SARS determines which tax bracket your money making habits in the markets fall under according to the time horizon over which you held your instrument. The guideline informed by the JSE itself is a three-year period. Buy now and sell tomorrow? The tax authority may view that as trading, therefore you’re more liable to pay a higher tax rate

• Risk & reward

Investing carries less risk than trading because of the latter’s complexities, so besides taxation (briefly mentioned above), risks as an equity trader are the same as an equity investor in relation to the market conditions facing the shares traded in, the shares' fundamental make-up, and compliance with the JSE rules, regulations and guidelines. 

Efficient investing requires less nuance and awareness of day to day market movements than trading does. Far more skill is necessary to consistently ensure profit is made in trading, and the normal fluctuations we experience in the markets on a daily basis can sometimes severely affect the trader’s cashflow. Speaking of nuance…

• Capital gains versus shorting

Profit is king in both instances, but there are different ways to making money on both sides. With investing in equity (shares) you earn via capital gains (that’s selling at a higher price than where the investor bought) and dividends. While you can earn dividends in trading shares, as well as through selling your holdings at a higher price than your initial entry point the same as an investor, however you can also go short on a share via equity CFDs. To elaborate briefly, an equity CFD is a derivative of a share which means that you can make money on a share when it’s value and price drops.

• Fundamental or technical analysis

Fundamental analysis is the evaluation of a share by analysing a company’s business health. That’s a review of that company’s profits, expenses, earnings, future prospects, its financial soundness pretty much. Technical analysis is about the visual representation of the market behaviour in that company, and determining where the price action (behaviour) is headed to.

Both methods can be used to inform investors and traders of opportunities, but investors tend to employ fundamental analysis more than its technical cousin to identify value. And on the other side, technical analyses are typically adopted by traders more heavily than fundamental analysis.

• EasyEquities and GT247.COM

EasyEquities introduced fractional share investing to South Africa in 2014, allowing hundreds of thousands of people to access the markets through a low-cost platform. GT247.COM brought CFD’s to South Africa in 2000 - a massively innovative step in making local markets more sophisticated and competitive on the global stage.

Like apples and oranges, while the two companies cater to two different types of audiences they can be quite fruitful. They’re actually more like siblings, a la Michael and Janet Jackson. They look and sound very different, but each has their own appeal.

Want to trade in CFDs - where you can go long or short on forex, indices, commodities and equity CFDs? GT247.COM is your gal. Want to grow your wealth and reach your financial freedom goals by owning shares in the brands you love and the companies you see succeeding in the future? That’s Easy.