Trading vs investing: what’s the difference?
The terms 'trading' and 'investing' are often used interchangeably, but there are key differences between these two methods of attempting to profit from financial markets. Explore both trading and investing in our in-depth guide.
Trading vs investing: an overview
Trading and investing both involve taking a position on a financial market in order to profit from price movements. However, they pursue this goal in vastly different ways. While investors will physically buy the asset in question, traders will take a speculative position on the underlying market price.
Investors will take a longer-term look at markets, assessing the future health and growth prospects of a company over years and even decades. Traders or speculators will look at rising and falling markets over a shorter time frame in order to profit from volatility.
Read on for our detailed explanations of trading and investing or take a look at the table below for a summary of the key differences.
|Markets||Shares, exchange traded funds (ETFs), indices, currencies, cryptocurrencies, commodities, options and more – see our full range of markets||Shares, ETFs and investment trusts|
|Method||Derivative products such as CFDs and spread bets||Investing via a share dealing account, ISA, SIPP or IG Smart Portfolio|
|Time frame||Short to medium term||Medium to long term|
|Initial capital required||Deposit (margin)||Full value of investment|
|Returns||Profit from long and short positions||From capital appreciation and dividends|
|Cost of trading||Trade spreads from 0.6 points on key FX pairs like EUR/USD, 1 point on major indices like the Germany 30 and FTSE 100, and 0.3 points on Spot Gold||Buy and sell shares and ETFs from as little as £3 commission1|
|Tax benefits||Spread bets are tax free, and both spread bets and CFDs are free from stamp duty2||IG ISAs aren’t subject to capital gains tax (CGT) or income tax. SIPPs have no capital gains tax to pay, and tax relief on contributions2|
|Risk||Potentially magnified by leverage||Limited to the initial outlay|
|Style||Day trading, swing trading, trend trading and position trading||Passive and active investing|
Basics of investing
Investing is the traditional ‘buy and hold’ strategy, in which an individual will buy an asset outright with the intention of holding it for a long period of time and selling it for a profit at a later date.
Investing is used as an alternative means of generating a return on cash. While you could let your savings sit in a bank and earn interest, you could choose to take a risk with your capital and invest. While investments can result in losses, they can also earn you a lot more than you put in.
The most common market for investors is the stock market, which is the exchanging of shares or equities. Shares are portions of ownership in a company, so when you own a share, you are entitled to certain rights. These can include votes on a company’s decisions and a portion of the company’s earnings in the form of dividend payments – if dividends are paid by the company.
Other markets available to invest in with IG include ETFs and investment trusts.
ETFs are a form of investment that are bought and sold on exchanges, much like stocks. They track the performance of an underlying basket of assets, whether this is a group of stocks, an entire index, sector, or group of commodities or currencies.
Investment trusts are funds that enable investors to pool their money together with others and gain exposure to a broad range of assets through a single position. They are set up in the same way as public companies and are traded on exchange. They have a board of directors and management team who make decisions about where to allocate the funds capital.
Investors could also choose to explore physical asset markets such as real estate, precious metals and jewellery.
As a general rule, investors believe in diversifying their holdings in order to lower the risk of their entire portfolio underperforming. The idea is that by spreading out your capital across asset classes, if one decreases, the other holdings will remain profitable enough to balance out the loss.
Most investors will use a broker to complete their transactions with exchanges and execute positions on their behalf.
With an IG share dealing account, you can invest in more than 12,000 international shares, ETFs and investment trusts. And you’ll always find something that suits your goals and risk appetite with our range of investment products.
- Share dealing. Buy and sell shares and ETFs from as little as £3 commission1 by opening an IG share dealing account
- IG Smart Portfolio. Tell us your needs and risk appetite, and we’ll create a fully-managed portfolio tailored to your goals
- SIPP. Take control of your capital and investments for retirement with a self-invested personal pension
- Stocks and shares ISA. Invest in shares and ETFs for the same low commission rates without paying tax on any profits with an IG ISA
Investing time frame
Traditionally, investing has a longer time frame than trading, as it can take years for the desired returns to accumulate.
However, individual investors will have different ‘time horizons’ – which is the term used to describe how long an individual expects to hold onto an investment. These time horizons will be dictated by the individual’s chosen method of investing, their goals and the style of investing they employ.
The longer the time horizon, the more aggressive an investor can be in their portfolio management. Typically, if an investor has a shorter time horizon (meaning they want to make money faster) they will need to be more conservative in their asset selection – choosing shares or ETFs they are sure will produce the returns needed. With a longer time horizon, investors can look at ‘off-the-beaten-track’ stocks. While riskier, these may result in unexpected returns.
As the time frame for investing is so long, the actual day-to-day time commitment is significantly less than that required for trading. As company announcements are only released quarterly, the fundamental analysis required for long-term investing can be done around these significant points in the year. And as there is little focus on short-term movements, investors won’t need to pay too much attention to news reports that could cause interim volatility.
Initial capital required for investing
When you invest, you’ll be required to put down the entire value of the asset to open a position. So, if you want to buy five shares that are currently worth £100 each, you’ll have to pay £500 upfront.
With IG, there is no minimum funding amount per month, so the total amount of capital that you need to start investing will completely depend on the assets you want to include in your portfolio.
Returns from investment
Most investors will aim to achieve returns of 10%-15% annually. There are two main avenues of profit for investors, these are:
- Dividend payments – which can be paid by companies to their shareholders, depending on the company’s performance
- Capital appreciation – which is the difference between the price you bought the asset at and the price you sell it for. This is known as return on investment, or return on investment (ROI)
Dividend payments will vary from company to company and can change throughout the year depending on a company’s performance – sometimes dividends may not be paid at all. This makes it important to read earnings announcements each quarter. Dividends will be paid directly into your IG account in cash.
The return on your investment will only be received once you have closed your position by selling the asset in question. Once you have sold your shares, you’ll be able to reinvest immediately or withdraw the cash to your bank account once the shares have ‘settled’. This process usually takes two days.
Cost of investing
An important thing to remember, is that you’ll also need to consider the fees associated with investing – high broker fees can eat into any returns that you make. This is why it is so important to compare your broker against others to ensure you’ll be getting the best service for your money.
|IG||Hargreaves Lansdown||Barclays||AJ Bell|
|Best commission rate (UK shares)||£3||£5.95||£6||£4.95|
|Standard commission rate (UK shares)||£8||£11.95||£6||£9.95|
|Commission rate on US shares||2 cents per share, minimum of $15||£11.95||n/a||£9.95|
|FX conversion fee||0.5%||1.0%||n/a||1.0%|
Data taken from competitor websites, correct at 17 April 2019
Taxes for investments and benefits
When you invest, your positions may also be subject to additional fees or taxes depending on the country where the company is listed. Tax laws are subject to change and depend on individual circumstances. Tax laws may differ in jurisdictions other than the UK.
On a standard UK share dealing account, you could be subject to:
- UK stamp duty reserve tax (SDRT). When investors make electronic share transactions, they must pay SDRT – this applies to UK shares, shares in a foreign company, options and any interest from shares. SDRT is a flat rate of 0.5% of the purchase price of the shares
- A PTM levy. This applies to any individual transactions conducted on the London Stock Exchange worth over £10,000. PTM stands for Panel of Takeovers & Mergers, which is an independent regulatory body that ensures shareholders are treated fairly. It is a flat fee of £1 per transaction
- Capital gains tax (CGT). This tax is levied by the UK government on the profits made from the sale of financial assets. CGT regulations change over time, and can vary from country to country so it is important to be aware of the costs you could incur
For SIPPs, you can invest up to £40,000 each tax year with a 20% tax relief on your contributions and no capital gains or income tax will be levied.3
Risks of investing
When you invest, your risk is capped at the price at the purchase price of the asset. You won’t lose more than you paid for the asset in the first place – additional fees excluded.
Continuing the earlier example, if you paid £500 to open a position on five shares worth £100 each, and the share value fell all the way to zero, you would lose £500. This is known as equity risk.
Each investor’s level of acceptable risk is different. You should calculate your risk appetite based on your financial goals, how much time you can dedicate to portfolio management and how much capital you have available.
Styles of investing
There are two styles of investment that you could use: passive and active.
Passive investing involves using benchmark funds, such as ETFs and mutual funds, that will mimic the returns of the underlying asset. This style of investing tends to be more long term and isn’t concerned with the shorter-term movements of an underlying asset.
Active investing involves a more hands-on approach, which is why many individuals will choose to use a fund manager that makes most of the choices on their behalf. Active investors will aim to beat the average returns of the market and so use a lot of fundamental and technical analysis to identify the most advantageous buy and sell points.
To start investing, you should:
- Create a live account
- Choose from 10,000 shares, funds and investment trusts
- Open your first position from just £3 per trade1
Basics of trading
Trading involves speculating on the future price of a market via derivative products. These products take their value from an underlying asset, and do not require a trader to own the asset in order to take a position.
Traders can not only open the more traditional ‘long’ position, but they can take advantage of markets that are falling in price too – known as going ‘short’. This opens up a whole other avenue of potential profit.
Markets to trade
When you trade, you’ll be able to take a position on a wider variety of asset classes, and you won’t need to worry about the intricacies of taking ownership of the asset – such as delivery of currencies or commodities.
With IG, you can trade a range of asset classes, including:
- Shares. When taking a position on a share, it is important to research the company, the industry and the stock exchange it is listed on. Unless your provider offers out-of-hours trading, your dealing will be confined to the exchange’s opening hours
- Indices. A stock index enables you to trade on the performance of a group of shares, rather than just one company. As there are many constituents that can move the market, stock indices tend to see more volatility than individual shares
- Forex (FX). This is the world’s most liquid and volatile financial market due to the vast number of currency dealers. Traders can buy and sell currencies 24 hours a day, five days a week. IG also offers weekend trading on GBP/USD
- Commodities. Trading commodities provides vast opportunities for profit, but the nature of the market creates a high level of risk. The price of commodities can fluctuate constantly as the rate of their production and consumption changes
- Cryptocurrencies. These digital assets can be speculated on just like physical currencies. The crypto market is known for its volatility, which can create an exciting landscape for traders but does present unique risks
Most trading takes place via derivatives products such as CFDs and spread bets. Both of these methods of trading use leverage, which means you only have to put up a small deposit to gain exposure to the full value of a trade.
While this will magnify profits, it will also magnify losses. This is why learning about the risks of trading is crucial for anyone who is starting to trade.
Before you start to trade, you should decide which of these two methods is best for you.
A CFD is an agreement to exchange the difference in the price of a market between the opening and closing of a trade. There are a variety of benefits to trading CFDs, such as:
- DMA on shares and forex5
- Being able to offset losses against profits as tax deduction2
- Not having to pay stamp duty2
- Having negative balance protection4
A spread bet is a bet made on the future change in price of a financial market. All spread bets have a fixed expiry date. Spread betting offers a range of benefits to traders, including:
- No capital gains tax (CGT) on profits2
- No commission charge, just our spread
- No stamp duty2
- Negative balance protection4
Trading time frame
Trading timeframes are significantly shorter than investing holding times – while investors will hold positions for years, traders will hold positions for just minutes, hours, days or weeks. The time frame of a trade completely depends on the style of trading you choose to use.
Whereas investors ignore smaller market movements, and focus on the longer-term trend of the market, traders aim to open positions more frequently to take advantage of volatility around key events and intraday activity.
Initial capital required for trading
When you open a CFD or spread betting position, you would put down a small initial deposit – the margin – which is a percentage of the full value of the trade. This is why leveraged trading is sometimes referred to as ‘trading on margin’. This initial funding is often presented as a percentage of your total trade.
So, as before, let’s say you want to buy five shares that are currently worth £100 each. If you wanted to invest, you’d have to put up all £500 to open the position. But if you decided to trade using leveraged products instead, you might only have to pay 20% of this (£100) to open the position.
Returns from trading
The exact amount of profit a trader will be set to make will depend on the strategy they use, their risk management practices and the amount of capital they put down in the first place.
When you trade using leverage, any profits made would be magnified. You would only need to put down an initial deposit to gain full market exposure. Any subsequent profit (or loss) is then calculated using the full value of the trade, not this initial payment.
Trading can be potentially lucrative, but it is also risky – this makes it important to learn about the risks associated with trading.
While investors might seek to generate annual returns of 10%, traders will be looking to generate the same average return each month. These profits are made by being proactive in a short timeframe through the frequent buying and selling of assets – taking advantage of both rising and falling markets.
In contrast to buying and holding assets as investments, there is no dividend yield from a CFD or spread betting position. Instead, positions are adjusted to reflect the change in the underlying market.
Cost of trading
As with investing, there will be some additional charges associated with each trade. In most cases this fee is in the form of a spread, which we charge on top of the market price. The spread is the difference between the bid and ask prices and can vary depending on market conditions.
Spread charges apply to spread bets on all markets, and CFD trades for all markets except shares. For every shares CFD trade, you’ll pay a commission instead of a spread.
The actual costs of trading with us via a spread bet or a CFD are nearly identical, even if the way we charge to trade a market differs. For example, the cost of a 0.20% commission on a share CFD trade works out similarly to a 0.20% spread on a share spread bet.
Other potential charges include overnight funding fees, guaranteed stop premiums and any extra services you choose to use, such as direct market access, advanced charting packages and data streaming.
It’s also important to be aware of the maintenance margin, which is the term for the additional funds that might be required if your open position starts to incur losses that are not covered by the initial deposit. If this happens, you could get a notification from your provider – known as a margin call – asking you to top up the funds in your account. Failure to do so can result in your position being closed and the loss to your account being realised.
Taxes for trading and benefits
When you trade, the tax your position is subjected to will depend on whether you are using spread bets or CFDs.
- Spread bets have no CGT or stamp duty
- CFDs have no pay stamp duty and any losses can be offset against profits for CGT liabilities – making them a useful instrument for hedging
Like investments, taxation rates will depend on the country where the company is listed – tax laws may differ in jurisdictions other than the UK. Tax laws are subject to change and depend on individual circumstances.
Risks of trading
Spread bets and CFDs come with a unique set of risks as they are leveraged products. While leverage can magnify profits, as we’ve seen, it can also magnify your losses. To help restrict your potential losses from trading, there are a variety of ways that you can manage your risk with IG.
The most common are stops and limits. Stops automatically close your position when the market moves against you by a specified amount. You can choose from three types of stop:
- Basic. Closes you out as near as possible to the price level you choose. A basic stop may be affected by ‘gapping’ overnight or in times of high volatility
- Guaranteed. Closes you out at the level you requested, regardless of whether the market gaps. This will incur a small premium, but only if the stop is triggered
- Trailing. Moves with your position when the market moves in your favour, but locks in as soon as the market starts to move against you
Limits, meanwhile, do the opposite, closing your position when the market moves a specified distance in your favour. Limits are a great way to secure profits in volatile markets.
You can learn more about financial markets and managing your trading risk with IG Academy’s series of online courses.
Styles of trading
A trading style is a set of preferences that determine how often you’ll place a trade and how long you will keep those trades open for. It will be based on your account size, how much time you can dedicate to trading, your personality and your risk tolerance.
There are four main trading styles:
- Day trading. As the name suggests, this style involves opening and closing positions within a single day – this is so that there are no risks or charges associated with holding positions overnight
- Scalp trading. This style involves opening and holding a position for a very short amount of time, from a few seconds to a few minutes at most. The aim is to take small but frequent profits
- Swing trading. The aim of this style is to focus on the body of a larger move, rather than identifying the start and finish of a trend. Positions are held from days to weeks
- Position trading. This style is the most similar to investing, as it involves holding positions for a longer period of time, depending on the overarching market trend. This could be months to years
To start trading, you should:
- Create a live account
- Choose an asset to trade
- Open your first position
If you don’t feel ready to trade on live markets, you can always open an IG demo account to practise trading in a risk free environment.
1Place 3+ trades on UK shares in the previous month to qualify for a £3 commission rate. Please note published rates are valid up to £25,000 notional value. See our full list of share dealing charges and fees.
2Tax laws are subject to change and depend on individual circumstances. Tax law may differ in a jurisdiction other than the UK.
3Tax laws are subject to change and depend on individual circumstances. Tax law may differ in a jurisdiction other than the UK. Amounts drawn from your SIPP at retirement are subject to income tax at prevailing rates. You may be able to carry forward unused allowances from previous tax years. Please consult your financial advisor.
4Negative balance protection applies to trading-related debt only, and is not available to professional traders.
5To trade with Forex DMA, you’ll need to qualify for an IG professional account.
This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.
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