Trading is all about timing the market. Basically, it’s the old adage of “buy low and sell high”, but applied to the stock market. There’s nothing inherently “right” or “wrong” about the strategy, but it does carry a couple of significant pitfalls as compared to investing. First of all, trading is, essentially, all about making transactions and the companies which arrange these transactions generally charge a fee for their services. Even if this fee is small, it still eats into a trader’s profits. Secondly, traders may face a larger tax bill than investors. In the UK, for example, Capital Gains Tax is payable on the sale of shares (except when they are held within an Individual Savings Account). It, therefore, follows that traders, who are continually buying and selling shares could wind up paying substantially more tax than investors who are buying and holding shares. The irony here is that investors who pick the right shares could still end up with the same amount of profit in hand at the end of the year.
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Growth versus income
Traders focus on the price of a share. The basic idea behind trading is to look for shares which have good prospects for growth, wait until the growth is achieved (at least to a sufficient level) and then sell the shares on to someone who missed out on the opportunity to buy them the first time around. Investors, by contrast, may look for capital growth or income, alternatively known as earnings or yield. The key difference between growth-focused investors and traders is that the former are in it for the longer term. For example, they may specialize in the Alternative Investment Market, or the smallest companies on the main stock market, sit tight as these companies grow (accepting that some of them will probably fail along the way) and then sell (a part of) their shares to investors who prefer to invest in companies which have reached a certain stage of maturity. It should be noticed here that investors who are focused on growth can only realize their gains when they sell their shares (although they may pick up some income along the way). Investors who are going for yield are looking for dividend-producing shares, which will pay out (ideally) year after year. The point to note here, however, is that it is never a given that a company will pay a dividend. Those seeking guaranteed income will need to look elsewhere, such as on the bond market.
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