What is share trading?
Share trading is the buying and selling of company stock with the aim of making a profit. Shares represent a portion of ownership of a public company. They make up its market capitalisation, or in other words, its value.
For a trader, share (or stock) trading is one of the most popular ways to invest, but there are different ways you can approach share trading.
Most share trading takes place on stock exchanges where public companies are listed. This method involves buying and selling shares outright. You buy and take ownership of company stock and sell the stock for a higher price with the aim of making a profit. In this instance, you would normally open a ‘nominee’ account. A stockbroker will often place trades on your behalf, for a small fee.
Investment is not limited to stock market indices and shares. You can also invest in exchange traded funds and mutual funds, among others. This helps to diversify your investment portfolio.
Alternatively, you can use derivative products like spread bets - UK only - and Derivatives to trade shares. This way you can take a long or short position and take advantage of rising as well as falling share prices.
With spread betting and Derivatives trading, you do not take ownership of the actual shares you are trading. You simply speculate on whether you expect prices to rise or fall and take a position accordingly.
For this reason, you do not pay stamp duty when you spread bet on shares or trade share Derivatives in the UK. You do, however, pay capital gains tax on share Derivatives. Tax laws are subject to change in the UK.
Share trading vs Investing
The main differences between investing and share trading are the amount of time involved and level of risk undertaken. Investing focuses on the long term and investors tend to adopt a buy and hold approach. The idea is to gradually build up wealth over a longer period of time. Wealth is generated through buying and taking ownership of shares.
Investors will generally research the underlying company before buying shares. They try to determine the wealth prospect of shares in the medium to long term. Investments are often held for a period of years, or longer.
Market conditions may fluctuate over time , but this has less of an impact on long-term investing. It is generally considered to be lower risk than trading. This is because the expectation is that any downtrend will rebound and losses will be recovered.
Share trading, on the other hand, focuses on the short term. It involves the frequent buying and selling of financial instruments. The aim is to take advantage of quick price movements in the stock market to make a profit. Very often traders will hold stocks for less than a day, a type of trading known as day trading. Trading can have higher potential returns than investing.
However, it is also higher risk because there can be sudden, sharp price movements in the market. Traders generally tend to analyse a share’s current trend in the market using a range of trading and analysis tools. Numerous trading platforms these days offer technical analysis tools to help you refine your share trading strategy.