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 trading and investing in our in-depth guide.

Trading vs. Investing

Essential Knowledge You Need to Invest

Essential Information You Need to Trade

Trading and Investing: An Overview

Both trading and investing involve taking positions in financial markets to profit from price movements. However, they pursue this goal in very different ways. While investors will actually purchase the relevant assets, traders will take speculative positions on the underlying market prices.

Investors will conduct longer-term research on the market, assessing the future health and growth prospects of companies over the next few years or even decades. Traders or speculators will focus on rising and falling markets over shorter periods to profit from the volatility.

Read on for a detailed explanation of trading and investing, or see the table below for a summary of the main differences.

| Trading | Investing |

|---------|-----------|

| Markets: Stocks, Exchange Traded Funds (ETFs), indices, currencies, cryptocurrencies, commodities, options, etc. — see all our market shares, ETFs, and investment trust methods | Derivatives such as Contracts for Difference (CFDs) and spread betting through a stock trading account, ISA, SIPP, or IG Smart Portfolio |

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| Timeframe: Short to medium term | Long term |

| Initial capital required: Deposit (margin) for trading, full investment value for investing | Full investment value |

| Profit from: Trading spreads on major forex pairs like EUR/USD at 0.6 pips, major indices like Germany 30 and FTSE 100 at 1 point, and spot gold at 0.3 points, with a commission of just £3 to buy and sell shares and ETFs | Capital appreciation and dividends |

| Tax advantages: Spread betting is tax-free, and both spread betting and CFDs are exempt from stamp duty | 2 IG ISA is free from Capital Gains Tax (CGT) or income tax. SIPP is free from Capital Gains Tax, and contributions are tax-deductible |

| Risk: May be amplified by leverage | Limited to initial outlay |

| Style: Day trading, swing trading, trend trading, and position trading | Passive and active investing |

Please note that the tax advantages mentioned are subject to the individual's circumstances and the tax laws in their jurisdiction, and they may change over time. Always consult with a tax professional or financial advisor for the most current information.Investment Basics

Investing is the traditional "buy and hold" strategy, in which an individual directly purchases an asset with the intention of holding it for the long term and selling it later to make a profit.

Investing is an alternative method of generating cash returns. While you can deposit savings in a bank and earn interest, you have the option to take on the risk of investing and potentially reap greater returns than what you put in.

Investment Markets

The most common market for investors is the stock market, which is the exchange of stocks or shares. Shares represent a portion of a company's ownership, and therefore, when you own shares, you are entitled to certain rights. These can include voting on company decisions and receiving a portion of the company's earnings in the form of dividends (if the company pays dividends).

Learn more about what stocks are.

ETFs are a form of investment that is bought and sold on the stock market, just like stocks. They track the performance of an underlying basket of assets, whether it be a group of stocks, an entire index, an industry, commodities, or a currency combination.

Investment trust funds are funds that allow investors to pool their money with others and gain exposure to a broad range of assets through a single position. They are structured like publicly traded companies and are traded on exchanges. They have a board of directors and a management team responsible for deciding where to allocate the funds.

Investors can also choose to explore tangible asset markets, such as real estate, precious metals, and jewelry.

Learn how to invest in Real Estate Investment Trusts (REITs).In general, investors believe in diversifying their investments to reduce the risk of poor performance across the entire portfolio. The idea is that by spreading your capital across various asset classes, if one asset decreases, the others will maintain sufficient profits to balance out the losses.

Investment Timeframe

Traditionally, investing is over a longer time horizon than trading, as it may take several years to accumulate the desired returns.

However, individual investors will have different "time horizons," a term used to describe how long an individual expects to hold onto an investment. These time spans will be determined by the investment approach, goals, and investment style chosen by the individual.

The longer the time horizon, the more actively an investor can manage their portfolio. Typically, if an investor has a shorter time horizon (meaning they want to make money more quickly), they will need to be more conservative in their asset selection—choosing stocks or ETFs that they are certain will generate the required returns. Over a longer time horizon, investors can focus on "out-of-the-ordinary" stocks. Although the risk is greater, it may lead to unexpected returns.

Due to the long time frame for investing, the actual daily time commitment is significantly less than what is required for trading. Since company announcements are only made quarterly, the fundamental analysis needed for long-term investing can be centered around these key times throughout the year. And because there is less focus on short-term trends, investors do not need to pay much attention to news reports that may cause temporary fluctuations.

Investment Returns

Most investors aim for annual returns of 10%-15%. There are two main ways for investors to profit:

Dividend Payments - Companies can pay shareholders based on the company's performance.

Capital Appreciation - This is the difference between the price you bought the asset for and the price you sell the asset for. This is referred to as the return on investment (ROI) or rate of return on investment.The method of dividend payment varies from company to company and can change throughout the year based on the 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 in cash to your stock account.

Investment returns can only be obtained after you close your position by selling the related assets. After selling the shares, once the stocks have "settled," you can immediately reinvest or withdraw the cash to your bank account. This process typically takes two days.

Investment Costs

An important thing to remember is that you also need to consider the costs associated with investing—high broker fees can eat into any returns you might have. This is why it's so important to compare your broker with others to ensure you're getting the best service for your money.

Investment Risks

When you make an investment, your risk is capped at the price you paid for the asset. First and foremost, your losses will not exceed the amount you paid for the asset—excluding additional fees.

Continuing with the previous example, if you pay £500 to open a position of 5 shares valued at £100 per share, and the stock value plummets to zero, you would lose £500. This is known as equity risk.

The acceptable level of risk varies for each investor. You should calculate your risk tolerance based on financial goals, the time available for portfolio management, and the funds at your disposal.

Explore Five Steps to Manage Investment Risks

Investment MethodsYou can utilize two investment approaches: passive investing and active investing.

Passive investing involves the use of benchmark funds, such as ETFs and mutual funds, which mimic the returns of the underlying assets. This investment approach tends to be long-term and is not concerned with short-term fluctuations of the underlying assets.

Active investing involves a more hands-on approach, which is why many people choose to use fund managers who make most of their decisions on their behalf. Active investors will strive to beat the average market return, thus employing a significant amount of fundamental and technical analysis to determine the most advantageous points to buy and sell.

Trading Basics

Trading involves speculating on the future prices of the market through derivative products. These products derive their value from the underlying assets and do not require traders to own the asset to hold a position.

Traders can not only establish more traditional "long" positions but also capitalize on markets that are falling in price (also known as "shorting"). This opens up another avenue for potential profit.

Trading Markets

When you engage in trading, you will be able to take a position in a broader range of asset classes without worrying about the complexities of obtaining asset ownership, such as the delivery of currencies or commodities.

With a stock account, you can trade a range of asset classes, including:

Shares. When holding shares, it is important to research the company they are listed with, the industry, and the stock exchange. Unless your provider offers out-of-hours trading, your trades will be limited to the opening hours of the exchange.Indicators. Stock indices allow you to trade a basket of stocks rather than the performance of just one company. Due to the many components that can drive market fluctuations, the volatility of stock indices tends to be greater than that of individual stocks.

Commodities. Trading commodities offers significant profit opportunities, but the nature of the market brings with it a high level of risk. Commodity prices fluctuate continuously with changes in production and consumption rates.

Cryptocurrencies. These digital assets can be speculated upon like physical currencies. The crypto market is known for its volatility, which can create exciting prospects for traders but does indeed carry unique risks.

Trading Methods

Most trading is conducted through derivative products such as contracts for difference (CFDs) and spread betting. Both of these trading methods use leverage, which means you only need to deposit a small margin to gain the full value of the trade.

While this can amplify profits, it can also amplify losses. This is why understanding trading risks is crucial for anyone starting out in trading.

Before you begin trading, you should determine which of these two methods is most suitable for you.

Contracts for Difference (CFDs)

A contract for difference (CFD) is an agreement to exchange the difference in market prices between the start and end of the trade. There are many benefits to trading CFDs.

Spread BettingSpread betting is a wager on the future price movements in the financial markets. All spread bets have a fixed expiry date. Spread betting offers a range of benefits to traders:

Trading Time

The time frame for trading is much shorter than that for investment holding—investors may hold positions for years, while traders only need to hold positions for a few minutes, hours, days, or weeks. The time frame for trading is entirely dependent on the trading method you choose to use.

Investors overlook minor market fluctuations and focus on long-term market trends, whereas traders aim to open positions more frequently to take advantage of key events and intraday trading volatility.

Initial Capital Required for Trading

When you establish a position in a contract for difference or spread bet, you put down a small initial margin—a percentage of the total value of the trade. This is why leveraged trading is sometimes referred to as "margin trading." The initial capital is usually represented as a percentage of your total trade amount.

So, as before, let's assume you want to buy five shares of a stock currently valued at £100 per share. If you wish to invest, you must commit the full £500 to open a position. However, if you decide to trade using leveraged products, you only need to pay 20% of that (£100) to open a position.

Trading Profits

The exact amount of profit a trader will make depends on the strategy they use, their risk management practices, and the amount of capital initially invested.

When you trade with leverage, any gains are magnified. You only need to put down an initial deposit to gain exposure to the full market risk. Then, any subsequent profits (or losses) are calculated using the full value of the trade, not the initial payment.Learn About Leverage in Detail

Trading can be profitable, but it also comes with risks—so it's crucial to understand the risks associated with trading.

While investors might hope to generate a 10% annual return, traders will aim for the same average monthly profit. These profits are achieved by actively buying and selling assets frequently, capitalizing on both rising and falling markets in a short period of time.

Unlike buying and holding assets as investments, contracts for difference (CFDs) or spread betting positions do not generate dividend income. Instead, positions are adjusted to reflect changes in the underlying market.

Trading Costs

As with investing, each trade incurs some additional costs. In most cases, this cost is in the form of a spread, which we charge based on the market price. The spread is the difference between the buying price and the selling price and can vary depending on market conditions.

Spread costs apply to all spread betting on the market, and CFD trading applies to all markets except for stocks. For each stock CFD trade, you will pay a commission instead of a spread.

Even though we charge differently for market trades, the actual cost of trading with us through spread betting or CFDs is almost the same. For example, the 0.20% commission cost for stock CFD trading is similar to the 0.20% spread bet on stock spreads.

Learn more about trading costs and fees

Other potential costs include overnight financing fees, guaranteed stop-loss premiums, and any other services you choose to use, such as direct market access, advanced charting packages, and data streams.Maintaining margin is also crucial. Maintaining margin refers to the additional funds that may be required if your open positions start to incur losses that the initial margin cannot cover. If this situation arises, you may receive a notice from the provider (known as a margin call), asking you to replenish the funds in your account. Otherwise, it may lead to the liquidation of your positions and result in losses to your account.

Trading and Benefits Tax

The taxes you incur on your positions will depend on whether you are using spread betting or contracts for difference (CFDs).

Like investments, tax rates will depend on the country where the company is listed—tax laws in other jurisdictions besides the UK may vary. Tax laws can change and are dependent on individual circumstances.

Trading Risks

Spread betting and CFDs are leveraged products with unique risks. As we have seen, leverage can amplify profits, but it can also amplify your losses. To limit the potential losses from trading, you can manage risk in various ways.

The most common are stop-loss and limit orders. These automatically close your position when the market moves against you. You can choose from three types of stop-loss orders:

Basic. Places you as close as possible to the chosen price level. A basic stop-loss may be affected by "gaps" during overnight or high volatility periods.

Guaranteed. Closes you out at the level you request, regardless of whether the market gaps. This incurs a small premium but ensures that the stop-loss is triggered.

Trailing. Moves with your position when the market is in your favor, but locks in when the market starts to move against you.At the same time, limit orders work in the opposite way; when the market is in your favor, if you move by a specified distance, then close the position. Setting limits is a good way to capture profits in a volatile market.

Trading Styles

Trading style is a set of preferences that determine how often you trade and for how long you hold these trades. This will depend on your account size, the amount of trading time you can commit, 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—thus avoiding the risk or cost of holding positions overnight.

Scalping. This style involves opening and holding positions for a very short time, from just a few seconds to a few minutes. The aim is to capture small but frequent profits.

Swing trading. The purpose of this style is to focus on larger moves in the market, rather than trying to pinpoint the beginning and end of trends. Positions can last from a few days to several weeks.

Position trading. This style is most similar to investing, as it requires holding positions for a longer time based on the overall market trend. This can range from several months to years.