Trading vs Investing

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The tax treatment of shares depends on whether you're considered to be holding shares as an investor share trading or investing carrying on a business as a share trader. A shareholder is a person who holds shares for the purpose of earning income from dividends and similar receipts. A share trader is a person who carries out business activities for the purpose of earning income from share trading or investing and selling shares.

For a share trader:. Whether or not you're carrying on a business of share trading depends on much the same factors as apply to determining whether any other undertaking is considered a business for tax purposes. Under the tax law, a 'business' includes 'any profession, trade, employment, vocation or calling, but does not include occupation as an employee'.

The question of whether a person is a share trader or a shareholder is determined by considering the following factors that have been taken into account in court cases:. The intention to make a profit is not, on its own, sufficient to establish that a business is being carried on. A share trader is someone who carries out business activities for the purpose of earning income from buying and selling shares.

Shares may be held for either investment or trading purposes, share trading or investing profits on sale are earned in either case. A person who invests in shares as a shareholder rather than a share trader does so with the intention of earning income from dividends and receipts, but is not carrying share trading or investing business activities.

It is necessary for you to consider not only your intention to make a profit, but also the facts of your situation. This includes details of how the activity has actually been carried out or a business plan of how the activities will be conducted. Repetition — that is, the frequency of transactions or the number of similar transactions — is a significant characteristic of business activities.

The higher the volume of your purchases and sales of shares, the more likely it is that you are carrying on a business. A business of share trading could also be expected to involve the purchase of shares on a regular basis through a regular or routine method. A share-trading business could reasonably be expected to involve study of daily and longer-term trends, analysis of a company's prospectus and annual reports, and seeking of advice from experts.

Your qualifications, expertise, training, or skills in this area are relevant to determining whether your activities constitute a business.

Failure to keep records of purchases and sales of shares would make it difficult for a taxpayer to establish that a business of share-trading was being carried on. The amount of capital that you invest in buying shares is not considered to be a crucial factor in determining whether share trading or investing carrying on a business of share trading. This is an area in which it is possible to carry out business activities with a relatively small amount of capital.

Conversely, you may also invest a substantial amount of capital and not be considered to be a share trader. Molly is an electrical engineer. After seeing a television program, she decided to become involved in share-trading activities. Molly set up an office in one of the rooms in her house. She has a computer and access to the internet. Molly share trading or investing daily analysis and assessment of developments in equity markets, using financial newspapers, investment magazines, stock market reports, charts and trend lines.

Molly's objective is to identify stocks that will increase in value in the short term to enable her to sell at a profit after holding them for a brief period. In the last income year, Molly conducted 60 share transactions: All the transactions were conducted through stockbroking facilities on the internet.

The average time that Molly held shares before selling them was twelve weeks. Molly's activities show all the factors that would be expected from a person carrying on a business. Her share-trading operation demonstrates a profit-making intention even though a loss has resulted. Molly's activities are regular and repetitive, and they are organised in a business-like manner. The volume of shares turned over is high and Molly has injected a large amount of capital into the operation.

George is an accountant. He has boughtshares in twenty 'blue chip' companies over several years. George bought the shares because of consistently high dividends. He would not consider selling shares unless their price appreciated markedly. Although George has made a large gain on the sale of shares, he would not be considered to be carrying on a business of share trading. He has purchased his shares for the purpose of earning dividend income rather than making a profit from buying and selling shares.

Show download pdf controls. Shareholding as investor or share trading as business? Shareholding as investment Share trading as business How to determine whether you're carrying on a business of share trading Examples Shareholding as investment A shareholder is a person who holds shares for the purpose of earning income from dividends and share trading or investing receipts.

Share trading as business A share trader is a person who carries out business activities for the purpose of earning income from buying and selling shares. For a share trader: How to determine whether you're carrying on a business of share trading Whether or not you're carrying on a business of share trading depends on much the same factors as apply to determining whether any other undertaking is considered a business for tax purposes.

The question of whether a person is a share trading or investing trader or a shareholder is determined by considering the following factors that have been taken into account in court cases: Nature of activity and purpose of profit making The intention to make a profit is not, on its share trading or investing, sufficient to establish that a business is being carried on.

A business plan might show, for example: Repetition, volume and regularity Repetition — that is, the frequency of transactions or the number of similar transactions — is a significant share trading or investing of business activities.

Organisation in a business-like way and keeping records Business-like: Amount of capital invested The amount of capital that you invest in buying shares is not considered to be a crucial factor in determining whether you're carrying on a business of share share trading or investing.

Share trader Molly is an electrical engineer. Shareholder George is an share trading or investing.

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Investing online , also known as online trading or trading online , is a process by which individual investors and traders buy and sell securities over an electronic network, typically with a brokerage firm.

This type of trading and investing has become the norm for individual investors and traders since late s with many brokers offering services via a wide variety of online trading platforms. Prior to the Internet , investors had to place an order through a stockbroker , in person or via telephone.

The brokerage firm then entered the order in their system, which was linked to trading floors and exchanges. In August , K. Investors could now enter orders directly online, or even trade with other investors via electronic communication networks ECN. Some orders entered online are still routed through the broker, allowing agents to approve or monitor the trades. Online brokers in the US are often referred to as discount brokers but in Europe and Asia many so-called online brokers work with high-net-worth individuals.

Their popularity is attributable to the speed and ease of their online order entry, and to fees and commissions significantly lower than those of full service brokerage firms within the US. Two types of online brokerages have emerged in the US in the mids: Investors who trade through an online brokerage firm are provided with a online trading platform. Included with the platform are tools to track and monitor securities, portfolios and indices , as well as research tools, real-time streaming quotes and up-to-date news releases—all of which are necessary to trade profitably.

Often, more robust research tools are available such as full, in-depth analyst reports and analysis, and customized backtesting and screeners to see how particular investment strategies would have been realized during different historical periods. In all investments, there is a risk of investment fraud. This risk can increase for online brokers where the investor does not have a personal relationship and the broker may be located in a different jurisdiction.

For this reason some financial regulators warn potential investors to research the online brokers they plan to employ, assuring that those firms are licensed within their state, provincial or national jurisdiction.

Informed investors are less likely to fall victim to unlawful securities schemes, such as the so-called "boiler room" scam. This website cautions investors to be wary of internet newsletters, investing blogs, or bulletin boards. Stock manipulators often float false information and "hot tips" on these sites, as part of an effort to affect the price of shares in a particular security. Investors are also advised to turn to unbiased sources when researching investments. In the US, the U.

Online investors typically invest without help from a trained stockbroker or investment adviser , and may not fully understand the potential risks of investing in a particular security. Inexperienced investors are easy prey for stock manipulators and pump and dump schemes often associated with penny stocks.

For this reason, many online brokers offer a number of investment tools to educate and inform new investors. Many online brokers provide tools to help investors research and select potential investments. There are also numerous third party providers of information, such as Yahoo! Other reputable sites provide information on business sectors, news and financial statements of individual companies, and basic tutorials on subjects such as diversification , basic portfolio theory , and the mitigation of risk associated with volatility in the stock market.

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