Trading vs investing: your guide to the key differences

What’s leverage?

Leverage is a feature that determines the way you open a position, how much you pay for it and how your losses are calculated – it enables you to open a larger position at only a fraction of the cost.

Unlike with investing, where you’d pay the full value of the trade upfront to buy that asset, leverage means you’d pay a small portion of the position’s worth upfront to take a position on the asset. When you close your trade for either a profit or loss, the calculation is based on the full position size, not the initial deposit you committed. Just as profits are payable to you, you’re solely liable for any losses.

What's margin

Margin is the initial deposit amount required to open a leveraged trade. This amount is a fraction of the full position size and you are essentially ‘borrowing’ the rest from the provider you’re using to trade.

What’s a stock exchange?

A stock exchange is a centralised financial marketplace where assets such as shares and bonds are bought and sold for money. Just as you’d go to a marketplace to buy and sell goods like food or clothing, financial assets like shares and ETFs have marketplaces, too.

What are dividends?

Dividends are payments given to shareholders by the company they’ve bought shares in, which usually come out of company profits. Companies that do well financially are more likely to give dividends, or larger dividend payments, than ones that are struggling. However, some companies choose to not pay dividends to fund ventures such as product development or expansion.

It’s important to note that companies aren’t required to pay dividends, but may choose to. Some companies pay dividends regularly and predictably, for example each quarter, while others give ‘special’ dividends more sporadically and only if certain profit margins are met. In such cases, dividends can be regarded as ‘bonuses’ rather than primary source investment income.

Companies announce their dividends ahead of time. When a stock is ‘cum dividend’, it’s due to be paid out soon, on the specified ‘payment date’. Close to this time, that stock is ‘ex dividend’, meaning that payouts are imminent and, if you were to become a shareholder at this point in time, you’d only be eligible for the next dividend and onward.

What causes share prices to rise or fall?

Share price appreciation and depreciation are determined by a number of factors, both within the company itself and the wider market.

Different shares are worth different amounts of money. A share’s value will vary depending on whether you’re looking at its fair value or its market value. The fair value is the intrinsic value of a stock based on the company’s fundamentals, while the market value is the amount that individuals are currently willing to pay for the stock.

At its simplest level, share prices and the value of ETFs increase when the company or fund is performing well in the marketplace, is well managed and has support or popularity from the public. Events like the company’s latest earnings season or a high-profile press conference can spike or drop share prices temporarily.

However, no company or ETF is an island – and wider market conditions and sentiment can affect share prices, too. These factors include macroeconomic events (for instance, the Covid-19 pandemic affected almost every company and ETF globally), major geopolitical events in the country that the company or ETF is domiciled in, as well as news and fiscal decisions on interest rates and the like. If the company or ETF in question is linked to a certain industry, for instance mining, the supply and demand for resources from that industry will also materially affect the share price or ETF value.

Remember, with us you can only trade derivatives via CFDs.