Share Trading is a Business

Submitted by Marco Palmero on 19 May, 2009 - 19:03

Share Trading is a Business

As a professional trader, you should treat share trading as a professional business. If your are actively trading stocks, forex, or CFD’s it is of vital importance for you to treat your trading activities as a business. Firstly it is psychologically beneficial to see your trading as a business – as you will treat it with respect. Secondly it is important financially as it has tax implications.

Share trading is an interesting (and exciting) vocation to choose. The Australian Tax Office(ATO) defines a business as "any profession, trade, employment, vocation or calling, but does not include occupation as an employee". In the eyes of the tax office, are you treating your share trading as a business (i.e. you are a share trader) or are you simply an investor (i.e. you are a share holder). There are a number of factors which the tax office examines - standards which you too can use to see if you measure up.

  1. the nature of the activities, particularly whether they have the purpose of profit making
  2. the repetition, volume and regularity of the activities, and the similarity to other businesses in your industry
  3. the keeping of books of accounts and records of trading stock, business premises, licences or qualifications, a registered business name and an Australian business number
  4. the volume of the operations, and
  5. the amount of capital employed.

Share Trading Business: Trading for a Profit

Of course, everyone show is trading shares is in it to make a monetary profit. Shares can be held as an investment or for trading purposes. However there is a slight difference to the profile of an share holder compared to an active share trader. A share trader who is operating a business of trading carries out their trading with the purpose of earning income from buying and selling shares. While a share holder would earn an income from dividends and receipts and hence is not carrying on a business.

All businesses have a business plan. Conversely, a share trader constructs a share trading plan which should reveal the trader’s goals, techniques, analysis rules for each trade investment, research and the methods you use in deciding whether to hold, buy or sell your stocks.

Share Trading Business: Trade Frequently

Another criteria to pass for a share trader is repetition and regularity of activities. Just like a business selling widgets, they do so repetitively and frequently. I’m not saying to trade frequently to simply pass this criteria - but what it does mean is that professional share traders show a regular and frequent pattern of trade transactions.

Share Trading Business: Treat it like a Business and Keep Records

A share trader who is undertaking a share trading business is typically expected to be involved in "the study of daily and longer-term trends, analysis of a company's prospectus and annual reports, and the seeking of advice from experts. Any qualifications, expertise, training, or skills you may have in this area would be relevant to determining whether your activities constituted a business." Also, it is important to keep record of your trades – this is of course a no-brainer; how else are you going to find out if you are running at a profit or loss? Or if your trading technique/strategy is profitable?

Share Trading Business: Volume

This is probably another point which had to be stated by bureaucrats to make the guide comprehensive. If you are truly carrying on a share trading business and are trading frequently – you would surely amass a massive amount of trading volume (or account turnover).

Share Trading Business: Trading Capital

People can be share traders and not have a massive amount of capital. This is possible now with the leverage provided using derivatives like Warrants, CFD’s or Forex. This is what the tax office says: "The amount of capital that you invest in buying shares is not considered to be a crucial factor in determining whether you are 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. "