Financial traders - instruments and shares: the badges of trade
BIM56810 makes it clear that the first step in deciding whether an activity of buying and selling shares amounts to a trade is to find the facts. Once this has been done, you can look at all the relevant information and come to a decision.
One approach to this task is to use the so-called ‘badges of trade’ (see BIM20200). However, it is important to be aware of the limitations of this approach in considering an activity of buying and selling shares and other financial instruments.
Limitations of the badges of trade
The ‘badges of trade’ emerged from a Royal Commission of 1955. Two members of the commission produced minority reports in which they expressly identified share transactions as being ones where a strict application of the badges could produce the wrong answer.
For example, the presence of a large number of purchases and sales may often be used to support an argument that an activity amounts to trading, but this has no particular relevance to share transactions. In Clarke v Trustees of British Telecom Pension Scheme & Others  72TC472, Robert Walker LJ said: ‘Frequency cannot by itself be decisive, since an investor may change his investments frequently (as the Trustees did) without the investments losing their character.’
Nor is the presence or lack of a trading organisation significant. As Lord Wilberforce remarked in Ransom v Higgs  50 TC 1, ‘All depends on what you organise.’ No special organisation is needed to buy and sell shares, nor do they need any alteration before being sold. In any event, large investment entities such as pension funds exhibit an obvious level of organisation, but this does not transform them into trading entities.
The limitation of the badges of trade as a whole was considered by Oliver J in Salt v Chamberlain  53TC143 at page 154:
‘…I doubt whether the question whether in any given case a person is or is not carrying on a trade is capable of solution by the application of a logical progression of propositions culled from decided cases. The question is, I think, one of overall impression.’
In the Salt case it was held that there was not a trade, despite a number of the badges being present.
The better approach is, therefore, to look at the facts and circumstances of the transaction as a whole and then form a view as to whether the activity amounts to a trade or not. There is further guidance on this at BIM56850 to BIM56870.