Share trading is the buying and selling of company stock with the aim of making a profit. Shares represent a portion of ownership of a public company. They make up its market capitalisation, or in other words, its value.
For a trader, share (or stock) trading is one of the most popular ways to invest, but there are different ways you can approach share trading.
Most share trading takes place on stock exchanges where public companies are listed. This method involves buying and selling shares outright. You buy and take ownership of company stock and sell the stock for a higher price with the aim of making a profit. In this instance, you would normally open a ‘nominee’ account. A stockbroker will often place trades on your behalf, for a small fee.
Investment is not limited to stock market indices and shares. You can also invest in exchange traded funds and mutual funds, among others. This helps to diversify your investment portfolio.
Alternatively, you can use derivative products like spread bets - UK only - and contracts for difference (CFDs) to trade shares. This way you can take a long or short position and take advantage of rising as well as falling share prices.
With spread betting and CFD trading, you do not take ownership of the actual shares you are trading. You simply speculate on whether you expect prices to rise or fall and take a position accordingly.
For this reason, you do not pay stamp duty when you spread bet on shares or trade share CFDs in the UK. You do, however, pay capital gains tax on share CFDs. Tax laws are subject to change in the UK.
The main differences between investing and trading are the amount of time involved and level of risk undertaken. Investing focuses on the long term and investors tend to adopt a buy and hold approach. The idea is to gradually build up wealth over a longer period of time. Wealth is generated through buying and taking ownership of shares.
Investors will generally research the underlying company before buying shares. They try to determine the wealth prospect of shares in the medium to long term. Investments are often held for a period of years, or longer.
Market conditions may fluctuate over time , but this has less of an impact on long-term investing. It is generally considered to be lower risk than trading. This is because the expectation is that any downtrend will rebound and losses will be recovered.
Trading, on the other hand, focuses on the short term. It involves the frequent buying and selling of financial instruments. The aim is to take advantage of quick price movements in the stock market to make a profit. Very often traders will hold stocks for less than a day, a type of trading known as day trading. Trading can have higher potential returns than investing.
However, it is also higher risk because there can be sudden, sharp price movements in the market. Traders generally tend to analyse a share’s current trend in the market using a range of trading and analysis tools. Numerous trading platforms these days offer technical analysis tools to help you refine your share trading strategy.
Shares are bought and sold on a network of global exchanges. For example, most UK shares are traded on the London Stock Exchange. US-listed shares are traded on the New York Stock Exchange. Only certain people can buy and sell shares on exchanges, so most people trade shares via a stock broker. If you want to buy and sell shares, you’ll need to set up an account with a stock broker or through an online trading platform.
Similarly, you can also spread bet shares or trade share CFDs using an online trading platform. Numerous brokers provide spread betting and CFD trading accounts in the UK these days. You can use these accounts to speculate on shares.
Once you’ve opened an account, you’ll need to deposit enough money to cover your trade before taking a position on the shares that you want to trade.
If you think the price for a particular stock, say Apple for instance, is about to rise, you can go long or buy. If the price goes up as you had predicted, you would make a profit. If the price moves against you and goes down you would make a loss.
You could also speculate on falling share prices. If the price for Apple shares will fall, for instance, you can take a short position or sell. If the price falls as you had anticipated, you would make a profit, if your prediction was incorrect and the price rises, you would net a loss.
Spread bets and CFDs are both leveraged products. This means that you are able to get greater exposure to the share market by putting down a smaller amount of capital to place your trade. Leveraged trading could potentially result in bigger profits. It carries greater risks as well, however, as your losses could exceed your deposits if your trade goes against you.
If you own shares in a company you also have the right to receive dividends. These usually take the form of a cash payment. When a stock goes ex-dividend, the value of that stock effectively falls by the dividend amount. This means that if you hold a spread betting or CFD trading position in a company and that company announces a dividend, your account will be credited or debited on the day the stock goes ex-dividend.
There are some costs you should consider when buying and selling shares through an online broker. The main fees applicable to buying and selling shares are account fees and commissions. Online brokers will charge different account fees. For example, they may charge you a monthly, quarterly or annual account fee. Sometimes, fees may be waived if you make a minimum number of trades, or if your account is a certain size.
Typically, when you spread bet shares, an additional spread will be built into the price of the shares displayed on the trading platform. This will be applicable upon execution of any order. The additional spread is one of the costs associated with placing a spread bet on a share.
When trading share CFDs, a commission will be charged upon execution of any order. Minimum commission charges may apply. Commissions can be charged at a flat rate, or as a percentage.
An investment portfolio is a collection of assets held by an individual. Most portfolios are made up of shares, bonds, mutual funds and exchange traded funds (ETFs). However, they can also include cash, real estate and ‘hard’ assets such as gold. Generally they will contain a mixture of different asset classes.
The types of investments in a portfolio are usually chosen based on different risk-reward combinations. For example, low risk, low yield investments and high risk, high yield investments.
Different investments also have different types of income streams. These can include steady but fixed, or varied but with potential for growth. Investment professionals consider ‘diversification’ a key part of building a portfolio. This means having a range of different asset classes, as well as different types of risk-rewards and income streams. Investing in a range of asset classes in your portfolio helps to spread your risk.
The risks of share trading depend on your method of trading. If you are buying, holding or selling shares outright, then the most obvious risk is that the shares can depreciate in value. Small losses in value will often balance out over time, but it’s possible for share prices to crash, or for a company in which you own shares to go out of business.
Stock market crashes are also possible. For example, in 2008, the FTSE 100 nearly halved in value in just a few weeks. Instances like this are generally related to the overall economic outlook.
What you invest in can also have an impact on your overall risk. It’s important to diversify your portfolio. For example, if you invested in the shares of three different energy companies, you are limiting yourself to one sector. If anything impacts on the value of that sector, it’s likely all your shares would be affected. Traders often prefer, therefore, to invest across different sectors to prevent this from happening.
Established companies are also likely to be lower risk than new, unestablished start-ups. Although obviously this cannot be guaranteed.
If you are using derivative products such as spread bets or CFDs, then your risks will be slightly different. Spread bets and CFDs are leveraged products. This means you get greater market exposure with a smaller outlay of capital. However, profits and losses will both be based on the full value of any trade. It’s possible to lose more than your deposits.
Share trading is the buying and selling of stock with the aim of making a profit. There are two ways that traders can approach share trading. Either you buy, hold and sell shares outright through a ‘nominee’ account. Or, you can trade shares using derivative products such as spread bets or CFDs
The first approach can most accurately be described as investing. It’s a long-term approach, with the aim of generating profit over time. Using leveraged products such as spread bets and CFDs can be more accurately described as trading. You are attempting to profit from short-term fluctuations in market prices.
Inevitably, both of these methods involve risk. Ultimately, your investment goals will define your approach to trading shares.
CMC Markets is an execution-only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.
CMC Markets does not endorse or offer opinion on the trading strategies used by the author. Their trading strategies do not guarantee any return and CMC Markets shall not be held responsible for any loss that you may incur, either directly or indirectly, arising from any investment based on any information contained herein.
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