Want to get started trading stocks in the UK but not sure where to start or how to do so? Read ahead in this trading guide on stocks and shares trading and you will find information to help you get started. This article will cover stock trading methods, a step-by-step how-to guide on stock trading and an overview of where to trade stocks.
A stock market or stock exchange is a financial market in which company stocks are bought and sold. A stock market is usually more organised and regulated in comparison with other markets such as forex and cryptocurrencies. Additionally, the prices of stocks and shares in exchanges are determined by the organic forces of supply and demand, and are not determined by a broker or market maker.
Stock markets exist in major cities around the world. Some common exchanges include:
A stock market brings together buyers and sellers on one platform and enables them to negotiate prices and transfer ownership of stocks and shares. If a company is public, its stocks are freely traded on the stock market and the price is determined by supply and demand from investors. Stock traders aim to buy stocks at a low price with the hope that the share price will rise in the future so they can cash out on the price increases. However, it can be just as common for investors to lose money if the stock price falls.
Companies initially list shares of their company via a process referred to as an IPO (initial public offering). Here, a company’s shares are offered as they transition from a private to a public company. When investors buy upcoming IPO stock, the company can then raise capital and allocate this money towards growth opportunities in the market.
Stocks can be split into various categories to help organise the wider stock market. These can include:
For this section, we explore three of the most interesting and commonly mentioned stocks categories: growth stocks, value stocks and penny stocks.
A growth stock is a company stock that is suspected to experience growth that surpasses the market average. Therefore, it is a faster-growing company when compared with its competitors. These companies typically do not offer dividends due to the fact they often reinvest any earnings that accrue to expedite their growth. Pharmaceutical stocks are a good example of these growth stocks.
From a risk perspective, growth stocks are considered towards the higher-risk end of the scale. They are usually characterised by a medium sized market cap, lack of dividends and heavy investment into their growth. Therefore, they are considered a highly speculative investment in comparison with other investments, such as top stocks.
Growth stocks typically perform well during bull markets and are prevalent in sectors related to technology, especially within China tech. They are usually fuelled by their appetite for innovation, which provides them with a means to outperform industry rivals. However, the high potential of growth stocks can cause them to be overvalued due to the ‘hype’ that can surround the industry or company.
A value stock is a company stock that is undervalued when compared to its intrinsic value. Investors attempt to estimate a company’s intrinsic value by vigorously analysing a company’s fundamentals. Therefore, a value stock generally has a good price relative to the company’s success on paper. Value investors often buy value stocks as they can provide consistent dividend yields and stable growth forecasts.
The price of a value stock can be undervalued for several reasons, with some contributing to a better motive to buy than others. Perhaps the company has a low stock valuation as the industry is becoming less relevant, or it has seen bad press or tighter regulations. Given these reasons, there could be little future utility in purchasing a value stock.
However, investors often look for value stocks where they believe in the opposite of the above. That is, regulations loosening in the future, press coverage and public perception improving and the industry becoming more relevant. Beyond a company’s intrinsic value, a value investor should also look at macroeconomic drivers to forecast future growth opportunities.
A penny stock is a share that has a value worth below £1 in the UK or below $5 in the US. Their value is the only thing that characterises them against other stocks. When trading penny stocks, it is best to trade with care as they can be very volatile. However, if you pick the right penny stock, you can experience significant growth in comparison to larger stocks due to the low share price.
When trading shares, you can either buy the physical share or trade via a spread betting or CFD trading account. The main difference between the two is that with spread betting or CFD trading, you don’t own the underlying asset; instead, you trade on its price movements. However, you can still benefit if the market moves in your favour or make a loss when the market moves against you.
There are some differences between CFD trading accounts and a traditional share trading account. Some of these can include:
When spread betting shares, you will encounter some unique differences that spread betting has in comparison with CFD trading.
Basic trading knowledge indicates that the market value of a stock is determined by the supply and demand of that asset. Generally, prices increase if supply declines and/or demand grows. Conversely, prices decrease if the asset’s supply overshadows its demand.
This we know, but what factors can determine and influence a stock’s supply and demand in the first place?
Major stock exchanges require businesses to release information on their financial performance. This provides stocks and share traders with opportunities to predict market movements. If a company exceeds profit and/or revenue expectations, the share price is likely to increase in order to reflect the positive outlook of the company. However, the opposite can happen if a company misses targets or under-performs relative to its forecasts.
Marco-economic forces such as interest rates, inflation and GDP (gross domestic product) can cause shifts in the supply and demand of all industries. During bull markets, the profits of companies are generally increasing, which could cause an increase in demand, and thus, the stock’s price. In this situation, companies sometimes decide to perform a stock split and sell fractional shares, which are of a lower value and therefore more affordable for investors. Learn more about stock splits and fractional shares. Similarly, if the wider stock market is experiencing bearish movements, the profit of companies is likely to be generally decreasing, which can decrease stock demand, and thus, stock prices.
Trade wars, coups, legislation changes, strikes and other politically motivated events can cause major disruptions and changes in markets. For example, if legislation is about to loosen around a certain industry, it can cause stock prices to increase in companies operating in that industry as the new legislation could improve business profitability. Similarly, if a company is working in an industry that is closely related to political agendas, an event such as a trade war can cause a stock to decrease in price.
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