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Trading in financial markets involves significant risk of loss which can exceed deposits and may not be suitable for all investors.
Before trading, please ensure that you fully understand the risks involved
Trading in financial markets involves significant risk of loss which can exceed deposits and may not be suitable for all investors. Before trading, please ensure that you fully understand the risks involved

What is share trading?

Share trading is the buying and selling of company stock with the aim of making a profit. Find out more in our share trading guide here.

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 capitalization, 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. You can make money trading stocks from home and on-the-go with the flexible and easy to use online trading platform.

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 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 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.

What is the difference between investing and trading?

The main differences between stock trading vs investing in shares 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, known as position trading. The idea is to gradually build up wealth over a longer period of time, which is generated through buying and taking ownership of shares.

Investors will generally research a company's fundamentals before buying shares, which is commonly used when investing into rising companies during a specific period of time, such as water stocks and pharmaceutical stocks. 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.

Trading, on the other hand, focuses on the short term. It involves the frequent buying and selling of shares. 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 short-term strategies called 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 technical analysis tools. Numerous trading platforms these days offer technical analysis tools to help you refine your share trading strategy.

How to buy and sell shares online?

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 stockbroker. If you want to buy and sell shares, you’ll need to set up an account with a stockbroker or through an online trading platform.

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.

CFDs are 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 you could lose all of your capital 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 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.

What is an investment portfolio?

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.

Risks of share trading

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 CFDs, then your risks will be slightly different. 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 all of your capital.

Share trading platform

The CMC markets NG trading platform, has an abundance of market data, price charts and graphs, and financial reports from reputable sources all over the world, making it a favorable share trading platform. It also offers share basket trading on a number of stock clusters.

Summary

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 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 CFDs can be more accurately described as trading. You are attempting to profit from short-term fluctuations in market prices.

Inevitably, CFDs involve risk. Ultimately, your investment goals will define your approach to trading shares.

When share trading via CFD trading you have the option to trade both sides of the market.

Source: CMC Markets UK

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