What Are Shares?
Whether you are a trader or not, it is highly likely that you have encountered the words “stock” or “shares” in the past. They could have come up in the news as the reporters cover the highest-trading stocks or the stocks of the companies that have experienced losses, or you could have simply encountered them as you were binge-watching a big Hollywood blockbuster in which they mention Wall Street and the stock market. Either way, stocks or shares might not be foreign concepts to many people, but did you ever take the moment to think about what they actually mean, how they function, and more?
Stocks are the shares into which ownership of the company is divided. Those who own stocks are called stockholders or shareholders. The ownership of shares entitles stockholders to a fraction of the company's assets and earnings (proportional to the number of shares owned). Stocks are usually traded in stock markets.
Why Do Companies Issue Stocks?
Companies go public and issue stocks in order to raise money to invest in their business and help it grow.
Here are some of the reasons behind why companies might decide to issue shares:
- To reduce debt: when companies issue stocks, they are essentially avoiding the risk of handling debt on their own, this is because issuing shares to stakeholders acts as a quick money influx that would cover companies’ debts.
- Increase their accessibility to loans: companies that issue stocks can increase their ability to borrow loans in the future. This is because companies that get money from their stakeholders, concurrently decrease their need to ask for loans, thus increasing their chances to get loans in the long run.
- To fund expansion: big businesses can sell stocks to generate cash flow in order to fund their business expansion. When a business is attractive to many investors, the chances of it making profitable expansions from its shares are bigger.
Why Invest In Stocks?
Investors, on the other hand, buy stocks to try to make money and diversify their investments. This is because while investors pay a company money in order to buy its shares, the company grants them access to voting rights and a fraction of its profits. They invest in stocks because it renders many benefits which include:
- A strategy for staying ahead of inflation: historically, stocks have shown to be high-yielding, scoring annualized returns that are higher than inflation rates.
- Liquidity: stocks have relatively high liquidity. You can choose to turn your stocks into money relatively fast.
Nonetheless, investors should keep in mind that stock prices fluctuate, which means that the value of the company either increase or decrease. , hence it can also incur losses.
In order to trade shares, individual investors usually turn to brokers (nowadays it’s often an online broker) like Plus500 Invest, who can execute the trades on their behalf.
Trading Stock CFDs
In addition to investing in stocks, traders can also get exposure to shares through trading Stock Contracts for Difference (CFDs) with Plus500. As opposed to regular stock investing, Stock CFDs, do not give you ownership of shares. Instead, they are a way of speculating on the future direction of the underlying share price thus allowing traders to even trade in falling markets. CFDs allow you to settle for the price difference between the open and close rates. Trading CFDs on shares means that traders get access to leveraged trading which means that they can possibly increase their gains with an initially small capital, and they can get access to multiple and more diverse financial markets. However, it is also important to realize that trading CFDs comes with many risks; trading with leverage can magnify potential profits, but can also magnify potential losses as well. You can read more about CFD trading here.
Both contracts for difference and share trading offer ways to take advantage of price movements in financial markets, and both can form part of your portfolio.
What Is the Difference Between Trading Stock CFDs and Investing In Stocks?
In short, stock CFDs trading and investing are two different things. Whereas the former is usually done in hopes of making gains in the short-term, the latter is done by investors who hope to make gains in the longer run. Therefore, whether you want to invest in stocks or trade stocks CFDs depends on your goal and financial vision. You can read more about the differences between the two here.
Stocks are usually traded in stock exchanges, which provide a marketplace for buying and selling stocks. Stock exchanges track the supply and demand for the stocks of every corporation, from which the price of the particular shares are derived. These are the largest stock exchanges and their market capitalisation as of December 2021:
- New York Stock Exchange - 27.69 trillion U.S. dollars.
- NASDAQ Stock Exchange - 24.56 trillion U.S. dollars.
- Shanghai Stock Exchange - 8.15 trillion U.S. dollars.
- Euronext- 7.33 trillion U.S. dollars.
- Japan Exchange Group- 6.54 trillion U.S. dollars.
- Shenzhen Stock Exchange - 6.22 trillion U.S. dollars.
- Hong Kong Stock Exchange - 5.43 trillion U.S. dollars.
- London Stock Exchange - 3.8 trillion U.S. dollars.
Each exchange has its own list of requirements that corporations must adhere to in order to be listed there. The requirements are usually related to number of shares, market capitalisation and earnings over the past few years.
In order to choose where to list, companies take various factors into account, such as:
- Location of the corporation and the exchange.
- Type of exchange.
- Listing and compliance costs.
- Accounting policies to be followed.
The exchange where the stock is listed affects the trading hours of the particular stock. Most exchanges have a fixed schedule with particular opening and closing times, adapted to the local time. Some markets offer pre-market and after-hours trading as well.
Important Terms Used in Stock Trading
- Annual Report - Report that contains information about the company's management and financial situation.
- Ask - The price at which a seller is looking to sell his shares.
- Bear Market - Refers to the stock market being in a span of falling prices.
- Bid - The price that a buyer is willing to pay for a stock.
- Broker - Person who arranges transactions (buys of sell) in your name for a fee.
- Bull Market - Refers to the stock market being in a span of rising prices.
- Dividend - A portion of the earnings which is paid periodically by a corporation to its shareholders.
- Earnings Release - Quarterly statement that details the corporation's profits or losses.
- Exchange - The venue where trades take place.
- Initial Public Offering (IPO) - The first stock offering of a company to the public.
- Liquidity - Represents volumes available to buy or sell a stock.
- Portfolio - Collection of assets that a particular investor owns.
- Sector - Groups of stocks that are in the same industry.
- Spread - The difference between the buy and sell prices of a particular stock.
- Symbol - An abbreviation (usually one to four characters) that represents a particular stock in the market.
- Volatility - The speed at which the asset moves in any direction. The bigger and faster the stock swings, the more volatile - and riskier - it is.
- Volume - The amount of shares of a company traded in a particular time period.
How Can you Trade Stocks CFDs?
Plus500 offers an alternative way to trade Stocks, through Contracts for Difference (CFDs). This gives traders the ability to use leverage to speculate on price movements of leading companies without actually having to invest large sums in the underlying security. This will amplify any profits, but it also means that losses are amplified. With some CFD providers this may involve losing more than your initial deposit.
With CFD stock trading you can either open a BUY position or a SELL position, depending on whether you think the stock price will rise or fall. This gives you the possibility to profit on both rising or falling markets. However, it must be remembered that CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage.