Today we are going to look at the basics of stock trading and show you the different approaches that you can use when beginning to stock trade. This article will also explain why CFD trading and Spread betting are cost effective strategies when you compare them to traditional shares trading. We will also explain how these strategies can help you in maximizing your potential.
How does stock trading work?
The share price of a particular firm usually moves in three ways. One the share price may move up if the firm is performing well, or move down if the company is not performing well. The share price can also move sideways if the investors are not sure of the company’s performance in the future. To make a profit as a stock trader, you must have the ability to predict the right movement of the share price and select a company that will do well.
For instance, at the end of the month of December in 2000 Mark and Spencer’s company had a share price valued at 187p. An individual who invested 10,000p in Marks and Spencer got approximately 5,348 shares in the company. The price of a Mark and Spencer’s share had peaked to 759p on 27 April 2007. This means that the individuals who had 5,348 shares, which he had bought for 10,000p, were now worth 40,591.32. This means that the individual had made a profit of over 30,000p.
Timing when to sell the shares is very important. For example by 15 January 2008, the cost of the shares had dropped to 386.75p per share. If the individual did not sell the shares when the value of a single share was at 759p and sold them when the share value was at 386.75p, the value of the investor had gone down to 20,683. This is around half the value of what he would have gotten a mere 9 months earlier.
For a trader, knowing when to sell your stock is very important as knowing when to buy the shares. These are the main decisions that determine whether you are going to make a profit or a loss. Remember using the traditional share dealing, you are liable to pay your broker the total of the value of the shares you want to purchase. In this case, getting 5,348 from Mark and Spenser’s company in December 2000 would mean paying 10,000p upfront. You would also have to pay a small commission charge for the trade. The commission usually varies from one broker to the other.
Reasons to opt for spread betting and CDF trading alternatives offered by eToro index
The CDFs trading and the spread betting are attractive alternatives to physical share trading. These strategies allow the trader to take a position on the shares without having to pay the full amount upfront. eToro Index company allows you to only deposit a small percentage of the total value of the shares, maintaining the same level of exposure.
Lets us explain this using the Mark and Spencer’s example. Charging a margin rate of about 4 percent to the total value of the Mark and Spencer’s shares, a trader would need to deposit about (5,348x 187p x 0.04) which is equivalent to 400.03. Remember the 400.03 p will have the same exposure as the 10,000p. This will help you to have a much higher investment than you would have with the conventional trading. This would also mean that you would have greater potential returns when compared to your initial investment. However, if the prices do not go in the way you expected, it means that you will lose more than what you invested. This is why a trader you must have in place risk management plans if you would want to succeed in stock trading.
Here are some things you need to know when you trade CDFS or spread bet
You are not the actual owner of the shares as you would when you used the traditional stock strategies to purchase the shares. With spread betting, you simply speculate on the movement of the specific shares.
Since spread betting is a leveraged product, the losses and profits are magnified.
You can profit from both rising and falling markets- we will discuss this here below
How can you profit from both rising and falling markets?
Benefiting when the markets are rising or falling is one factor that makes the CDFs trading unique. This factor also gives a trader complete trading flexibility to take the advantage of the market movement regardless of it being up or down.
For instance, if you think that a certain share price will rise in the future, you can buy or go long. You will make a profit when there is an increase in price above your opening level. With this option, you will only lose when the price falls below your opening level.
On the other hand, if you think that the share price will go down, you can sell them or go short. This allows you to make a profit when the price falls below the opening level. Here you will lose if the prices go over the opening level.
For example, if you believe the current values of Facebook’s shares is overpriced and you believe that the price will fall in the future you can sell or go short the shares at a price of let’s say $76.50. You will make a profit when the share price decreases.
What you need to know about trading with eToro index- benefits
You will have the advantage of trading using the CFDs trading or spread betting, which lets you make profit when the market is either falling or rising. However, you must be aware of the risks involved.
With eToro Index, you will not pay any commission when spread betting
There is no stamp duty or capital gains tax
You can use the CFDs and Spread betting; you just need to come with a nice strategy
You have the advantage of accessing global shares with over ten thousands of markets to choose from