A CFD, or Contract for Difference, is a type of financial
instrument that allows you to trade on the price movements of
stocks, regardless of whether prices are rising or falling. The
key advantage of a CFD is the opportunity to speculate on the
price movements of an asset (upwards or downwards) without
actually owning the underlying asset.
Stock trading has been a popular financial pursuit since stocks
were first introduced by the Dutch East India Company in the 17th
century. This is both an efficient and effective type of
investment for both families and individuals.
What Are Stocks?
Stocks, also commonly referred to as equities or shares, are
issued by a public corporation and put up for sale. Companies
originally used stocks as a way of raising additional capital, and
as a way to boost their business growth. When the company first
puts these stocks up for sale, this is called the Initial Public
Offering. Once this stage is complete, the shares themselves are
then sold on the stock market, which is where any stock trading
will occur.
People occasionally confuse buying shares with physically owning a
portion of that company as if this somehow gives them the right to
walk into the company offices and begin exerting their ownership
rights over computers or furniture. The law treats this type of
corporation in a unique way; as it is treated as a legal person,
the corporation, therefore, owns its own assets. This is referred
to as the separation of ownership and control.
The separation of these things is beneficial to both the
shareholders and the corporation because it limits the liability
for each party. For example, if a major shareholder were to go
bankrupt, they cannot then sell assets belonging to the
corporation to cover their debts and pay their creditors. This is
the same in reverse; if a corporation you own shares in goes
bankrupt and the judge orders them to sell all their assets, none
of your own personal assets are at risk.
One thing lies at the core of a stock’s value: it entitles
shareholders to a portion of the company profits.
How Do I Trade Stocks?
A stock market is where stocks are traded: where sellers and
buyers come to agree on a price. Historically, stock exchanges
existed in a physical location, and all transactions took place on
the trading floor. One of the world’s most famous stock markets is
the London Stock Exchange (LSE).
Yet as technology progresses, so does the stock market. Now we are
seeing the rise of virtual stock exchanges that are made up of
large computer networks will all trades performed electronically.
A company's shares can be traded on the stock market only
following its IPO, making this a secondary market. The large
businesses listed on global stock exchanges do not trade stocks on
a frequent basis. Stocks can only be purchased from an existing
shareholder, not directly from the company. This rule also applies
in reverse, so when selling your shares, they go to another
investor, not back to the corporation.
The reason traders choose to invest in stock is because the
perceived value of a company can vary greatly over time. Money can
be made or lost; it depends on whether the trader’s perceptions of
the stock value are in line with the market.
Trying to predict the price movements of stocks in the short term
is nearly impossible. Generally, stocks do tend to appreciate in
value in the long term, so many investors choose to have a diverse
portfolio of stocks that they intend to keep for a long time.
Bigger companies pay dividends to their shareholders, which is a
portion of the company’s profits. The value of the share itself
will not impact the dividend.
In order to trade stocks, there must be a seller and a buyer; as
not all traders have the same agenda, stocks are bought and sold
at different times and for different reasons. Someone may sell
their stock for profit, others sell it in order to cut losses, and
some because they believe the value of the stock is about to
change either way.
Stock Trading Risk Assessment
All forms of financial investment carry a level of risk, and stock
trading is no different. Even traders with decades of experience
cannot predict the correct price movements every single time.
People use various strategies, but it is important to note that
there is no such thing as a failsafe strategy. It is also
advisable to limit the amount of money you invest in a single
trade, as part of your own risk management.