The chance to invest directly in individual companies has seen shares remain one of the best investment opportunities thanks to their potential for returns.
Having a pension or an investment ISA exposes you to shares, whether through a fund or company shares. But trading in shares can be less rewarding if dealing costs are too high eating off a large chunk of your investment returns. You can invest in shares on popular UK markets such as the FTSE100, FTSE250 and FTSE AIM 100.
CFD Share Trading
CFD trading is almost similar to traditional share trading. The main difference is it offers a more flexible alternative to traditional share dealing. It’s also riskier and you could lose more than your deposit. Another major difference with traditional share trading is that when you trade a contract for difference, you don’t own the underlying share. What you’re buying is a contract between yourself and the CFD provider.
Things to Consider
Leverage: It magnifies returns and losses in a similar fashion. Therefore you could lose more than your initial deposit.
Deposit requirements: You need to have sufficient funds in your account to cover the margin requirement. If your position begins to lose money, your broker may request you deposit additional funds (margin call). Failure to and your position may be closed.
Price movements: You stand to lose money if prices move against you unless you close or amend your position immediately.
No shareholder privileges: Since you don’t own the underlying asset, you cannot participate in AGMs or hold voting rights.
No stamp duty: CFD trading in the UK is currently free from stamp duty. Irish stocks charge 1% of the notional trade value which is refundable if you trade out within 30 days.
Go Long or Short: CFD trading allows you to take a position on the value of an asset whether it will increase or decrease. For example, if you predict Google’s share value is overpriced, you can take a position on it falling. If the price moves in the direction you’ve predicted, you make a profit, and Vis visa if it moves against your prediction.
Binary Stock trading
Binary stock trading doesn’t grant you part-ownership of the company – it’s a temporary contract which has another trader at the opposite end of your stock option trade. There’s always a winner and a loser. Such trades are attractive to traders with lower capital as they offer higher leverage than traditional stock trading.
Binary stock trading enables traders to predict if the price of a particular share will gain or lose price without having to buy the shares. You can predict the price will go up, and use a “call option” or you can predict the price will go down and place a “put option”. The amount of price movement is not a major factor in the amount of payout received. You either win or lose the trade with binary trading. No matter the size of your win, the payout is the same as squeaking a 1 pip win. As a result, regular binary options have the potential to profit will minimal market movement. For volatile markets, you can trade with expiry times as low as sixty seconds. Such a scenario enables traders to join and exit the trade for swift profits even when prices swing around in any direction.
Spread Betting Shares
Spread betting has the added advantage of tax-free profits. This means you don’t own the underlying instrument on which your spread bet is based, as your profits are free from capital gains tax. It’s also free from stamp duty and commissions, giving traders an advantage over more conventional forms of share trading. As a result, you can speculate on shares whether their prices are ascending or descending. This feature allows trading to be more flexible with trading strategies and potentially gain even when prices decline.
The Dynamics of Dealing
When spread betting, you bet a certain amount of money per point movement in the share price. A point is equal to one unit change in the share price. For UK companies it’s a 0.01-pound change and $0.01 for U.S stocks.
Trading fees: Unlike traditional share trading where a broker buys and sells on your behalf, the cost of dealing is inclusive of the spread.
Going short: It’s easier to go short on shares when spread betting in comparison to traditional trading. This is because you bet on the share price rather than physically buy or sell the shares themselves.
Leverage: Your outlay to take a position is much lower in spread betting as a spread bet uses leverage. But your potential loss will be similar whether you trade the underlying shares or place a spread bet on them. For example, if you place a bet equal to 100 GBP of shares, you would need to put up a margin payment of 5% or 5 pounds instead of the full amount. If the opposite happens and the share becomes worthless your maximum possible loss will be 100 GBP.
Pros and Cons of Stock Trading
Stock trading is an effective way to make money and build wealth. Despite its simple trading requirements, it can be tricky especially for novice traders. Here are some pros and cons of trading in shares.
- Huge returns: There’s high potential to make profits in the stock market. Smart investors buy shares at a lower price and then sell them when the price goes up
- Accessibility: Traders with enough capital can choose from the wide variety of company shares available in the market
- Electronic exchange: You can trade shares via an online platform, which is faster and cheaper than a brick and mortar stock exchange
- Liquidity: Stocks have greater liquidity unlike other types of securities. You can convert company stocks into cash with ease.
High risk: The risk of uncertainty involves a company going bankrupt, leaving you holding worthless shares.
Extra brokerage fees: Most brokerages’ offer a variety of services which come with higher commissions and additional fees for trading.
Losses: You can suffer big losses if the value of shares dips. Share prices can also be affected by factors such as natural disasters, negative news or profit warnings.
Before venturing into share trading, due diligence and research of both the company and industry are important. Remember that despite the potential gains, shares carry more risk than other investments options such as cash savings or bonds. Diversifying your portfolio can protect you from the ups and downs of the stock market.
Low margins and competitive spreads on a wide range of popular, global stocks
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