Three Methods of Trading Stocks
If you're new to stock trading, then getting to know the ins and outs of it takes time and patience. Understanding shares and how to trade them is relatively simple, and you could just leave it up to a fund manager to organize your portfolio. However, if you want to go a little bit further and trade yourself, then it's worth knowing about the other methods of trading stocks. If you're new to the world of investing and would like to find out the different ways to trade, then here are three common methods.
Stocks and Shares
Most investors, whether they be institutional or independents, invest in stocks and shares. Shares are simply a portion of a company that you can buy or sell on a stock exchange, and their value fluctuates according to how much the market judges their worth. It's important to think share trading is a long term method. Over a period of one year, market volatility can make it a risky alternative to cash, but over the long term, say over five or ten years, the stock market generally grows as the world economy continues to strengthen due to new developments. If you 'invest' in the short term, you're little more than speculating on the price of stocks; as an unprofessional individual investor, most of this will be down to chance. Investing in the long term with diversity does not put you at the mercy of the markets.
Contract for a Difference
With a Contract for a Difference (CFD) you sign a contract to hold either a long or short position on a share or other financial security on a margin. If you hold a long position, then you're predicting that the share price will go up, while if you hold a short position, you'll be anticipating that it will be going down. Because you'll be trading on margin, you don't technically own the shares that you'll be buying, and for this reason CFDs are exempt from the taxes normally associated with share trading. For example, if you were to buy 5,000 shares at £1, but only had £1,000 capital to buy, then you could choose to use your £1,000 as a 10% deposit and then decide on your position. If you took a long position and the shares rose in value, then you could make much more money in a shorter space of time than if you simply put up the money in stocks. However, you could stand to lose more if the markets moved against your position. Take a look at CMC Markets for more on CFD trading.
Spread Betting
With spread betting you place a 'buy' or 'sell' position on a stock index. Spread betting providers will provide two positions on each trade, known as the spread. For instance, if the real value of the FTSE was 5321 points, then their sell position might be 5320, while their buy position might be 5322 – the money they make is through this margin. You then place a bet on which way you think the market will go by either buying or selling. If you bought at £10 per point and the next day the market closed at 5400, then you'd have made £780. But if the market went the same the other way, then you could lose this much. Because of the risks involved, it's important that you don't devote your entire portfolio to spread betting. A maximum should really be under 20% of your portfolio's total value.
