Shares

What are shares?

A share is a unit of ownership in a publicly traded company. Also called stocks or equities, shares are one of the most popular financial assets being traded today. Shares also allow their owners a share of any dividends declared by the company and voting rights.

How do I Trade in Shares?

There are a number of ways to trade in shares. Many people use a broker to purchase shares. However, directly purchasing shares means the trader must also follow applicable short sale and day trading rules, which can be onerous.

A sometimes-preferred way to trade in shares is through the use of contracts for difference (CFDs). These are contracts between two entities (usually the trader and the broker), in which the price difference in the underlying asset of the contract is paid out when the contract is closed. Trading in shares using CFDs avoids the restrictions of day trading and short sales that are common when buying actual shares.

Popular Shares

There are literally tens of thousands of shares that can be bought and sold. The most popular are often some of the largest and most popular companies in the world as well. So, among the technology companies Apple and Amazon, Microsoft and Facebook are all very popular among traders. Other popular shares include entertainment companies like Disney, retailers such as Wal-Mart and innovative firms like Tesla.

Trading Example

Suppose you’re interested in Apple shares because you believe the price of the shares will rise when the company releases their newest model of the iPhone.

You are going to use CFDs to make the trade so that you can buy and sell on the same day and not be affected by day trading rules.

Prior to the Apple event introducing the newest iPhone models, shares of Apple are trading at $120, but you think they will trade higher in response to the iPhone launch. You buy 10 CFD contracts to speculate on the price move. Each contract covers 100 shares of Apple, so your purchase puts you in control of 1,000 shares or $120,000 worth of Apple shares. Because your broker allows 20:1 leverage on share trades you only need to put up $6,000 for the trade.

If you were right and Apple shares rise to $130 after the iPhone launch you could collect $10,000 as a result ($10 x 1,000 shares). That’s a gain of more than 160% on your investment.

However, you could have been wrong as well, and rather than gaining you might see Apple shares drop to $110 for a loss of $10,000.

Shares Effect on the Indices Market

Indices are composed of individual shares, so it should come as no surprise that the price movements in shares can also have an impact on the indices they are a part of. The impact of the shares will depend on whether the index is capitalization weighted or price weighted.

In a capitalization weighted index, the representation of each company’s shares is based on the market capitalization of the company and its effect on the index is proportional to the market capitalization of the company. That means companies with massive market capitalizations will have the greatest effect on the index. Both the S&P 500 and the Nasdaq 100 are capitalization weighted indices.

In a price weighted index, the price of the stock determines its weighting in the index. In these types of indices, the higher priced stocks will have the greatest effect on the index.  One of the most popular price weighted indices is the Dow Jones Industrial Average, also called the Dow 30, or simply the Dow.

There are other methods for weighting indices, such as fundamental weighted and equal weighted, but the capitalization and price weighted averages are most common.

Benefits of Stocks Trading

There are a number of benefits to be gained from stocks trading. For one thing, stocks are an option to buy and sell, whether you buy the actual shares or if you decide to speculate on price changes using CFDs.

Stocks also tend to trend quite well based on the financial strength of the underlying company. This can make it very helpful to forecast price movements in stocks.

And since there are so many stocks to choose from there is never a lack of trading opportunities.

Disadvantages of Shares Trading

Just as leverage increases the potential gains in any shares CFD trade, it also increases the potential losses. This makes leverage a double-edged sword and both a benefit and a disadvantage when leverage is not used properly.

Another disadvantage, often not considered by aspiring shares CFD traders is the amount of research and knowledge required to successfully predict share market movements. The markets are very complex and it isn’t unusual for traders to get caught by geo-political risks they hadn’t considered.