What is Share Trading?

Share trading refers to the buying and selling of company stocks with the intention of making a profit. Shares represent partial ownership of a company, and their price fluctuates based on the company's performance, market trends, and broader economic factors. Share trading can be an exciting way to grow your wealth, but it also comes with its own set of risks and rewards.

In simple terms, share trading involves purchasing stocks at a low price and selling them at a higher price to earn a profit. The value of these shares, also referred to as market capitalization, is determined by multiplying the number of outstanding shares by the current stock price.

Share trading remains one of the most popular ways to invest in financial markets due to its potential for high returns. However, there are multiple approaches to trading, and each trader may adopt a different strategy depending on their objectives and risk tolerance. Thanks to online trading platforms, traders now have more flexibility than ever before, allowing them to buy and sell shares from the comfort of their homes or on the go.

Types of Share Trading

Most share trading takes place on stock exchanges, where public companies list their shares. Traders can buy and sell these shares outright, taking direct ownership of company stock. In this scenario, traders typically open a nominee account, where a stockbroker executes trades on their behalf in exchange for a small fee. This type of share trading is ideal for those who wish to invest in stocks for the long term, profiting from price increases and potential dividend payouts.

Beyond stock exchanges, there are other options for investing in shares, such as exchange-traded funds (ETFs) and mutual funds. These funds allow investors to diversify their portfolios by pooling their money to invest in a wide range of companies across various sectors. Diversification helps reduce the risks associated with individual stocks by spreading investments across multiple assets.

Alternatively, traders can use derivatives, such as contracts for difference (CFDs), to trade shares. CFD trading is different from traditional share trading because it allows traders to speculate on the price movements of shares without owning the underlying asset. With CFDs, traders can take both long (buy) and short (sell) positions, allowing them to profit from both rising and falling markets.

Share Trading vs. Investing: What’s the Difference?

The primary difference between share trading and investing lies in the time horizon and risk profile.

• Investing focuses on the long term. Investors typically adopt a buy-and-hold approach, purchasing shares with the expectation of holding onto them for years or even decades. This allows them to build wealth gradually over time. Investors are more likely to focus on a company's fundamentals, such as its earnings, growth potential, and market position. Long-term investors are less concerned about daily market fluctuations and focus on the broader outlook.
• Trading, on the other hand, is a short-term activity. It involves frequently buying and selling shares to capitalize on short-term price movements. Day traders, for instance, may hold shares for only a few hours or minutes, aiming to profit from small changes in price. Share traders use technical analysis to study price trends, market data, and chart patterns to make quick trading decisions. Trading offers the potential for high returns, but it also carries higher risks due to the market’s volatility.

In summary, investors are looking for long-term gains and focus on the company’s fundamentals, while traders are focused on short-term profits and rely on technical analysis to predict price movements.

How to Buy and Sell Shares Online?

With the rise of online trading platforms, buying and selling shares has never been easier. Shares are traded on global stock exchanges, such as the London Stock Exchange (LSE) or the New York Stock Exchange (NYSE). While only certain professionals have direct access to these exchanges, everyday traders can use stockbrokers or online platforms to trade shares.

To start share trading online, follow these steps:

1. Set Up an Account: Open an account with a stockbroker or online trading platform. Many platforms now offer user-friendly interfaces, making it easy for beginners to get started.
2. Deposit Funds: Once your account is open, deposit money to fund your trades. Be sure to deposit enough to cover the cost of the shares you want to buy.
3. Place a Trade: Once you’ve chosen a stock, decide whether you expect the price to rise or fall. If you believe the price will rise, take a long position (buy). If you expect the price to fall, take a short position (sell).
4. Monitor Your Position: After placing a trade, track its performance. Platforms typically offer tools to help you manage your risk and set stop-loss orders, which automatically close a trade if the price moves against you.
5. Close Your Position: If your trade reaches your desired profit level (or hits your stop-loss), you can close the trade and take your profit (or loss).

With CFD trading, you are not buying the actual shares but are instead speculating on the price movements of those shares. CFDs are leveraged products, meaning you only need to put down a small percentage of the full trade value. This can magnify potential profits but also increases risk, as losses can exceed your initial capital.

What is an Investment Portfolio?

An investment portfolio is a collection of financial assets that an individual or institution holds. It can include shares, bonds, mutual funds, ETFs, cash, real estate, and other hard assets, such as gold. The primary purpose of building a portfolio is to diversify investments to reduce risk.

For example, a diversified portfolio may contain a mix of:

• Equities: Shares in various companies across different industries.
• Bonds: Debt securities that pay regular interest.
• ETFs: Funds that track the performance of a specific sector or index.
• Real Estate: Property investments.
• Cash: Holding a portion of your portfolio in cash for liquidity.

Diversification helps to spread risk by ensuring that a downturn in one sector or asset class doesn’t affect the entire portfolio. In other words, it’s like not putting all your eggs in one basket. A balanced portfolio includes a mix of high-risk, high-reward investments, such as stocks, and low-risk, low-reward investments, like bonds, which provide more stability.

Risks of Share Trading

Every investment carries some degree of risk, and share trading is no exception. The level of risk depends on your trading method and market conditions.

1. Market Risk: Stock prices can fluctuate for various reasons, including economic events, changes in interest rates, or political uncertainty. While long-term investors may ride out these fluctuations, traders face higher risks due to the short-term nature of their positions.
2. Liquidity Risk: Some stocks are harder to buy or sell quickly because they don’t have as many buyers or sellers in the market. This is known as liquidity risk. Low liquidity can make it difficult to execute trades at your desired price.
3. Company-Specific Risk: If you hold shares in a single company, you are exposed to risks specific to that company. For example, poor earnings reports, management scandals, or regulatory challenges can cause a company’s stock to plummet.
4. Leverage Risk: Leverage amplifies both gains and losses. While leveraged trading through CFDs allows traders to gain greater market exposure with less capital, it can also lead to significant losses. It’s possible to lose more than your initial deposit in leveraged trades.
5. Stock Market Crashes: Entire stock markets can experience sharp declines during periods of economic stress. For example, the 2008 financial crisis caused global stock markets to lose trillions of dollars in value. Even long-term investors can be affected by these crashes, though historically, markets tend to recover over time.

The Role of a Share Trading Platform

A good share trading platform is essential for modern traders. Platforms like CMC Markets offer a wealth of resources, including real-time market data, price charts, financial news, and in-depth reports from reputable sources.

These platforms provide access to global markets, allowing traders to buy and sell shares from various stock exchanges. They also offer technical analysis tools, which help traders make informed decisions based on historical price patterns and market trends.

Many platforms also offer the ability to trade share baskets, where traders can buy a collection of stocks grouped by industry or sector. This allows for a more diversified approach to share trading.

Summary

Share trading involves buying and selling company stocks in the hope of making a profit. There are two primary ways to engage in share trading: buying shares outright or trading through derivatives, such as CFDs.

• Buying shares outright allows you to take ownership of the stock and benefit from price appreciation and dividends.
• CFD trading enables you to speculate on price movements without owning the underlying asset. CFDs offer the advantage of going long or short, but they also come with higher risks due to leverage.

Building a well-diversified investment portfolio is essential for minimizing risk, and choosing the right share trading platform is crucial for executing trades efficiently.

Ultimately, whether you choose to invest for the long term or trade for short-term gains, your approach to share trading will depend on your financial goals and risk tolerance.