A beginners guide designed to answer what is share trading, and help decide whether investing or CFD trading is right for you.
There’s no getting around the fact that share trading can be a complicated, overwhelming venture. With so many different ways to trade and invest in the share market, this guide is not only about answering what is share trading, but also which avenue of market exposure is right for you.
The simple definition of share trading is that you’re buying and selling a portion, known as a share, in a company. These shares are then traded on a centralised exchange where you’re able to buy and sell at a market driven price.
This market driven price is determined purely by factors of supply and demand. Something that in many cases is driven purely by speculation on the future performance of the company.
If a company is expected to perform well over the near-term, then demand for shares will rise and the price will go up. On the other hand, if a company is expected to underperform, then demand for shares will dry up and the market may be flooded with supply, meaning the price will fall.
There are however, a number of ways to profit from the stock market through trading shares. One such method offered by Propex24 being through CFD trading (or contracts for difference), a synthetic instrument that allows you to make money without actually owning any shares at all.
Let’s start by going over the difference below.
Buying Shares v CFD Trading
We know that the basic premise of profiting from share trading is that you sell your shares for a higher price than you initially paid to purchase them.
There are however, a number of ways stock market exposure can be achieved. Let’s go over the difference between buying shares outright and trading them in the form of CFDs.
Buying Shares
Shares, sometimes referred to as stocks or equities, are used to describe purchasing ownership in a company.
As an owner, or shareholder in this regard, you’re entitled to vote on internal matters as well as to your share of the company’s earnings in the form of a dividend.
Trading CFDs
CFDs, or contracts for difference in full, are a synthetic product that enable you to speculate on the price of an underlying asset without ever actually taking ownership.
Brokers offer CFDs on a whole range of asset classes including individual shares, share market indices, forex, commodities and even cryptocurrency markets.
CFDs are traded on leverage, meaning you’re able to control a much larger position than you otherwise would by simply buying shares outright. Always keep in mind that while profits can be magnified using leverage, if the market goes against you, then losses are too.
Share Trader or Investor
Whether you’re a share trader or investor is determined by the period you intend to hold onto your shares or position in the market.
So now we understand the difference between buying shares and CFD trading, let’s go over how each asset class can be most effectively used.
Trader
A trader focuses purely on the short term. They look to profit from movements in price, often buying and selling multiple times over a short period of time.
While there are a plethora of different share trading strategies for buying/selling outright and trading CFDs, there is no right or wrong way to trade.
One defining factor of trading shares via CFDs is the fact that you’re able to short a stock. That is, you’re able to profit when the price falls as well as rises.
Investor
An investor on the other hand, focuses on the long term. Not only do they look to profit from a rise in price when they choose to sell, but they also benefit from dividend payments that shareholders receive.
Investors can hold their shares for years and even decades. Many choose to reinvest their dividend profits into more shares, building a large stock investment portfolio in the process.
Trading Share Market Indices
An alternative to buying and selling individual shares is trading share market indices.
Sometimes referred to as a stock market index, indices markets are some sort of market grouping which gives an overall stock market snapshot. Grouped by size or market segment, indices markets take their value from all combined prices of the underlying assets that make up the index.
Some popular share market indices markets that clients of Propex24 are able to trade via CFDs, include:
SPI200: The 200 largest publicly traded companies listed on the ASX.
S&P500: The 500 largest publicly traded companies in the US.
DAX30: The 30 largest publicly traded companies in Germany.
Using CFDs as a Hedge
One popular share trading strategy includes using CFDs as a hedge against falling prices in a market where you already own outright shares in a company. If you believe that the share price of a company you own is going to go down in the short-term, but you don’t want to sell your entire investment, then shorting a CFD is an option.
By shorting CFDs in that same market, you’re able to offset any short term losses in your share investment. Simply close out your shorts when you believe the short-term bearish trend has concluded.
Using CFDs as a hedge works well in highly volatile markets that experience price swings in an overall bullish trend.
Final Thoughts on Share Trading
As you can see, share trading is a complicated beast that can be attacked from numerous angles. The most important thing to remember is that there is no right or wrong when it comes to share trading.
You just have to figure out what works best for you and your own particular circumstances. Having compared buying shares and CFD trading, you’re hopefully now in a better place to decide which avenue that is.