What are Stocks?
Stocks are a way of investing in a company by buying an ownership stake in it. The more stocks (or shares), the greater your profit when the company appreciates in value.
Different Types of Stocks Explained
You can invest in companies and enjoy an ownership interest in those companies by buying stocks. The greater the number of stocks you own in a company, the bigger your ownership stake. When the company performs well financially, you can generate profits through your stock holdings.
Many folks ask the question, ‘What are stocks?’ There isn’t a quick and easy answer to this question, since there are tens of thousands of stocks listed on the financial markets. Stocks vary from company to company, and market to market. There are value stocks, tech stocks, pharmaceutical stocks, industrial stocks, retail stocks, automotive stocks, dividend stocks, et al.
You can buy stocks in any public listed company. These include Pfizer, Caterpillar, General Motors, Bank of America, British Petroleum, Apple Inc, Microsoft, Berkshire Hathaway, Walmart and many others. Stocks are divided up into industries and sectors.
Provided companies stick to the rules of the financial markets and regulators, they can create different kinds of stocks. There is common stock which confers ownership of a share in the company’s profits or losses, as well as voting rights. You may also earn dividends from common stock. Any trader or investor can buy common stock, provided you have the capital available.
There is also preferred stock with fixed dividends available to investors. There is less volatility with preferred stock. These stocks also generate consistent incomes for stockholders. The absence of voting rights with preferred stocks means that stockholders will not be held accountable for company failures. If a company goes into liquidation, preferred stockholders will be paid out first from the company’s assets. Only once preferred stockholders have been paid out (and if financials allow) will common stockholders receive payments.
Tips for Trading Stocks
Now that you have a good understanding of what stocks are all about, the next question is probably, ‘How to trade stocks?’ Fortunately, the presence of regulated brokers with cutting-edge trading platforms makes it easy to trade stocks online. Gone are the days when the only way to trade stocks was through institutional brokers in their ivory towers. The democratisation of stocks trading means that any registered trader with a reputable trading platform can buy/sell stocks online during market hours on the global exchanges. All that’s needed is an account with a trusted trading platform, a stable Internet connection, and a PC, Mac, or mobile device.
Trading stocks successfully requires knowledge. Read as much as you can about the financial markets. Important information can be gleaned from economic calendars, through interest rates, unemployment figures, inflation rates, GDP growth, and company financials. There is no shortcut to success when trading stocks. It’s all about conducting research, and then putting your knowledge to the test. Start with demo accounts, and when you’re confident you can trade for real money. Start with a stock that you’re familiar with, perhaps a product or a service that you use daily. As your understanding grows, you can expand your portfolio of stocks.
Remember to implement risk mitigation at all times. When trading stocks, stop loss and take profit orders should be worked into your daily routine. It’s always better to be safe than sorry.
Risks of Trading Stocks
Whenever you take your capital and invest in stocks, you risk losing your capital. This is one of the primary reasons why many people don’t invest in the stock market. Stock ownership does not guarantee profitable returns. If the company you are invested in performs poorly, stock prices could drop. Often, a seemingly stable company can generate mediocre performance. There are myriad reasons why stocks may stumble, including a pandemic, new technologies, geopolitical events, economic challenges, monetary and fiscal policy. Competitors can also enter the market and render a company’s products and services redundant.
A 100K investment could be whittled down to just 10K if you trade the wrong stocks, or fail to implement stop loss and take profit orders. There is an alternative solution in the form of stock CFDs a.k.a. share CFDs. Recall that CFDs are derivative instruments which do not confer ownership of the actual stock in question. You’re simply trading a contract that mirrors the price performance of the underlying stock. Therefore, you can trade share CFDs in rising and falling markets. The trick is knowing which way stock prices are likely to move when buying (going long) or selling (going short) share CFDs.
These leveraged financial instruments come with increased risk. Since only a portion of your capital is needed to open a much larger trade size, there is naturally more volatility at play. On the plus side, you can generate outsized returns when trades finish in the money. But the risks are also magnified when trading leveraged instruments. Consider what happened to worldwide travel and leisure stocks with the advent of COVID-19. Boeing, Airbus, Marriott, cruise ship stocks, and scores of others lost a fortune.
Negative balance protection with CFD stocks is offered by preferred brokers to protect clients against outsized losses. As a new trader or investor, you may be prone to putting all your eggs into one basket. By investing in a concentrated portfolio of stocks in a specific industry or sector, it is possible to boom or bust depending on market movements. It’s better to diversify your financial portfolio across multiple sectors, categories, and industries to mitigate against downside movements.