What is the purpose of buying or trading shares?
People who buy and trade stocks are a way to understand the global economy and the strength and growth of individual companies. Your decision about investing or trading stocks depends on whether your interest is long or short.
Why buy shares directly?
Investors buy stocks because it is a more successful - albeit riskier - way of generating long-term returns than holding cash. Over the past 100 years, UK stocks have been 4.99% above inflation on average per year, meaning the real value of the investment has doubled every 13 years. Your return is 4.99% more than that - about 7.5%.
Stock trading gives investors the option to only buy company stock - which usually means you'll only make a profit if the stock goes up in value, and if the stock price goes down, the investor loses money. However, it is possible to receive a dividend even if the company's stock price falls.
What is the purpose of trading stocks through CFDs?
Stock trading through derivatives is becoming more and more popular because it allows people to short sell and buy - giving you the potential to profit from markets where prices are falling, not just markets that are rising. This is because there is no need to own the underlying asset.
When you trade stocks through leveraged products like CFDs, you only need to put in a portion of the required capital, which is called margin. This is a big advantage of stock trading because it means that less capital is required to gain full exposure to the market. Leverage, although with great benefits, also comes with risks.
Risks of buying or trading stocks?
Share price to $0.
The risk of buying stock is that the company will struggle and face bankruptcy, or that the stock price will drop to zero. If this is an asset, then the amount of the amount that was put in the asset - however, this is the maximum steel, and it is sized when the shares are traded. For example, you invested $1000, this maximum which can be $1000 if the stock price goes down to $0.
For traders, the short-term risk of falling stock prices can be offset by a popular strategy known as hedging. Traders, in turn, can diversify their holdings by buying or speculating on exchange-traded funds (ETFs) - a basket of stocks that track price movements in the underlying market.
Leveraged stocks risk
The risks associated with trading stocks through CFDs vary widely depending on the leverage. When you trade on margin, your profits and losses are calculated based on the full value of your position and not the amount initially paid. This means that while your profits can be magnified, you can also magnify your losses.
However, there are tools that traders can use to manage these risks. For example, stop-loss tools allow traders to set their own closing points for trades that go against them, while limit orders close the trade after the market moves a certain amount in the trader's favour.
Also, if you decide to sell your shares - traditionally through a broker or using derivatives - you face limitless negative possibilities. Because in theory, there is no limit to how high a stock price can go.