Know the difference between buying stocks and speculating on their prices
Before you open a stock position, you should understand the difference between how to buy a stock and how to trade its price movement. The main difference between the two methods is the time frame of holding the position and the method of making a profit.
buy stock
Traders buy shares outright in the hope that their prices will rise, and they can then sell them at a later time to make a profit. As such, they enforce the traditional rule of buying low and selling high - this is known as long buying. Traders can also open positions for longer periods of time in an effort to profit from stock price changes and dividend payments.
stock price speculation
Traders use derivatives that derive their value from the underlying market price. These do not require traders to own the shares, and while traders do not have shareholder rights or receive dividends, they can open positions to take advantage of low and high prices. Traders tend to hold short to medium term positions and focus on small movements in the market.
Develop a stock trading plan
A good trading plan is very useful for trading stocks or investing in stocks because it will determine exactly your goals, how much capital you have at your disposal, and how much risk you are willing to take.
The goal of a trading plan is to keep emotions out of your decisions and provide some structure when opening and closing positions.
Understand the risks and costs
When you own a stock, your risk is always limited to your initial outlay. If you were to invest $1000, you could lose $1,000 - even if the stock went to zero. You will also pay any fees for opening and closing positions. The high fees that some brokers charge investors can reduce any long-term gains.
With IG, you pay no commission for up to 10 US stock trades per month, while you only pay from £8 for UK stock trades.
The risks associated with trading vary greatly. CFDs use leverage, a feature that enables traders to open positions at a fraction of the initial price requested by the investor. While leverage increases your profits, it can also increase your losses.
Traders have tools to manage this risk, such as stop-loss orders, which allow them to set a specific point to close trades against them. Regular and trailing stops can be prone to slippage, when market volatility causes a discrepancy between the price you are asking for and the price your supplier can execute the trade at. However, you can protect yourself from price slippage by attaching a guaranteed stop loss order.
Unlike other service providers, IG does not charge any upfront fees for using a guaranteed breakout, but there is a small fee in the event of a stopover.
How to buy shares
Buying stocks means purchasing shares of ownership in a publicly traded company. As an owner of the stock, you are entitled to a portion of the company's profits and assets, and you may also have voting rights on certain company decisions.
The value of your stock may increase or decrease based on the performance of the company and the overall market. Speculating on stock prices, on the other hand, refers to buying or selling stocks with the expectation of making a profit from price changes rather than from dividends or the underlying performance of the company. Speculation can be based on various factors such as market trends, news, or rumors, and it often involves a higher level of risk.