Three Ways to Trade Stocks

 

If you're new to investing, then you probably wouldn't have heard of all the various ways that you can trade. It's relatively simple to open up a trading account that's linked to your current account and trade stocks and shares, but have you thought of the products that allow you to trade on leverage? While you should maintain a healthy balance in your stock portfolio with at least 80% stocks, you could use the other 20% to trade on leverage to make quicker gains and reduce your desire to make regular trades with stocks. To see three different ways to trade, take a read of this article.

Shares

If you're looking to 'invest', then you should be looking to put your money into stocks or other investment products for a period of five years or more. Publicly listed companies allow you to buy a portion of them (a share), which can be sold on a stock exchange. You will have to put up the full value of a share's capital in order to buy it, and the full value of is given to you when you sell it. It's important to think of the stock market as a long-term investment as opposed to trading on leverage, which is speculative. Making constant trades will send your trading fees sky high, and it's too difficult to predict the markets over the long term to make a lot of money through speculative trades. Even if you had a few earlier breaks, you should make sure you have a diverse portfolio that you're prepared to stick with over a period of years.

 

CFDs (Contract for Difference)
With a CFD, you sign a contract to hold either a long or short position on a share on margin/leverage. If you hold a long position, you're speculating that the share price will go up, while if you hold a short position, you believe it will go down. By signing a contract on margin, you don't technically own the shares you're buying. This means that CFDs are exempt from tax, and you don't have to put up the full amount of money to actually buy the share. For instance, if you wanted to buy 5,000 shares at £1 each, but only had £1,000 to pay, you could use that as a 10% deposit and then decide on your position. If you took a long position and the shares rose, then you'd stand to make more money much quicker than if you simply traded £1,000 for stocks. However, if you went short and the same thing happened, you could stand to lose your initial deposit, and perhaps more if the market continued to go against you. To prevent this from happening, you'd need to put down a stop loss. For more on CFD trading, take a look at CMC Markets.

 

Spread Betting
On a spread bet, you can take either a 'buy' or 'sell' bet on a stock or index. Spread betting providers give you two positions on a trade, which is known as a spread. For instance, if the value of the FTSE 100 was 5231, then their sell position might be 5230, while their buy position would be 5222 – the money they make is through this margin. You could place a bet by either buying or selling. If you bought at £10 per point and the next day the market advanced to 5300, then you'd stand to make £680. However, if the market went the other way, then you could stand to lose this much. Some people use spread betting as a way to 'hedge' their investments. An example of this would be if they had a FTSE 100 tracker fund which they feared would lose value, then they could sell the FTSE 100 on a spread bet. If it did indeed lose value, then their tracker's value would dip, but they would make money on the spread bet. If it didn't lose value, then their portfolio would be fine or increase, while they would lose the spread bet.

 

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