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Stocks, or equities, represent a symbol of ownership in a company.
The history of stock markets is long, colourful and, at times, somewhat blurred.
Some academics claim equities trading kicked off as far back as the late 17th century, though evidence also suggests stock trading begun with the Amsterdam Stock Exchange in 1602.
What are Stocks?
The stock market works by providing a platform that connects traders and investors so they can buy and sell financial assets.
Ultimately, two of the most common ways in which companies raise money are:
- Debt (or debt financing). Common types of debt instruments are corporate bonds.
- Capital (or equity capital). Companies issue stocks to raise capital – selling a piece of the company’s pie to investors.
Stocks (or shares / securities / equities) form part of the capital market and are an important fragment of any investor’s portfolio.
Investors invest in a company at the current stock price (or share price) to earn a return on their investment. Ultimately, it is the investor or trader who determines what a good investment is, though some who feel they lack knowledge may employ the skills of an investment advisor; this is particularly true for retirement accounts.
Particular stock commonly aired in financial news are often publicly-traded companies that trade on an exchange – think popular blue-chip companies such as Amazon (AMZN) and Apple (AAPL). The stocks held, the industries in which you invest and the duration you hold positions will depend on your age, risk tolerance and investment goals.
Throughout history, share trading occurred on trading floors – referred to as the pit. Even if you’ve never been to the famed trading pits, chances are you know what they look like, and thanks to Hollywood, sound like. Since the early ‘90s and 2000s, the arrival of electronic trading platforms largely displaced pit traders of old, along with its legendary form of communication: Open Outcry. In 1971, the Nasdaq stock exchange set out to establish the world’s first electronic stock market.
Trading Vs. Investing
Trading refers to the buying and selling of securities in order to seek short-term gains. Investing, on the other hand, adopts a longer-term approach. In between the short-term trader and investor, we have what’s known as a swing trader.
Short-term traders tend to focus on technical analysis to generate trading decisions, yet many include the economic calendar and earnings to help position themselves amidst high-impacting events. Although it will vary between different traders, short-term traders rarely hold positions longer than a few weeks. Day traders, however, as the name suggests, mostly liquidate positions before the day’s close (exchange close). This trading style, along with scalping, focuses on a number of different stocks, such as penny stocks and sometimes growth stocks. Yet, investors tend to concentrate on value stocks (think Warren Buffet here) and income stocks (this security generates a steady and stable income in the form of a dividend).
Investment strategies often focus on diversification across a number of asset classes (such as ETFs, mutual funds, index funds, real estate) and examine several elements before arriving at an investment decision. Investors often view markets from a fundamental perspective, but some will use technical analysis to determine entry.
Swing traders also use a combination of both fundamentals and technical, though for the most part, technical analysis is key.
How Equities Can Earn You Money
Making money in stocks has become popular among millennials, tired of the low interest rates offered in savings accounts. Online stock trading platforms actually witnessed a surge in demand as the COVID-19 pandemic struck in March with traders and investors attempting to take advantage of undervalued equities.
The Standard and Poor’s 500, or commonly referred to as the S&P 500, was introduced March 4th, 1957. Since then, the index has measured the overall performance of 500 large-cap US stocks and become synonymous with the US stock market (along with the Dow Jones Industrial Average), a leading benchmark investors use to gauge market sentiment and measure stock portfolio performance.
The annual return for the S&P is approximately 9-11 percent, with stocks generally outperforming bonds.
(Figure 1 Source: Macrotrends – annual percentage change of the S&P 500)
Traditional share dealing, for the most part, can earn profits either through dividends or capital gains, or both. Though the former mostly applies more to investors as they hold positions long term, dividends represent a payment that some companies provide to existing shareholders from the profits of that company – think of it as a reward for holding stock.
Traders, nonetheless, speculate short term, rarely receiving dividend payments. Day traders, in particular, attempt to buy low and sell high, feeding off market volatility and sentiment. This main goal is to capture sufficient profits on winning trades to cover losing trades. To consistently earn profits day trading, a solid trading plan is necessary, one with a back tested (and preferably forward tested) trading strategy and a risk and money management approach.
Individual Stock CFDs
Ultimately, CFDs are derivatives and are used for two things: to speculate on rising and falling prices and to hedge, a popular strategy to offset potential losses.
With share CFDs, together with other derivative products, such as futures and options, traders are able to freely buy and sell stocks as, unlike traditional share dealing, there is no ownership of the underlying shares – it’s simply an agreement between two parties.
Market speculation is where CFD share traders acquire the bulk of their profits, mostly through a technical-based trading strategy.
In addition to profits derived from price movement, dividend adjustments can generate returns. Holding a long position in share CFDs, before the ex-dividend date, entitles the holder to a payment equivalent to the amount of the dividend. The holder, in this case, receives a credit to their account. A short position in share CFDs, on the other hand, incurs a debit, essentially owing the equivalent of the dividend value.
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