Trading in the stock market represents the process of buying and selling shares of companies listed on the stock exchange with the aim of benefiting from fluctuations in their prices, and as happens in all other types of investment and trading, it entails risks that the investor will be exposed to losses.
Let's take a deeper look at the concept of trading a stock: Traders usually aim to buy stocks at low prices, and then hold them for a certain period of time before selling them at higher prices. This is what distinguishes trading in stocks from stock investing, which involves buying and holding stocks for the long term .
When you decide to trade in shares, you will be faced with two main options: the first is to buy actual shares, while the second involves trading in derivatives linked to the underlying asset such as Contracts for Difference (CFDs) on shares with the aim of speculating on share price movements.
What is stock trading?
Do you want to know how to start trading stocks? Let's start with the basics.
Shares represent ownership stakes in a company that is publicly traded on the stock exchange. Usually, these shares are offered for public subscription, which means that companies issue their shares to the public first or, in another way, list their shares on the stock exchange with the aim of raising additional capital, besides what can be obtained from the owners company or bank financing.
Stock types
- Driving stocks: Large, financially stable companies are characterized by stable stock prices that tend to hold up during periods of market volatility.
- Growth stocks: These are stocks that are expected to grow their earnings at a rate above average in comparison to the market over the long term.
- Value stocks: These are stocks that trade at relatively low prices compared to the revenue, earnings, or dividends a company generates.
- Low Cost Shares: These are small-cap stocks that typically trade at less than £1 per share in the UK or under $5 per share in the US.
- Dividend shares: These are the shares that offer regular dividends to investors on a regular basis for each share they own. Growth-yielding stocks include those that pay a dividend that is greater than the usual average dividend yield.
Types of stock trading strategies
There are many different trading strategies that you can adopt based on your preferred approach to the market and the period you want to keep your positions open.
Trading strategy based on the news:
This strategy is based on trading based on economic news and announcements. This strategy requires a good understanding of market expectations and the ability to react quickly when news is released.
End of day trading strategy:
Some traders can take advantage of the end of the trading session as liquidity increases and potential stock price trends become apparent when the market closes. This strategy may require less time than others because it focuses on a specific part of the trading day which makes it suitable for beginners.
Swing Trading Strategy:
This strategy aims to take advantage of stock price fluctuations by buying stocks before they go up and sell them before they go down. Traders rely on technical analysis indicators to get buy and sell signals based on the timing of the price trend change.
Day trading strategy:
This strategy requires the opening and closing of positions during the same trading day, and often several positions are opened during the session and closed before the end of it, this avoids traders exposure to price fluctuations after market hours.
Trend trading strategy:
This strategy is based on analyzing price trends using technical analysis, and allows traders to identify price trends and trade accordingly.
Profit Focus Strategy:
Traders use this strategy to hold open positions for long periods, and it relies on fundamental data analysis of companies rather than technical analysis. This strategy may allow investors to double the investment in the long term and achieve sustainable returns.
The pros and cons of trading CFDs on stocks
CFD trading provides many advantages unlike buying and selling shares directly, as it requires a high share price to make a profit, CFDs give you the opportunity to speculate on the rise and fall of share prices, where you can trade in both rising and falling markets using CFDs, Thanks to the possibility of short-term sale.
CFDs can be used to hedge against risks in your existing portfolio. For example, if you own a portfolio of stocks in a particular sector and you expect a short-term decline in their prices, you can use CFDs to sell on margin and offset any potential losses.
In addition, CFD trading often does not entail any commissions, as the broker makes its profits from the price differences, which means that the trader's goal is to profit from changes in the prices of the assets.
CFDs can be traded using margin, which means that the trader needs to put only a small amount of the value of the transaction as initial capital and can borrow the rest from the broker, and this increases the trader’s ability to access a variety of assets and increase investment opportunities.
It should be noted that CFDs are leveraged products, which means that profits and losses can be greater than the original investment. For example, if the margin is 5%, you will only need to pay 5% of the transaction value as initial capital.