Reviewed by Patrick Foot, Senior Financial Writer.
Investing vs share trading
Before we look at how to open your first shares position, we need to cover the two broad approaches to speculating on the stock market: physical share dealing, and online shares trading.
How investing works
Share dealing is the traditional method of investing in equities. You use a share dealing account, stocks and shares ISA or a SIPP to buy equities in their physical form, then hold your position over the long term.
How share trading works
In share trading, on the other hand, you never own the stocks you’re trading. Instead, you use derivatives such as CFDs and spread betting to speculate on share prices over the short, medium or long term.
Why trade instead of investing?
Now, you might be wondering why you’d want to trade shares without taking ownership of part of a company.
There are lots of reasons why CFDs and spread betting are popular. You can use them to buy and sell 1000s of markets, including indices, forex and commodities as well as stocks. Orders are usually executed instantaneously, and you’ll benefit from leverage.
But one of the key reasons why shares trading is so popular is the ability to go short as well as long, benefitting from falling as well as rising prices.
When asked what would happen to the stock market, famous US banker JP Morgan replied simply: ‘It will fluctuate’. While there may be trends in the market pushing prices in a certain direction, for the most part, prices in any given financial instrument will rise and fall at various points.
With a short position, you earn profit when a stock falls in price. It instantly doubles the opportunities you can trade.
And while it is possible to short sell with share dealing, the process is complex – involving borrowing stock, then selling it on – and comes with the risk of a short squeeze. With trading, shorting is just the opposite of buying. When you open a position, you’ll have option to go long or short. The choice is up to you.
How to trade shares online with City Index
We’ve mentioned two ways to trade shares: CFDs and spread betting. But what’s the difference between the two?
A contract for difference (CFD) is a form of trading that allows an investor to speculate on whether the value of a financial product will rise or fall by the time they close their contract. In many ways, it works similarly to share dealing – but you buy and sell contracts instead of shares.
For example, say you want to open a long position on Rolls Royce. Instead of buying Rolls Royce shares, you’d buy Rolls Royce CFDs. Buying one CFD gives you the same position as buying one share – buying 500 CFDs, meanwhile, is the same as buying 500 shares.
To go short, you sell contracts instead of buying them.
Spread betting on shares
Spread betting on shares is another way that people can benefit from the changing prices of stocks. As the name suggests, rather than buying the share in question, you’re placing a bet on whether you think the value of the share will go up or down.
Instead of buying 500 Rolls Royce shares, you could bet £5 per point that their price will rise. This will give the same result – you’ll make £5 for every penny that Rolls Royce rises, and lose £5 when it falls.
To go short, you bet that the company will fall instead of rising.
Train to trade shares
Before you dive into trading share CFDs, it’s always recommended to practise. City Index offers a free demo account so you can experience the markets and our platform. This is an excellent way to get a feel for trading in a risk-free environment.
How to start share trading
Now let’s examine the three broad steps you need to follow to start trading shares – researching the market, opening your first position and monitoring then closing your trade.
1. Research the stock market
One unique aspect of shares is the huge number of available markets. With a City Index account, for example, you can access 1,000s of stocks in the US, UK, Europe, Asia and beyond. This gives you far more opportunities than, say, commodities, indices or forex.
The sheer amount of choice can seem overwhelming at first. The best approach is usually to do as much research as possible: starting out with which country you want to focus on, then an industry, then choosing some stocks.
Most investors use fundamental analysis to calculate the inherent value of a stock, then trade if its market price is above or below that level. For example, if you think Apple stock is worth $160 but it’s priced at $150, you might open a buy position in the hope that the markets agree with your valuation.
Or for more information on how fundamental analysis works, head over to the City Index Academy.
2. Get ready to open your first position
Once you know your chosen market – and which way you’re going to trade – it’s time to open your position.
There are a few basics you’ll need to know at this point: buy and sell prices, commission, leverage and managing risk.
Share trading basics
Buy and sell prices
You’ll always see two prices listed for a shares market.
- The buy price (or ask) tells you how much you’ll pay to open a long position
- The sell price (or bid) tells you how much you’ll pay to open a short position
You don’t have to trade at the market’s current level, though. Using an order to open tells your trading provider to open a position when the market hits a price you specify. This can be useful if, say, you only want to buy a stock if its price drops down to a certain level.
Commission is how you’ll pay to open and close the majority of shares trades.
Commission can be calculated in different ways. Sometimes, for example, it’ll be a percentage of your position’s total value. Alternatively, you might pay a set rate for each share you buy or sell.
If you’re spread betting on shares, then you won’t pay any commission at all. Instead, all the costs to open and close your position are contained within the spread – the difference between the buy and sell prices.
Spread betting comes with some other useful benefits, too. It’s tax free, which means you won’t pay capital gains tax on your profits or stamp duty when you trade. Remember, though, that tax laws are subject to change.
Unlike share dealing, trading on shares gives you access to leverage. Leverage means that you don’t have to pay for the full value of your position. Instead, you just need a fraction of the trade’s total cost in your account, known as your margin.
Leverage enables you to act like an institutional investor without locking away all your funds on a single opportunity.
Returning to our Apple example, with share dealing you’d have to pay the full value of the shares you want to buy. If you have $1,500 in your account and Apple stock is priced at $150, you can buy 10 shares.
With share trading, you might only need 20% of your position’s value in your account as margin. So $1,500 could secure you 50 Apple CFDs – magnifying your position by five with the same amount of capital.
You’ll need enough margin in your account to keep your position open if Apple stock moves against you, though.
Leverage is a powerful tool, but it will increase your risk as well as your profits. Say, for instance, that Apple drops to $140 instead of rising. With share dealing, your loss is (10 x 10) $100. Because leverage has magnified your position by five, your loss when trading is five times greater: $500.
With this in mind, using risk management tools is hugely important. There are two that we’d recommend using on all your trades: stop losses and take profits.
These two types of order will automatically close your position. As the name suggests, stop losses will close it if it hits a certain level of loss, while take profits will secure you a return. Both offer useful ways to give your position an extra safety net.
3. Execute, monitor and close your position
To open your position, you simply set your direction (either buy to go long, or sell to go short), stake size (contracts for CFDs, bet size for spread betting) and hit ‘place trade’.
You can trade on our award-winning web platform or apps for Android and Apple devices. Whatever platform you choose, you’ll benefit from seamless execution and advanced features such as dealing from charts.
Monitoring a shares trade
Even though we’ve set stops and limits, it’s still a good idea to ensure that you’re keeping an eye on your open positions.
That doesn’t have to mean sitting at a desk and watching numbers move, though. You could, for example, set up automated alerts that tell you when your favoured markets are moving – then use our trading apps to adapt your strategy from anywhere.
If you have a position that’s nearing your profit target and you think it’s got further to run, you might even consider adjusting your stop and take profit. By moving your stop, you lock in profit without closing your trade, enabling you take advantage of running trends.
We wouldn’t recommend moving your stop when a market moves against you.
Closing your position
Finally, it’s time to close your position. Of course, if the market triggers your stop or limit, it will close automatically. But if you want to secure profits or cut losses early, you can manually exit.
To close a position, you trade in the opposite direction to how you opened it. In practice, this just means hitting the ‘close position’ button in the open positions tab. This will net off your exposure, and you’ll see you account balance updated instantly.
Ready to get started? Explore our full range of shares markets with a City Index account.
What moves stock prices?
Every company is different, and will have individual factors that could see its share price skyrocket or sink. But let’s examine three drivers of stock prices generally: the economy, earnings reports and interest rates.
Businesses tend to thrive in times of economic boom. Consumers have lots of ready cash to spend, industry is on the up and companies have the right conditions to send profits soaring.
Times of recession and austerity, on the other hand, can hurt stocks around the world. The 2008 crash, for example, saw stock markets write off years of growth in just a few months. Not only was overall public spending down, but investors were spooked – meaning demand for shares was at a low.
Almost every listed company has to release a regular earnings report that tells investors how it’s doing in terms of profits, revenues, costs and other key metrics. These releases give the markets the best insight into whether a company is primed for growth, or underperforming.
Analysts will tend to predict where they think a company’s earnings should land ahead of the report’s release. If the stock fails to match these expectations, its price may be in for a fall.
Companies need capital to grow, and they need consumers to be spending to earn profits. In the end, it is the base interest rate that determines whether they get either.
When interest rates are low, borrowing is cheap, so businesses can easily get the money they need to expand their operations. Savings accounts, on the other hand, will return little. What does this mean? That consumers are encouraged to get out and spend instead of hoarding cash.
Not only that, but investors are forced to look for returns in riskier places – like the stock market.
This is all beneficial for businesses, and can see stocks rise.
Ready to start trading shares? Open your City Index account today.