What is the stock market?

The stock market is a collection of public markets where the buying, selling, and distribution of shares of publicly-held companies occur.

So where does the buying and selling of stock occurs? This happens in what is commonly referred to as a stock exchange.

Most countries have their stock exchange but the largest and most traded exchanges are the NYSE (New York Stock Exchange) and the NASDAQ, both are located within the United States. Other major exchanges include the Tokyo Stock Exchange in Japan, the Shanghai Stock Exchange in China, and the London Stock Exchange in the UK.

Note: the terms stocks or shares, are often used interchangeably. There isn't a difference between stock and shares, they are the same thing.

Some of the features of the stock market

Dividends

Some companies pay their investors dividends for holding onto their shares, therefore, allowing investors to earn a passive income.

Easy access

Most brokers let traders open an account with as little as $5 dollars. You can fund your account with a credit or debit card as well as other methods.

Ownership

Purchasing shares in a company means you are an owner of that company, and therefore, gaining certain right owners have.

Increased leverage

Leverage involves borrowing money so that you can use a small investment to get a greater return. However, your risk is also increased.

Diversification

Stock traders/investors can diversify their investments by investing in different industries, or investing in stock indices such as the S&P 500.

Multi device trading

Most brokers allow trading on Mobile, Tablet, and Desktop. This allows traders to take advantage of the market whilst you are anywhere in the world.

Brokers

When trading stocks (or any financial instrument), brokers offer different ways of trading the instruments.

There are brokers that allows traders/investors to buy and sell actual stocks such as eToro. Then there are CFD brokers such as XM. A CFD or contract for difference is a derivative that allows traders to profit from the price movement, without actually owning the underlying asset.

If you are an investor then buying real stocks might be a better option as you receive the benefits for owning the shares. If you are a trader, then CFDs could be suitable, learn more on the Investing or Trading section. Click below to sign up to either a recommended real shares broker or a CFD broker.

Pros and cons of CFDs

Pros of CFDs

Pros

In the UK, traders of CFDs do not pay stamp duty. However, this is dependent on individual circumstances, please consult a tax advisor.

CFDs are a leveraged product which means traders will need less money to trade than if they were buying the actual underlying asset.

Cons of CFDs

Cons

You don't own the actual stock, so you won't receive any of the benefits of owning stock such as potential dividends, and voting rights.

Leveraged products can be a double edged sword, and you can lose more than your initial investment.

Learn more about the differences and similarities of Investing and Trading

Accessing the stock market

Open an account

Register with a broker and deposit the amount you wish to start trading.

Support

You will have access to a personal account manager who will provide you with support when you need.

Demo trading

If you never traded before or you are not in the position to start trading yet, you can open a demo account, this will allow you to trade without any risk.

Practise small

If you never traded before or you are not in the position to start trading yet, you can open a demo account, this will allow you to trade without any risk.

Some useful terms

Long means to buy a a company’s stock or asset. You would want to ‘go long’ when you are looking for prices to increase, or rise.

Short means to sell a company’s stock or asset. You would want to ‘go short’ when you are looking for prices to decrease, or fall.

The spread is the difference between the bid price (the price that a buyer is willing to pay) and the ask price (the price that a seller is willing to receive) of a security or asset. The spread is essentially the cost of your trading.

A stop loss order is an order placed with a broker to automatically close a position at a loss if the market goes in the opposite direction of your open order. Using a stop loss is a way to limit your risk and because you set the stop loss, you have control over your risk. A stop loss can be used for both long and short trades.

A take profit order is an order placed with a broker to automatically close a position in profit if the market reaches your desired profit level. Using a take profit rate helps you to control your trading as you don’t need to continuously observe your open position. A take profit can be used for both long and short trades.

Believing a market will rise or increase in value.

Believing a market will fall or decrease in value.

How to analyse stocks

The share prices of companies are analysed in a similar way to how currency pairs in the forex market are analysed.

Fundamental Analysis

This type of analysis involves studying macro factors such as the state of the economy, and micro factors such as company earnings.

Some events that can influence a currency's value include Earnings reports, Jobs reports, unemployment figures, GDP, Inflation, and elections.
To read more about Fundamental Analysis download a free ebook by clicking the button below.

Technical Analysis

This type of analysis involves using charts to identify trading opportunities in price trends and patterns.

Some technical indicators include: Relative Strength Index (RSI), Moving Average Convergence Divergence (MACD), and Moving Averages.
To read more about Technical Analysis download a free ebook by clicking the button below.

There is a third type of Analysis – Sentiment Analysis. This type of analysis involves studying the ‘feeling’ of the market. When a stock is falling in value it is said to have bearish sentiment, and when a stock is rising in value it is said to have bullish sentiment.

Many traders have their preference for analysis, and some would even go as far as to completely dismiss the validity of the others. This is not helpful, new traders should try to understand all types of analysis, and then decide what to apply when trading. It’s even possible to use more than one type of analysis whilst trading the markets.

Are you ready to open a demo account an practice what you have learnt? Then check out some of our recommended brokers, we only recommend regulated brokers so your money is in safe hands.

SHOULD YOU INVEST OR TRADE?

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