Shares Trading: Introduction
This guide will enable beginners to get to grips with the basics of trading shares and spread betting. By the end of this guide you should be able to get started with placing your first trade. If you have already started trading then this guide will increase your knowledge and make you a better trader at the end.
First we will go through the basics of shares trading. The basics of share trading will show you exactly what shares are, how to pick which company’s shares to buy, things to consider when buying and how to actually buy the shares. After shares then we will go through spread betting which is very similar to buying shares but there are still a some differences. We will go through the introduction to spread betting, terms used in spread betting, some of the advantages and disadvantages, and how to go about spread betting.
We will start with shares…
What are Shares?
Many years ago, traders invested in the market by buying shares/stocks and then hoped that the market along with the underlying value of the stock and shares went up. There were not many choices for an average trader or a retail investor. After the introduction of various trading products which includes spread bets and CFDs, buying and selling can be performed as long as there is activity in the market. When an individual trades a spreadbet, it makes no difference whether the market is moving up or down, since the individual has the opportunity to profit from the markets.
In the modern world with so many different variants of buying and selling shares, and the different techniques used to buy and sell shares, it is easy to overlook exactly what are shares. With shares it is true that experience will help in being success, the more experienced you are the more chance you have of making money, provided we learn from our mistakes but one key part is always remember the basics. In today’s world in particular there is information overload, with shares it can get complicated and one of the ways of finding ourselves is going back to basics.
No matter which form you trades the fact is that you are trading one thing which are shares. Shares have a simple definition which is that when you buy a share of a company it means that you own part of that company. Let’s say for example that a company has issued 100 shares and you bought 1 of them then that means you would own 1% of the company. Of course this is a simple example, companies will issues millions and billions of shares so to get even 1% you would have to pay a lot of money for a lot of shares. The main thing is you get the idea.
So how is the price of one share calculated? The price of a share is calculated from the value of the company (market cap) which is divided by the number of shares that is in issue. The price movements in shares come from supply and demand. Supply is the number of shares that are in issue and how many people want to sell. Demand is the number of people that want to buy. Lets say the supply is low and the demand is high this means that the people don’t want to sell. The buyers need to tempt the sellers to sell buy offering a higher price until the sellers want to sell. When this keeps on happening then the price will go up. On the other hand when there are more sellers than buyers then the opposite happens. The sellers have to tempt the buyers to buy by lowering the price. This causes the price of shares to decrease.
The basics of shares are a simple concept, of course there are other items attached with shares but essentially this is how shares work.
How do I pick which shares to buy?
There are different methods of picking shares to buy, the most common are fundamentals analysis and technical analysis. With fundamentals analysis you require going through the company and understanding the companies strengths and weaknesses. This can be done through going through financial data which companies issuing shares have to publish. Usually companies also post this to their website. If you are buying shares then going through all the material on their website is a good idea anyway so you understand the company as much as possible.
Of course as a newbie this can be difficult so maybe signing up to newsletters, newspapers and visiting sites like JTrades can be helpful as it will show you shares that will be researched by someone else. Of course do your own research but going through someone else’s research will give you a second opinion. You can also use online services like ADVFN (Check out the trading tools page) to filter by fundamentals analysis data such as Market Cap and how much dividends they are paying.
Technical analysis is a much quicker method of picking shares as it involves picking shares by looking at buying, selling and price movement patterns over a period of time. By analyzing the data you should be able to forecast future price movements. The most common method of doing this is by analyzing charts. Breakouts are something chartists look out for which means that the price is about to move sharply in one direction which means big profits for traders.
Of course you can use both fundamentals analysis and technical analysis to make sure. One tip is that knowing when to sell shares is as important as knowing when to buy. The popular phase “buy low, sell high” should be applied and can only be applied if you know when to buy and when to sell. You should always determine a target price when you buy the shares and then sell at this price. You would only review the sell price when you are sure the price will continue to rise further, if you are not sure then selling is the best choice.
How to buy Shares?
The easiest way to buy shares is to open an online account with a share dealing service. Opening an account is not difficult and can be opened with a few hundred pounds. Once opened you can buy shares straight away. Check the trading tools page for different share dealing services. Prices for buying shares can vary, normally ranging from £5 – £15 but each share dealing service has its own unique features so you need to find the one that suits your preferences.
Share Buying Tips
So you have opened an account and are ready to start trading. Remember there is still a risk that you are going to lose money. The best way to start is to stake little money as possible so you can see if you are going in the right direction. The last thing that you want is to lose all your money and then realise your mistakes. At the beginning you are going to make mistakes, nobody learns to ride a bicycle without falling off at some stage. Learning from your mistakes is the best way to gain experience so make sure you have the money to trade with the experience you have gained and don’t blow all the cash while you are learning.
Yahoo and MSN have a virtual trading platform which allows you to practice your trades. You will be given virtual cash which is used to buy shares. This way you can get familiar with trading and test your strategy.
No matter how much experience you have you should always remain a student in trading. People practice trading with £10000 and quickly make it into £100000 and then when they trade for real they cannot make the same profits. The reason this is common is that when practising they are a student which means at the same time of executing their trading strategy they are learning the market. Now that person is trading for real. This person already knows the market so all they have to do is execute their strategy but this is the mistake because this person has stopped learning the market. Never stop learning the market for the pure reason that markets change. You need to know the market of today. The most successful traders I have seen is the ones who keep themselves as students because that way they are constantly changing the same way the market does. So that is 2 things you should keep learning, the first is keep learning the market and the next thing is keep learning from your mistakes.
Limits and Stop Losses
Use limits and stop losses when trading. Limits are normally used to sell shares when they have reached a certain price. Setting limits means that if your shares reach your target price then they will automatically be sold. If you buy shares in Shell at 1800p and set the limit at 2000p then they will be sold as soon as the price reaches 2000p. This is useful if the shareprice spikes and then falls as y0ur shares will be sold on the spike and of course you can choose to buy back when they fall. Stop Losses minimises your exposure to a share. By setting a stop loss when you buy a share you are telling the stock broker to sell if the share price falls to a certain price. Lets say for example you buy shares in Barclays at 200p and you set the stop loss at 160p. The next week the share price has fallen to 100p. If you had laid out £10000 you would be left with £5000 with a £5000 loss if you had not set the stop loss. With the stop loss set the loss is minimized as the stock broker would have automatically sold at the stop loss price of 160p. This means you have £8000 with £2000 loss instead of the £5000 loss you would of had without the stop loss. The stop loss has just saved you further losses.
What is Spread Betting
Spread betting is an alternative to buying shares. The principle is the same where you profit if the price goes up but there are some differences. With spread betting you are not actually buying shares you are speculating on the direction of the share price. There are certain advantages and disadvantages of spread betting. The first advantage of spread betting is that you can profit even if a share price goes down. Let say for example you know that Tesco is about to give a profit warning and the share price will take a tumble. With shares this would give you a loss and you would stay away from these shares but with spread betting you can open a position to say this share price will tumble. This is known as a short postition. Whereas if you were to say a share price will go open then you would open a long position.
Advantage and Disadvantages
The next advantage is that you are able to leverage the amount that you place on a share. For example, suppose you buy Marks and Spencer at £10 a point at 400p with a stop loss order at 350p then your risk is £500. Your total position is 10 x 400 = £4000. Your initial margin would be around £500 – £1000, this is dependent on the broker that you are with. With shares to set up a similar position would mean that you would have to have the full £4000 cash to place the trade.
Of course there are disadvantages. By leveraging the position you are essentially magnifying your profits. With the Marks and Spencer example even though the initial margin was £500 the profits gained would have been similar to buying £4000 of shares. So lets say the price went to 450p from 400p then by spread betting you have bagged a £500 profit (50p gain x £10 per point). If you bought £4000 of shares at 400p and sold at 450p then the profit would be £500. The difference is that the margin requirements are much less with spread betting. In the same way the losses are also magnified if the share price went the wrong way. In shares you cannot lose more than you stake, but in spread betting this is possible and means that you could lose more than you have initially put in.
Start Spread Betting
Just as with share dealing, spread betting requires opening an account. An account can be opened in minutes. Most spread betting services will give a joining incentive of some sort such as cash bonus or an account with a tipping service/newsletter. Check out the trading tools page for some spread betting services.