Shares: What are they and how to trade them?
Learn what shares represent, how stocks differ from shares, and their significance within trading. Explore the dynamic world of stock exchanges, where shares are bought and sold, and how they influence global financial markets. Delve into the process of an Initial Public Offering (IPO) to discover how companies make their debut in the public markets by offering shares to investors.
Summary
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Shares
When people refer to trading, they typically talk about trading shares of a company. This is one of the most traditional ways to trade the financial markets and is facilitated through what we call a stock exchange. But first, what is a share? And what is a stock?
A share, also known as equity, is a financial instrument that represents the ownership of a fraction of the issuing company.
For example, if I own Tesla stock then I am a partial owner of the company Tesla. The units of stock are called 'shares', these entitle the owner to a proportion of the corporation's profits and assets relative to how many shares they own.
We call the total value of a company's shares the market capitalisation; this number is equal to the market price per share multiplied by the number of outstanding shares. For example, company X has 2.5mn shares in issue and they trade at £0.72 or 72 pence. The company’s market capitalisation, or worth, is then £1.8mn (2.5mn * £0.72).
PRICE
The price of a stock will change based on various factors such as how profitable the company is, interest rate changes, the state of the country's economy in which the corporation is based, earnings announcements, dividend announcements, corporate actions such as a merger or acquisition. The main premise is that we can trade shares and if we can predict whether the price will go up or down, we can make money.
- Earnings and Profits: A company's financial performance, especially its earnings and profits, is a fundamental driver of stock prices. Positive earnings reports often lead to higher stock prices, while losses or missed expectations can lead to declines.
- Supply and Demand: The basic economic principle of supply and demand plays a crucial role. If there's high demand for a stock and limited supply, its price tends to rise. Conversely, if there's more supply than demand, the price may fall.
- Economic Indicators: Broader economic factors, such as GDP growth, unemployment rates, and inflation, can influence investor sentiment and impact stock prices. Strong economic indicators are generally associated with higher stock prices.
- Interest Rates: Central bank policies, including interest rate changes, can affect stock prices. Lower interest rates tend to make stocks more attractive, as they reduce the returns on fixed-income investments.
- Company News and Events: Corporate developments, such as product launches, mergers and acquisitions, or leadership changes, can influence stock prices. Positive news often leads to price increases.
- Market Sentiment: Investor sentiment and psychology can be a powerful driver of stock prices. Fear, greed, and market speculation can lead to rapid price movements.
- Political and Geopolitical Events: Political decisions, international relations, and geopolitical events can impact investor confidence and, consequently, stock prices.
EXAMPLE
In the below chart of Apple's share price, you can see bars (often called candlesticks) which represent the price movement on that day. Green candles mean the price moved up and closed out at a higher price than it started at the beginning of the day, and red candles mean the price moved down and closed out at a lower price. There are various types of charts however candlestick charts are the most commonly used.
Say we bought a share of Apple on the 15th of June for around 13,500 cents ($135) and held that share till the 18th of August when the price of an Apple share had increased to around 17,500 cents ($175). Should we decide to sell the share, we would make a $40 profit. If we were using a spread betting account, that percentage return would be multiplied because of what we call leverage. We go into this in further detail later in the course so do not worry if it is confusing, for now, you only need to understand the basic concept of trading!
Dividends
The management team of a company can do one of two things with its free cash. It can either reinvest it back into the company or it can return it to shareholders. The cash a company distributes back to its shareholders is called a dividend. Larger companies such as Apple, Google, Netflix, LinkedIn, and Meta generally offer larger dividends since they have a lot more free cash than smaller companies that want to use their limited cash to reinvest in growth. Typically, dividend issuing companies will do so each quarter of a year along with their earnings results.
As a trader the key date to look out for is the ex-dividend date or ex-date. If you hold a long position in a stock into the ex-date, then you are eligible to receive the dividend. If you buy a stock on or after the ex-date, then you will miss out. Although with spread betting and CFD trading you don’t own the underlying stock, all dividend adjustments are passed on. If you hold a long CFD or spread bet position on a stock going into the ex date, you will receive the dividend in the form of a cash credit on your account. Conversely, if you hold a short CFD or spread bet position, you will pay the dividend in the form of a cash debit on your account.
Should we not all buy the stock before the ex-date then and avoid shorts? Not quite, there’s no such thing as a free lunch. Since buyers aren't entitled to the next dividend payment on the ex-date, the stock will be priced lower by the amount of the dividend. So let’s say the share price of ABC corp closes the day before the ex date at 100p and is due to pay a 10p dividend. All things being equal, we would expect the share price to open at 90p. So if you’re long 1 share, you receive a 10p cash dividend but your P&L will be 10p worse off. If you’re short 1 share, you pay a 10p cash dividend but your P&L will be 10p better off. In other words, the movement in the share price and the dividend should net off.
Stock Exchanges
Stocks are traded on the stock market; this consists of a network of stock exchanges in which stocks and other financial instruments can be bought and sold. A stock exchange provides a platform where trading can be easily carried out by matching buyers and sellers of stocks. Examples of the most famous exchanges today are the London Stock Exchange (LSE) in the UK, the New York Stock Exchange (NYSE) and the NASDAQ in the US.
Stock exchanges are highly regulated to ensure fair transactions and processes, so much so only certain qualified individuals are allowed to trade on the exchanges directly. Investors or traders in the public need to go through a stockbroker who acts as an intermediary.
How Does a Company List on a Stock Exchange?
When a company lists on a stock exchange, we call it 'going public' because the company is no longer privately owned. Companies generally 'go public' to raise cash and to access a market where their shares can be traded. To do this they exchange a portion of their ownership of the business and offer it in what we call an initial public offering or otherwise known as an 'IPO'.
It will generally take 6-9 months for a company to complete its public debut if the IPO process is well organised.
When are Stock Exchanges Open?
At any time of day, you will find that at least one stock exchange is actively trading because of time-zone differences. Here are the different times stock markets are open based on UK time:
| Stock Exchange | Standard Opening Hours (UK Time) |
|---|---|
| London Stock Exchange | 8am – 4:30pm |
| New York Stock Exchange | 2:30pm – 9pm |
| NASDAQ | 2:30pm – 9pm |
| Euronext | 8am – 4:30pm |
| Shanghai Stock Exchange | 1:30am – 7:00am |
| Tokyo Stock Exchange | 12am – 6am |
Futures and Rolling Contracts
When trading stocks with Spreadex, there are two types of contracts to choose from: a rolling contract or a futures contract.
Rolling Contracts
If you open a position in a rolling contract, the position will roll over from day to day. Rolling contracts are good for short-term trading as they tend to offer the tightest spreads. Some people also enjoy that rolling markets have prices that closely align to the underlying market. Do note however that positions held overnight in rolling contracts will incur an overnight financing fee.
Futures Contracts
In contrast to Rolling Daily contracts, futures on shares are derivatives that track the performance of the underlying asset and have a specified expiration date. This market doesn’t exist on exchanges and is instead just a popular product that spread bet providers offer. You can close a futures trade at any time before the expiry of the contract. If you decide you would like to keep the position open beyond the expiry date, you can simply set your positions to roll automatically. Do note that you will incur the Spreadex spread when rolling futures contracts.
There is no charge for holding a shares future overnight, instead financing fees are factored into the price. This is why you’ll find that futures expiring later will have higher prices. That is, futures expiring later have more nights of finance charges factored into their price. A common question we get on shares futures is whether you lose out from closing the trade early since you’ve already paid for the financing in the price. The short answer is no you do not. If you close the trade early, you will be closing it at a higher price, so you are effectively getting back “unused” financing.
Some trades like that with shares futures all charges are factored into the price. If you buy at 100p and sell at 110p, you’ve made 10p after all charges. It’s easier to find your breakeven point if you like. It’s worthing noting that futures contracts do have a wider spread than rolling contracts and so are less suitable for short-term trading.
Rolling vs Futures
There’s no hard and fast rule as to which contract is better. It comes down to your preferences as a trader. Some traders like that the rolling contract has a price that more closely aligns with the underlying market. Others prefer that the breakeven point is easier to see with the futures. Given the rolling contract has a tighter spread, it tends to be the most cost effective for short term trading. Over the medium to long-term it depends on the movement of two things: the share price and interest rates.
The overnight financing fee applied daily to rolling positions will vary with the share price of the underlying and interest rates. The higher the share price, the larger the position, the more financing you will pay. The higher the interest rate, the more expensive is leverage, the more financing you will pay. In contrast, when you buy a shares future you lock in the financing at the time of purchase. If interest rates rise or the share price rises, your costs stay the same. So if you think the share price and/or interest rates will rise, it might be worth considering the futures contract.
Indices: What are they and how to trade them?
Stock market indices are a representation of the overall performance of a group of stocks within a specific market or sector. They provide a snapshot of how these stocks are collectively performing. Traders can use various financial instruments like index futures or exchange-traded funds (ETFs) to trade these indices.
