When an investor purchases a share of stock, they're investing directly in a company. In exchange for this investment, they're given a piece of ownership in that company. Stock traders buy and sell trillions of dollars of stocks every day on various stock exchanges throughout the world.
Despite a wide variety of investment opportunities available today, investors continue making the choice to purchase stocks for many reasons. Here are some of the biggest benefits of stock trading:
- Partial ownership means that investors are shareholders and can enjoy dividend payments.
- Stocks in volatile or new companies can provide enormous returns.
- Stocks in steady, established companies can provide good return with minimal risk.
- Stocks are a great way to diversify your portfolio if it's mostly in bonds and savings.
Below, you'll find all the information you need to get started trading stocks and making profits of your own.
Types of Stock
In general, there are three types of stock:
- Common stock. These are also known as ordinary shares or common shares, and grant an investor their proportion of dividends, earnings growth, and voting rights. Buying common stocks makes you a partial owner of a company. Class A types of common stock have voting rights, while Class B common stock does not.
- Preferred stock. During bankruptcy, holders of preferred stock are granted priority over the holders of common stock. However, preferred stockholders usually don't have any voting rights. Cumulative preferred stock means that a company's backlog of owed dividends must be paid in full at a later time, while non-cumulative preferred stock where dividends do not have to be repaid if they aren't declared.
- Unlisted stock. These are stocks that aren't listed on a major stock exchange, and they can be either preferred or common. Unlisted stock is purchased directly from a company, and is much riskier than buying stock from an exchange. Some investors do invest in unlisted stock despite the risks because they can offer incredibly high yields.
Other Important Concepts
When you're trading stocks, there are a lot of different things to take into mind. You need to know what kind of stock you're purchasing, and everything about the company you're investing in. This includes financials, market trends, valuation ratios, and recent news stories.
There are other important things you'll also need to keep in mind:
- How liquid is the stock? If you're purchasing a stock that doesn't get traded very often, you'll often be at the mercy of the market when you want to sell it. Usually, common stocks are highly liquid.
- What is the annual yield? Your dividend will be based on your annual yield, and is the payment you'll receive every year for owning stock. If you receive high dividends, you'll make money even if the stock's price stays stagnant.
- Does this stock fit into my portfolio? If you've invested in nothing but energy stocks, you might need to diversify a bit.
Trading Stocks Without Ownership
If you want to trade stocks without actually purchasing an ownership share in a company, you may do so by purchasing CFDs. CFDs, or contracts for difference, are sold by private trading firms as an agreement to pay the difference between a stock's buy and sell price. You may hold a CFD for as long or as short a period of time as you'd like.
CFDs do not come with ownership rights like dividends or voting rights, like many stocks do. They're popular among many traders, however, because of some distinct advantages that they offer:
- There aren't any brokerage fees for CFDs, usually you only have to pay a small spread.
- You can buy and sell short on assets rather than just investing in them.
- CFDs can be bought and sold on leverage, so you can own $10,000 worth of shares by only investing $1,000.
- Buying CFDs is simple and can be done completely online. You don't have to go through the process of buying through a brokerage or going to the NYSE.
If you're ready to get started buying and selling stocks using CFDs, make sure to create an account with us today. We offer the lowest spreads around and a free sophisticated trading platform to make stock trading easier than it's ever been!