Types of shares and how to trade them: a comprehensive guide

Understanding the various types of shares and how to purchase them is fundamental for any trader or investor. This article will explore the different types of shares available in the market, guide you through buying shares, discuss their significance for traders, and answer some common questions. Whether you're a beginner or an experienced trader, this knowledge can help you make informed investment decisions.

Types of shares

Shares represent ownership in a company and come in various types, each with unique characteristics and rights:

1. Common shares: These are the most typical types of shares. Holders have voting rights and receive dividends, but dividends are not guaranteed, and they are last in line in case of liquidation.
2. Preferred shares: Preferred shareholders typically don't have voting rights, but they receive dividends before common shareholders and have a higher claim on assets during liquidation.
3. Cumulative preferred shares: If dividends are missed, they accumulate and must be paid out before common shareholders receive any.
4. Non-cumulative preferred shares: Missed dividends do not accumulate and are lost if not declared.
5. Convertible shares: These can be converted into a predetermined number of common shares.
6. Non-voting shares: These shares do not provide the shareholder with voting rights in the company's decisions.

How to buy shares in a company

Understanding the distinction between buying and trading shares is fundamental for investors and traders. While both involve the stock market, they cater to different financial goals and risk tolerance.

Buying shares: owning a part of a company

• Long-term investment: Buying shares is typically seen as a long-term investment. Investors purchase shares with the intention of holding them for an extended period, benefiting from the company's growth and dividends.
• Ownership rights: When you buy shares, you own a part of the company. This often includes voting rights and a share in the company's profits through dividends.

Process of buying shares:

1. Open a brokerage account: Choose a reputable broker and open an account. Consider fees, services, and platform usability.
2. Research: Conduct thorough research on the company whose shares you're interested in. Look at financial statements, market position, and growth potential.
3. Decide how many shares to buy: Determine how many shares you can afford and how they fit into your overall investment strategy.
4. Place an order: You can place different types of orders, like market orders (buy at the current price) or limit orders (buy at a specific price).
5. Monitor your investment: Regularly review your investment's performance and adjust your strategy as needed.

Trading shares: engaging with market movements

• Short-term strategy: Trading often involves a shorter time horizon. Traders buy and sell shares, or trade in share derivatives, to capitalize on market fluctuations.
• CFDs and Derivatives: Trading can involve instruments like Contracts for Difference (CFDs) or other derivatives, where traders speculate on the price movement of shares without owning them.
• Leverage and risks: Trading, especially with CFDs, often involves leverage, allowing traders to take larger positions. While this can amplify gains, it also increases the risk of losses.

Process of trading shares:

• Trading account: Open a trading account, often with a broker that offers CFDs and other derivatives.
• Market analysis: Engage in thorough market analysis to make informed trading decisions.
• Executing trades: Use trading strategies to buy (go long) or sell (go short) on shares or share derivatives.
• Risk management: Employ risk management techniques, including setting stop-loss orders and monitoring positions closely.

Differences between buying and trading shares

1. Ownership vs. speculation: Buying shares means owning a part of the company, while trading, especially with derivatives like CFDs, is about speculating on price movements without ownership.
2. Investment horizon: Buying is generally for long-term investment, whereas trading is suited for short-term strategies.
3. Risk and return profile: Owning shares offers potential dividends and capital appreciation but with lower liquidity. Trading, particularly with leverage, can lead to higher returns but also comes with increased risks.
4. Market approach: The approach to the market differs; buying shares requires analysis of the company's fundamentals, while trading focuses more on technical analysis and market trends.

Why is it important for traders?

Understanding and trading different types of shares is important for traders:

• Diversification: Different types of shares help in diversifying investment portfolios, and reducing risk.
• Income and growth potential: Preferred shares can offer regular income through dividends, while common shares often provide growth potential.
• Strategic investments: Knowledge of share types allows traders to make strategic investments based on their risk tolerance and investment goals.
• Market understanding: Understanding different shares provides deeper insights into market dynamics and company valuations.

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FAQs

Q: Can anyone buy shares of any company?

Generally, yes, if the company is publicly traded. However, some shares might have restrictions.

Q: What are the tax implications of buying shares?

When you buy and own shares, you may be subject to capital gains tax on any profits from selling the shares and taxes on dividends received. The specific tax implications depend on your country's tax laws and your personal financial situation.

Q: Can I buy shares in any company I want?

You can buy shares in any publicly traded company. However, some companies may have restrictions on who can buy their shares, especially if they are not listed on major stock exchanges.

Q: How much money do I need to start buying shares?

The amount of money needed varies depending on the share price of the company you're interested in and the minimum investment requirements of your brokerage. Some brokerages offer fractional shares, allowing you to start with a smaller investment.

Q: How do I choose between buying and trading shares?

The choice depends on your investment goals, risk tolerance, investment horizon, and interest in actively managing your investments. Buying is typically for long-term growth, while trading is for those who seek to profit from short-term market movements.

Q: Do all shares pay dividends?

Not all shares pay dividends. It depends on the company's dividend policy. Typically, well-established companies are more likely to pay dividends than startups or growth-focused companies.

Q: Can I buy shares internationally?

Yes, many brokerages offer the option to buy international shares. However, this might involve additional fees and currency exchange risks.

Q: What is the difference between blue-chip and penny stocks?

Blue-chip stocks are shares of large, well-established, and financially stable companies with a history of reliable performance. Penny stocks are low-priced shares of small companies and are generally considered more speculative and risky.