What is share trading? An overview on what affects share price and how to start trading.
What are shares?
The words shares and stocks are used interchangeably in the financial landscape, but they have minor differences. Stock is a more generic term in finance, referring to a portion of ownership in one or several companies. For example, if you purchase 50 stocks, you are referring to 50 different companies. However, the term shares refer to the ownership of one particular company, such as Facebook or Amazon. When dealing with shares, it’s important to note the differences between share trading, otherwise referred to as stock trading, and share investing. We will discuss these differences later in this article.
What is share trading?
Online share trading vs. other trading types
There are risks associated with share trading, but many experts still find trading shares more attractive than forex trading. For those who don’t know, forex trading involves buying and selling currencies on the foreign exchange market. Forex trading aims to make a profit, but because of the market’s volatility, investors may prefer trading in the stock market as it often has more stable price patterns. This volatility is also why individuals prefer share trading over commodities trading. Additionally, forex trading requires investors to be more vigilant, always waiting to act on rapid market movements. This process isn’t always sustainable for beginner investors who don’t have access to multiple trading monitors 24/7.
What affects share trading and share prices?
Many factors can affect share trading and a company’s share price. A few to note include:
- Supply and demand
- Interest rates
- Investor sentiment
- Politics and current events
Supply and Demand
One of the main reasons stock prices change is supply and demand. When there is a disparity between supply and demand, a stock’s price automatically increases or decreases. For example, if there is a sudden scarcity of toilet paper and more people are trying to buy it, the price of toilet paper will go up. Likewise, if a company has produced impressive quarterly reports and there is a surge in interest in purchasing shares of the company, a shortage of shares will occur. When this happens, the company’s stock price will increase.
Interest rates also impact share trading. That is due to a trickle-down effect from the Federal Reserve, which can increase interest rates and cause the stock market to go down. Higher interest rates often incentivise individuals to sell their assets. However, if the Federal Reserve slashes interest rates, the stock market increases. In Europe, high interest rates and inflation can hold trading back and cause markets to drift into the red zone. That was the case in early February 2022, when the FTSE 100 ended the trading day down by more than 10 points.
It’s not just supply and demand or interest rates impacting share trading. Investors themselves play a role, depending on whether they are bearish or bullish about a particular market. For perspective, a bearish market refers to one where investors are concerned about risks, which causes stagnation and the share price to decrease. This type of trader has a lower-risk appetite. Conversely, a bullish market is one where individuals are investing confidently while taking risks, as they have a higher appetite for risk, which causes market demand and share prices to go up.
Politics and Current Events
Like all commodities, politics and current events can also impact share prices. Individuals should watch for terrorist attacks, civil war, and political turmoil. All of these factors can trigger market volatility and send stock prices plummeting.
Share trading vs. share investing
So, what is share trading, and how does it differ from share investing? That's a common question, but fortunately, the differences are easy to understand. People looking for short-term benefits favour share trading, and it involves the speculation of share price movements. With that said, there is often a higher risk associated with share trading, as share prices can increase or decrease in a brief space of time. Share investing involves buying stocks hoping to obtain long-term gains and is favoured by traders with a lower risk appetite.
Books To Read Before You Start Online Share Trading
When it comes to share trading, knowledge is power. One of the best ways to obtain this power is reading, a formula promoted by Warren Buffet and Charlie Munger. There are dozens of beneficial books to read before you start trading shares, including:
- The Intelligent Investor by Benjamin Graham
- Speaking of Warren Buffet, the CEO of Berkshire Hathaway called The Intelligent Investor one of the best books on trading ever written. The book focuses on value investing and how you can use fundamental analysis to purchase undervalued stocks. Components of fundamental analysis you will learn in this book include high dividend yields and low price-to-earnings ratios.
- Trading In The Zone by Mark Douglas
- Mark Douglas’ book is for individuals looking to understand why losses incur during trading and what behaviours contribute to this. Douglas also discusses common myths about how markets operate and move.
- Market Wizards by Jack Schwager
- Everyone loves a success story, and that’s what Market Wizards by Jack Schwager entails. The book is an anthology of interviews with some of the best traders in the world, including Richard Dennis and Bruce Kovner. In the book, these traders reveal the stories behind their biggest trades and what makes them stand out from the masses.
How do you start trading shares?
Now that you understand what share trading is and what it entails, how do you start? Luckily, the process is simple. Once you open a trading account, you can start online share trading, but there are a few things you will want to do before this. As discussed, reading as many stock market books and authoritative financial articles as possible will help you gather the information to begin this journey.
You will also want to study the basics of fundamental and technical analysis. Learning to analyse price charts will better prepare you for share price prediction. After you complete these steps and open a trading account, become familiar with the interface before making your first trade. Doing so will open you up to a world of free trading tools you can use to your advantage.
You should also familiarise yourself with the risks involved in online share trading. These risks include volatility and continuously changing market movements. Lastly, beginner to intermediate investors should be aware of any related fees associated with the share market. For instance, share trading involves loads and commissions. You will want to watch out for a front-end load, which is a fee charged when an individual purchases shares, and a back-end load, a fee charged when you sell shares. There are also commission fees paid to stockbrokers for using their services.
If you’re looking for more market insights on trading and what’s happening in the markets, you can follow this link. Keeping up to date with market news is crucial as it will better enable you to understand emerging price charts and market commentary. Additionally, if you don't want to get involved in share trading, know that other trading instruments are available. These instruments include CFDs on indices, commodities, and cryptocurrencies.
Not investment advice.
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