What is stock trading and how to trade stocks?
What are stocks?
Stocks are a type of security that represents ownership or equity interest in a company. In the world of finance, stocks are also known as shares or equities. Stock ownership may entitle stockholders to dividend payments or voting rights on a company's corporate policies.
The ownership of stocks is established on a per-share basis. Therefore, the owners are often referred to as shareholders or stockholders.
What is the difference between stocks and shares?
Are stocks and shares the same thing? It’s a fair question because many people tend to confuse stocks and shares. Although the two terms are often used interchangeably, there are some differences between them.
Buying shares basically means you own part of a company. The term stock is a more generic term and is commonly used to refer to a specific company. Here’s an example of how such a phrase would be typically used:
What is the stock market?
In simple terms, the stock market is a place where shares of publicly listed companies are traded. It’s where you trade the shares of top companies such as Meta, Amazon, Apple, Netflix, and Alphabet.
Each country has its own stock market; the United States, the United Kingdom, Australia, and other countries all have their own.
Leading exchanges in terms of proceeds worldwide include*:
- Nasdaq
- New York Stock Exchange
- Shanghai Stock Exchange
- Hong Kong Exchange
- London Stock Exchange
*Source: Statista.com
At its core, the stock market works in a really simple way: it lets buyers and sellers negotiate prices and make trades.
Companies will first list shares of their stock on an exchange. By doing so, they allow investors to purchase shares. This allows firms to raise funds to expand their operations while also improving their public image. Once the initial investors have bought their shares, they can trade them among themselves.
Exchanges, such as the Nasdaq or the New York Stock Exchange, keep track of the supply and demand of each listed stock.
Traders can only trade when the stock market is open. The stock market is usually open during the host country’s standard working hours.
For example, if you wanted to trade the US Stock market, their stock exchanges, such as the NASDAQ and NYSE, are open from 09:30 to 16:00 (Eastern Standard Time), which falls broadly within the country’s working hours.
What is stock trading?
Stock trading is a type of investment activity where individuals or institutions buy and sell stocks on various financial markets. It involves analysing market trends, company performance, and economic factors to make informed decisions about buying or selling stocks.
Owning stocks can come with benefits such as a claim on assets, the power to vote, and receiving dividends.
Differences between traditional stock trading and stock CFDs?
Both traditional stock trading and stock CFDs are trading options that provide exposure to stock price movements. However, there are some key differences between them.
With traditional stock trading, you take direct ownership of the assets, and you can only profit if the stock goes up in value from the moment you bought it.
With stock CFDs, you can go long (buy) or short (sell) and potentially benefit from either direction of the market.
Since stock CFDs are based on stock price movements rather than ownership, you have the flexibility to speculate whether the price will increase or decrease.
By combining CFDs with leverage, only a small percentage of the value of a trade is required to open the position. In contrast, investing directly in traditional stocks could require a lot more capital. However, note that when trading with leverage, you are subjected to margin requirements. If your total balance falls below the margin requirement, your positions will close automatically with a loss.
How does stock trading work?
When trading stock CFDs, you should consider a number of factors, such as regulation (verify that the broker is regulated in your county of residency), risk management, and fees.
First, you will need to pick a broker that offers stock CFDs. Look for a brokerage that offers a wide range of stocks across multiple markets and can ensure competitive and transparent fees.
Next, you’ll need to open a MetaTrader 4 (MT4) account so that you can use the trading platform to see all the different shares you can trade.
Once you’re done with this step, you can access the world of stock CFDs. Now you need to decide which stocks you want to add to your portfolio by either buying or selling.
To answer that question, you will have to analyse the stock price movements and see which ones present the best trading opportunities. To do this, there are two well-known methods of analysis available:
Applying a combination of these two methods can help you better drill down into short-term or long-term trading opportunities. With stock CFDs, you can trade in both directions: going long if you think the stock price is going to rise and going short if you think the stock price is going to drop. You would not have this flexibility if you owned the underlying asset.
Once you have narrowed down the stocks you want to trade, it’s time to set up the right risk management tools. As tempted as you may be to just dive into trading immediately, it’s important to realise that trading stock CFDs is risky, and without the necessary risk management tools in place, you stand to lose all your money.
Risk management entails evaluating the likelihood of your trades being correct or incorrect and allocating appropriate risk to them. Determine the lot size of your trade based on the distance between your stop loss and the amount of capital you are willing to risk losing.
At this stage, you would have ideally placed your first trade in the stock market. Most people tend to gravitate towards the US market, but you can also trade popular stocks in the UK as well as well-known European stocks. Diversifying your portfolio is important when you want to start trading stocks, yet stock diversification is often undervalued by traders.
Why trade stock CFDs?
Trading stock CFDs allows you to get involved with your favourite global companies by speculating on price movements.
1. Flexibility to go long and short
Trading stock CFDs offers flexibility and allows you to potentially profit from either market direction. You can go long (buy) when you expect prices to go up or go short (sell) when you expect prices to drop.
Traditional stock trading differs from CFD trading in that it derives value from ownership. When you own the underlying asset, the stock price must increase to make a profit - you can only trade in one direction.
2. Leverage
Stock CFDs allow you to trade on margin. This means you only need to put up a small percentage of the full value of a trade to open a position. Investing directly in traditional stocks could often require generous initial capital because you are paying the full price for every single share you are buying.
For most CFD brokers, a trader only needs to pay 5% of the full price of the share. In practice, this means you can enter a position that is 20 times larger with the same amount of capital when compared to traditional shares.
Stock CFDs are leveraged, meaning you can potentially make higher profits with a smaller amount of capital. While this can increase returns, it also increases the risk of loss.
3. FAANG: Top technology companies
FAANG is an acronym for the five largest companies in the technology sector of the US Stock Market. They are:
F - Facebook (FB)
A - Apple (AAPL)
A - Amazon (AMZN)
N - Netflix (NFLX)
G - Google (GOOG or GOOGL)
As well as being household names due to the nature of the services they provide, the FAANG stocks will be familiar to most people simply because of how large and profitable they are. But perhaps the most important thing for traders and investors is that they continue to have strong potential for growth.
US Stocks |
UK Stocks |
EU Stocks |
| Alibaba | Aviva | Adidas |
| Alphabet | BP | Airbus |
| Amazon | easyJet | BASF |
| Apple | HSBC | BNP Paribas |
| GSK | Daimler | |
| Microsoft | Lloyds | Deutsche Bank |
| Netflix | Rio Tinto | Kering |
| Pfizer | Rolls-Royce Holdings | LVMH |
| Tesla | Tesco | Sanofi |
| Walt Disney Co. | Vodafone | Siemens |
Advantages of trading stock CFDs
CFD trading gives you greater flexibility to open “buy” or “sell” trading positions on a wide range of global markets and potentially benefit from either rising or falling prices. Moreover, the use of leverage could amplify your exposure to the markets.
But what is the right trading method for you? See how stock CFD trading compares to traditional stock trading (investing).
Disadvantages of trading stock CFDs
Stock CFDs offer bigger exposure to the markets with the use of leverage, which could potentially amplify profits. However, leverage could also amplify losses. It is also important to remember that, unlike traditional trading, stock CFDs do not give you the option of stock ownership.
When trading with leverage, depending on the region you live in, you might also be subjected to margin requirements. If your total balance falls below the margin requirement, your positions will close automatically with a loss.
Stock CFDs |
Traditional stock trading |
| Use leverage | Pay full price |
| Multiple markets | Equities and ETFs |
| You don't own the underlying asset | Ownership of the underlying asset |
| Go short and benefit from falling prices | No option to benefit from falling prices |
| No shareholder privileges | Shareholder privileges and potential voting rights |
| Option to hedge your trades | Hedging requires the use of derivatives (options, futures, and inverse ETFs) |
Stock trading platforms and tools
With the use of the right platforms, tools, and plugins, traders can experience online stock trading in a way that is more intuitive, fast, and portable. When finding the right trading platform to trade stock CFDs, these are the ultimate tools to consider.
MetaTrader 4
MetaTrader 4 is an excellent option for online traders who are looking for a trading edge. It is simple to use and offers extensive functionality for pros, allowing you to access limitless trading opportunities.
AutoChartist
AutoChartist continuously scans the market for customised trade opportunities based on real-time pricing and your specific trade setups, then alerts you to potential trades.
Copy trading
Copy trading is a form of social trading that could provide a smart alternative to traditional trading. Copy trading is particularly useful if you need a break from market analysis, have little time to trade, or have trouble deciding what markets to trade.
5 risk management tools and tips
1. Use a stop-loss
A stop-loss is a predetermined level at which a trade automatically closes once the set price is reached. It's like a safety net if a trade goes against you, helping ensure a loss is not larger than you're comfortable with.
Keep in mind that stop-loss orders are subject to 'slippage', which is the gap between the requested and actual fill prices that can occur when market prices change too quickly. To protect yourself from slippage, you can use a limit order instead of a market order.
2. Use a take-profit
Want to secure your gains before the market gets a chance to reverse on you? Set a take-profit level, and when the market hits your desired level, your trade will automatically close and lock in your profit.
3. Use a trailing stop
A trailing stop is designed to limit losses AND lock in gains; think of it as being like a Stop Loss, with some added flexibility. It sits at a set distance from the current price and moves up and down with the market.
4. Adjust your lot size
Size matters in trading. The bigger the position, the greater the potential returns, BUT also the higher the risk. To help determine the right trade size, consider how much you would be willing to lose if the trade goes against you.
5. Use calculators
Use trading calculators to help set your trades.
Margin calculator: See how much margin is needed to open a position.
Profit/loss calculator: Helps estimate profits and losses and set stop-loss and take-profit levels.
Pip calculator: Estimates potential profits or losses based on pip movements.
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This information is not to be construed as a recommendation; or an offer to buy or sell; or the solicitation of an offer to buy or sell any security, financial product, or instrument; or to participate in any trading strategy. It has been prepared without taking your objectives, financial situation, or needs into account. Any references to past performance and forecasts are not reliable indicators of future results. Axi makes no representation and assumes no liability regarding the accuracy and completeness of the content in this publication. Readers should seek their own advice.
FAQ
Is trading stock CFDs safe?
All leveraged trading products, including stock CFDs, carry a degree of risk. We recommend using appropriate risk management strategies that suit your particular trading style and strategy. Axi offers a comprehensive range of educational resources to help you better understand risk in trading and ways to manage it.
When you buy stock CFDs, do you own the underlying asset?
No, you do not own any part of the underlying asset. When you trade stock CFDs, you are simply trading the price movements of the underlying asset.
Is stock CFD trading cheaper than traditional stock trading?
Stock CFD trading allows you to trade using leverage, which means you can speculate on the movement of stock prices with a smaller amount of capital than would normally be required to buy and take ownership of a physical share.
When trading with leverage, you are subjected to margin requirements. If your total balance falls below the margin requirement, your positions will close automatically with a loss.
How is trading the stock market different from trading forex?
The stock market is influenced by several factors when compared to forex trading. Stocks are particularly affected by news surrounding the underlying company's financial performance and trends in the broader world. For example, the stock price of the NVIDIA technology company rose strongly because of a rise in the popularity of Bitcoin, which required NVIDIA’s graphics cards to mine it.
How much money do I need to trade stock CFDs?
A common misconception is that it takes a lot of money to trade stock CFDs. While it is true that trading traditional shares can require a lot of capital - for example, with a capital of USD1,000, you can only buy 2 shares of Netflix priced at USD500 - the same cannot be said for stock CFDs. With the use of leverage, you can buy up to 40 shares of Netflix CFDs with the same amount of capital.
When trading CFDs, you might be subjected to overnight fees or swap charges. This means you will incur fees based on the length of time your positions are kept open. For more information on fees, refer to our Product Schedule.
What are the best US shares for less experienced traders?
Traders commonly ask what are the best stock CFDs. In general, it is most common to trade more popular stocks. This is because these stocks often have wide media coverage and large discussion forums dedicated to discussing their every move. This is a sort of self-regulating feature that prevents inaccurate and false information from deceiving investors.
What stocks are available to trade?
At Axi, we offer a wide range of stocks that represent many trading opportunities for our clients. Axi currently offers over 100+ stock CFDs across the UK, US, and European markets. For a complete overview of all stock CFDs and their active time zones, view our Product Schedule.
What are the costs of trading stock CFDs with Axi?
Axi charges no commission on stock CFD trades.
Fees are charged with a spread. To calculate the total spread cost, you can simply multiply the monetary value of the position per point by the spread. It’s important to note that CFD position sizes are based on contracts or lots, which means the calculation involves an extra step.
Please note that there may be fees for holding positions overnight. Overnight holding rates for stock CFDs are based on the underlying interbank rate for the currency of the relevant stock, plus 2.5% on buy positions and minus 2.5% on sell positions (exceptions may apply). For more details on fees, including trading hours, please refer to our Product Schedule.
