A share is a unit of ownership in a publicly traded company. Also called stocks or equities, stocks are one of the most popular financial assets being traded today. Stocks also allow their owners a share of any dividends declared by the company and voting rights.
There are a number of ways to trade in stocks. Many people use a broker to purchase stocks. However, directly purchasing stocks means the trader must also follow applicable short sale and day trading rules, which can be onerous. A sometimes-preferred way to trade in stocks is through the use of contracts for difference (CFDs). These are contracts between two entities (usually the trader and the broker), in which the price difference in the underlying asset of the contract is paid out when the contract is closed. Trading in stocks using CFDs avoids the restrictions of day trading and short sales that are common when buying actual stocks.
There are literally tens of thousands of stocks that can be bought and sold. The most popular are often some of the largest and most popular companies in the world as well. So, among the technology companies Apple and Amazon, Microsoft and Facebook are all very popular among traders. Other popular stocks include entertainment companies like Disney, retailers such as Wal-Mart and innovative firms like Tesla.
Indices are composed of individual stocks, so it should come as no surprise that the price movements in stocks can also have an impact on the indices they are a part of. The impact of the stocks will depend on whether the index is capitalization weighted or price weighted. In a capitalization weighted index, the representation of each company’s stocks is based on the market capitalization of the company and its effect on the index is proportional to the market capitalization of the company. That means companies with massive market capitalizations will have the greatest effect on the index. Both the S&P 500 and the Nasdaq 100 are capitalization weighted indices. In a price weighted index, the price of the stock determines its weighting in the index. In these types of indices, the higher priced stocks will have the greatest effect on the index. One of the most popular price weighted indices is the Dow Jones Industrial Average, also called the Dow 30, or simply the Dow. There are other methods for weighting indices, such as fundamental weighted and equal weighted, but the capitalization and price weighted averages are most common.
There are a number of benefits to be gained from stocks trading. For one thing, stocks are an option to buy and sell, whether you buy the actual stocks or if you decide to speculate on price changes using CFDs. Stocks also tend to trend quite well based on the financial strength of the underlying company. This can make it very helpful to forecast price movements in stocks. And since there are so many stocks to choose from there is never a lack of trading opportunities.
Just as leverage increases the potential gains in any stocks CFD trade, it also increases the potential losses. This makes leverage a double-edged sword and both a benefit and a disadvantage when leverage is not used properly. Another disadvantage, often not considered by aspiring stocks CFD traders is the amount of research and knowledge required to successfully predict share market movements. The markets are very complex and it isn’t unusual for traders to get caught by geo-political risks they hadn’t considered.
