Without shares there could be no stock markets, which are vital to every national economy. Find out how the shares trade enables companies to expand and develop, while providing sources of income to private investors and larger funds.
WHAT IS A SHARE?
A share is a unit of ownership in a company, which can be offered for sale to investors. The overall value of the company is divided up into units of equal size. Each unit is known as a share. To put this into context, if a company is worth $200 million and issues 100 million shares, each share is worth $2 – or 200 cents. As the value of the company fluctuates, so does its share price. So investors who buy shares in a company are hoping it will grow in value, enabling them to sell the shares at a higher price. Shares are also known as stocks. They are a type of asset or equity.
Spread betting or trading CFDs allows you to speculate on these fluctuations.
WHY DO COMPANIES OFFER SHARES?
By ‘floating’ their company on a stock exchange – allowing investors to buy shares and therefore own a portion of the business – the management are able to raise capital to put back into the company. If this money is applied wisely for expansion and improvement, it should boost the share price. So the company and its investors are heavily reliant upon each other.
Flotation is also a way for a business owner to realise a profit, particularly if they have built the company from scratch. The drawback is that they have to give up their sole control of the business, becoming answerable to shareholders.
WHY DO SHARE PRICES MOVE?
Share prices may stay fairly stable for months, or move rapidly. The amount a share fluctuates is known as its volatility. There are a number of factors that influence volatility:
- SUPPLY AND DEMAND
If more people want to buy a share than sell it, the price will rise because the share is more sought-after (in short, the ‘demand’ outstrips the ‘supply’). Conversely, if supply is greater than demand then the price will fall.
This is the profit a company makes. If the earnings are better than expected, the share price generally rises. If the earnings disappoint, the share price is likely to fall.
Perhaps the most complex and important factor in a share price. Share prices generally react most strongly to expectations of the company’s future performance. These expectations are built on any number of factors, such as upcoming industry legislation, public faith in the company’s management team, or the general health of the economy.
- BIDS AND OFFERS
In shares trading, the price you pay if you buy a share is called the offer price, and the price you receive if you sell the share is called the bid price. The offer price is always higher than the bid price, so it is the job of the stock exchange to facilitate buying and selling by coordinating these two prices. The difference between the bid and offer price is called the spread. The size of the spread is a fairly reliable measure of the liquidity of that share: the narrower the spread, the more liquid the share is likely to be. As prices constantly fluctuate, when you place a market order you might not know exactly what price you’ll pay or receive unless you place a specific stop or limit order.
WHAT ARE THE WAYS TO INVEST IN SHARES?
There are a number of different strategies you might use when investing in shares. You could:
- Look to invest in an INDIVIDUAL COMPANY that shows strong potential
- Track the performance of a SECTOR OR REGION by buying shares in related fields
- Use funds or trusts to build a BALANCED PORTFOLIO in a variety of businesses
Alternatively, you can trade on share prices using a derivative product such as CFDs, which enable you to trade on the full value of the underlying shares while only putting up a small percentage as margin.
Shares are traditionally considered a long-term investment; people tend to keep them for at least five or ten years. The share price is likely to fluctuate during this time and if the company fails, you could lose your initial investment.
Here are some of the ways you can trade shares or share derivatives:
You can trade Contracts for Difference (CFDs), which enable you to trade shares without taking on the cost of actually owning them. By trading on margin, you get considerable market exposure without tying up too much of your capital. With CFDs you agree to exchange the difference in share value at the time you open your position and the time you close it.
You can use your CFD trading account to deal on a range of other markets such as forex, indices and commodities, as well as shares. To find out how to trade shares as a CFD, please visit our how to trade CFDs section.
CFDs are a leveraged product and can result in losses that exceed your initial deposit.
SPREAD BETTING (IN UK ONLY)
In the UK, financial spread betting offers a tax-free way* to speculate on the price movement of a share or other markets like forex, indices and commodities. You can bet that the market will move in either direction, so you can profit on rising or falling prices. The product is leveraged, which means you can gain maximum exposure without having to put up the full value of your position.
Spread betting is a leveraged product and can result in losses that exceed your initial deposit. *Tax laws are subject to change and depend on individual circumstances. Tax law may differ in a jurisdiction other than the UK.
To buy or sell shares, you’ll need a stock broker to act as the middleman between you and the stock exchange. The role of the stock broker is essentially to buy and sell stocks on your behalf. Their exact involvement in your trading strategy depends on the level of service you require.
There are three main levels of service:
Role: Listen to your investment goals, create and execute a strategy to meet those goals.
Commission rate: High.
Role: Provide investment advice and recommend trades, but leave the final decision to you.
Commission rate: Medium.
Role: Simply carry out your instructions, without providing any investment advice. There’s a vast range of online brokers that offer an execution-only service.
Commission rate: Minimal.
With so many different stock broking firms, it’s important that you carefully choose the kind of broker you need. Consider your knowledge of the markets and the amount of time that you’re prepared to commit to watching your portfolio, as this will dictate the input you need from your broker.
Bear in mind that a single broker may offer various levels of service – an execution-only broker may offer advice for an extra premium, for example.
Futures contracts enable two parties to exchange a fixed quantity of shares (or other assets) at a specified future date, for a price agreed today. These trades allow owners of shares to lock in their price, thereby limiting their risk if the market moves against them in the specified time period. Speculators charge a fee to take on the other side of the deal.
WHAT YOU PAY TO DEAL SHARES
Buying shares outright is not leveraged: when you buy shares through a normal stock broker you’ll pay their full value, which is the extent of your exposure to the company’s performance.
On top of the offer price, there are typically some extra charges – click on the slideshow to find out what these are. If you choose to go through a broker, your fees are dependent on the level of service you’re looking for. At the top end, a full advisory service will involve a detailed assessment of your needs and existing investment portfolio, to allow the broker to make suitable recommendations. The broker may charge a fee for this, or take a higher commission rate.
At the other end of the scale, an execution-only service will simply carry out your trade without providing any advice. This service is much cheaper but you will need to do your own research.
Alternatively, you can trade shares as a CFD, where you’ll pay a commission of as little as 0.10% of the value of your trade. And as you’re trading on margin, you’ll initially only need to put up a portion of the total value of your trade.
Do bear in mind, though, that if the market moves against you, your risk is exactly the same as if you had bought the shares outright.
SHORT SELLING SHARES
Known as ‘going short’, this is the practice of selling shares in the hope of buying them back at a lower price. Traders use this method in an attempt to profit from an expected decline in the share price.
The idea is that you borrow the shares from a broker and sell them immediately, with a contractual obligation to buy identical shares back at a later date. You are hoping that the price of the shares falls, so you can buy them back more cheaply than the price at which you sold them and pocket the difference.
Short-selling is largely practised by professional traders, since many traditional stock brokers don’t offer the service to private investors. However, you can go short on shares via CFD trading, along with other derivative products such as futures and spread betting (in the UK).
EXAMPLE OF A LOSS-MAKING TRADE
Let’s say that shares in Prudential are trading at 1000p. Jonathan decides to borrow 100 shares of Prudential from a broker to sell them for a total of £1000. Soon afterwards, the price of the shares rises to 1200p. Jonathan decides to close out, by buying 100 shares of Prudential for £1200. Jonathan returns these shares to the lender, who now has the same number of shares as before, plus a fee for his service paid by Jonathan
Jonathan’s loss is the £200 difference between the price at which he sold the borrowed shares and the higher price at which he purchased the shares he returned, plus the fee he paid the broker
EXAMPLE OF A PROFIT-MAKING TRADE
Let’s say that shares in Prudential are trading at 1000p. Jonathan decides to borrow 100 shares of Prudential from a broker to sell them for a total of £1000. Soon afterwards, the price of the shares falls to 800p. Jonathan can now buy 100 shares of Prudential for £800. Jonathan returns these shares to the lender, who is content because he now has the same number of shares as before, plus a fee for his service paid by Jonathan
Jonathan keeps the £200 difference between the price at which he sold the borrowed shares and the lower price at which he was able to purchase the shares he returned. Of course, the fee he paid the broker is offset against his profit.
WHAT ARE THE OPENING AND CLOSING TIMES ON GLOBAL STOCK EXCHANGES FOR TRADING SHARES?
You can trade shares during the opening hours of their designated stock exchange. In the UK, for example, the buying and selling takes place between the trading hours of 8.00am and 4.30pm. However, a FTSE auction also takes place between 07.50am and 08.00am before the open, and again from 4.30pm to 4.35pm before the final closing values are taken.
Check the table for a list of opening and closing times on global stock exchanges.
|Australian Securities Exchange (ASX)||AEST (GMT+10)||10.00||16.10|
|Copenhagen Stock Exchange (CSE)||CST (GMT+1)||9.00||17.00|
|Euronext Amsterdam (AMS)||CET (GMT+1)||9.00||17.40|
|Euronext Paris (EPA)||CET (GMT+1)||9.00||17.30|
|Frankfurt Xetra (FSX)||CET (GMT+1)||9.00||17.30|
|Helsinki Stock Exchange (OMX)||EET (GMT+2)||10.00||18.30|
|Hong Kong Stock Exchange (HKEX)||HKT (GMT+8)||9.30||16.00|
|Irish Stock Exchange (ISE)||GMT||8.00||16.30|
|Johannesburg Securities Exchange (JSE)||CAT (GMT+2)||9.00||17.00|
|London Stock Exchange (LSE)||GMT||8.00||16.30|
|Milan Stock Exchange (MTA)||CET (GMT+1)||9.00||17.25|
|National Stock Exchange of India (NSE)||IST (GMT+5.5)||9.00||15.30|
|New York Stock Exchange (NYSE)||ET (GMT-5)||9.30||16.00|
|New Zealand Stock Market (NZSX)||NZST (GMT+12)||10.00||17.00|
|Oslo Stock Exchange||CET (GMT+1)||9.00||17.30|
|Shanghai Stock Exchange (SSE)||CSE (GMT+8)||9.30||15.00|
|Singapore Exchange (SGX)||SGT (GMT+8)||9.00||17.00|
|Spanish Stock Exchange (BME)||CET (GMT+1)||9.00||17.30|
|Stockholm Stock Exchange (OMX)||CET (GMT+1)||9.00||17.30|
|Swiss Stock Exchange||CET (GMT+1)||9.00||17.30|
|Toronto Stock Exchange||ET (GMT-5)||9.30||16.00|
|Tokyo Stock Exchange (TSE)||JST (GMT+9)||9.30||15.00|
|Vienna Stock Exchange||CET (GMT+1)||8.55||17.35|
WHAT IS A SHARE DIVIDEND?
Dividends are the portion of corporate profits that are allocated to shareholders. When a company makes a profit, the management chooses whether to put this back into the business or pay it to the shareholders as dividends. Most stable companies choose to strike a balance by reinvesting a percentage and paying the rest as a dividend, which may take the form of cash or stock.
Dividends can compensate for a share price that isn’t moving much, giving shareholders an income instead. Companies that are considered ‘high growth’ do not usually offer dividends as they reinvest profits to sustain their growth by expanding the business. The reward for shareholders in this case is a higher expected share price.
WHEN ARE DIVIDENDS PAID OUT?
Every time a company pays a dividend, it must be officially declared by the board of directors. Companies that pay out cash dividends will generally issue them half-yearly, although they may occasionally decide to pay a one-off special dividend. There are a few important dates to remember:
THE DIVIDEND DECLARATION DATE
This is the day on which the board of directors announces that a dividend will be paid.
THE RECORD DATE
This is when the company officially determines who their qualifying shareholders are (‘holders of record’).
THE EX-DIVIDEND DATE
Stock purchases can take some time to clear. To avoid any complications about ownership when the dividend is paid, the record date is preceded by a cut-off point (normally by two or three days). At this point you must own shares in the company in order to be listed as a shareholder and receive a dividend. This cut-off is known as the ex-dividend date. As a listed owner, once the ex-dividend date has passed you can sell the share and still receive the dividend.
THE PAYMENT DATE
This is the day the dividend is paid out to shareholders. A long time can elapse between the ex-dividend date and the payment date.
WHAT IS A CORPORATE ACTION?
A corporate action occurs when a publicly-traded company initiates a change to the business that will affect its shareholders, such as a merger, acquisition or share split. Any corporate action will normally need to be agreed by the company’s board of directors and authorised by its shareholders. A corporate action may have substantial implications for the company’s finances, including its share price and performance.
WHAT IS A SHARE DERIVATIVE?
Share derivatives are contracts which derive their value from the price of an underlying share – that is to say, a share that’s available to trade on a stock exchange in the traditional way. Derivative contracts are what are offered by CFD Trading brokers. Put simply, Contracts for Difference (CFDs) are an agreement to exchange the difference in value of a share (or other instrument) between the time your position is opened and the time it is closed.
So, when buying a share derivative you are paying to own a contract on the underlying share, rather than the share itself. There are many different types of derivative contracts, the most common of which are CFDs, futures and options.