The world of stocks and shares can appear to be very complicated to people who are unfamiliar with it. However, once you learn the ins and outs of the markets, you'll be in a position to confidently take part in trading and could boost your finances as a result.
There are many components to stocks and shares trading and it is important to learn about each of them to ensure you make the right choice. Here is an overview of the different ways you can trade with your cash.
One of the easiest ways to get into stocks and shares is spread betting. If you don't really know the best place to invest your cash, spread betting is a good way to find out how the markets work, as you don't actually have to buy the stocks yourself. Instead, you just bet on their price movement, which will give you an indication of what shares are doing well and which are not faring as favourably.
You trade on whether the market will go up or down in value and you can choose to bet on a variety of products, including commodities, the foreign exchange rate, equities and indices.
It works by putting a bet on whether the item will move in value. Therefore, if the market changes in your favour i.e. as you predicted, you will grow your money.
However, as with all trading, spread betting comes with risk to investors, as you can also lose multiples of your original bet if the product moves against you. In order to avoid making too much of a loss, you may be able to set a limit so you don't risk more money than you are willing to.
One way to make money by spread betting is known as 'going long'. This means to sell the instrument back at a higher fee to what you bought it for, as it has moved as you predicted in the market. Alternatively, you may think the item will drop in value. If this is the case you 'go short', selling it at a good price before buying it back later down the line at a lower cost.
An advantage of getting involved in spread betting is that it is free from capital gains tax, as you never become the owner of the instrument's shares. Therefore, this could really appeal to investors who do not want to reduce their profit by having to pay duty on their returns.
Contracts for difference
The alternative to spread betting is contracts for difference (CFDs). Like spread betting, you do not actually own the shares, which means you aren't limited by restrictions such as stamp duty.
CFDs works in a similar way to spread betting in that they enable you to trade on the change in a market's value. When looking to get started in CFDs, you'll notice that prices are quoted in sets of pairs. These are the selling and buying costs.
The spread is the difference between these two figures. Should you predict the value will increase, you trade at the buy price. However, if you think it will fall, you use the selling amount.
Another difference between CFDs and spread betting is that market margins vary by different amounts. With both products, you only have to put down a percentage of the overall value of the bet, with the market organisation depositing the rest. The margin is the proportion you have to put down and is very important when it comes to trading. This is because you'll be in a position to control a large investment even with a small deposit in some circumstances and the higher the margin of your trade, the greater the potential profits and losses.
You'll also notice a disparity in the amount of time trades run for between spread bets and CFDs. Therefore, you might find that you choose between them depending on how long you are keen to tie up your investments for. You may prefer to get your hands on a profit quickly - assuming you trade on the correct price movement. Alternatively, you might want to hold on to the leverage for a longer period of time and free up the returns in the future.