Share trading, allows you to narrowly define your view, and take a position in an individual stock, as opposed to a more broad-based index. When you invest in shares, the risk is limited to the change in the price of an individual stock, where the upside or downside can be significant if there is an impetus that will drive the stock price. In addition to global macro events, or sector events, stock prices are also driven by earnings releases that occur once a quarter.
Benefits of Share Trading
One of the benefits of trading shares on line with a forex broker as opposed to trading stock with a stock broker is the leverage you can employ. When you trade shares with a forex broker, you do not actually own the stock and therefore your risk is limited to the change in the price of the shares. When you purchase a stock through a stock broker, you are purchasing the shares themselves, and need to post all the capital that is required to own the shares. Most stock brokers can offer lending at 1.5 times the value of the shares.
For example, let’s say you purchase 10 shares of Apple stock at $160 per share. Your stock broker will require you to post $1,600 to purchase 10 shares. Once you own the shares, they will allow you to use those shares as collateral and lend you $800 to purchase more shares of Apple or other shares of another stock.
CFD Share Trading
When you purchase shares with a forex broker you are purchasing a CFD, or contract for differences. The contract is for the difference in the price between when you purchase the contract (or sold it), and were you sold the contract (or bought it). You are only on the line for the difference in the price, and therefore do not need to post all the capital required to purchase the shares. In many instances, the leverage can be a large as 200-1. This means since you are not buying the shares, your forex broker will allow you to borrow $200 for every dollar posted.
One downside to purchasing contracts for differences on shares as opposed to buying the shares themselves is that you do not receive a dividend on a dividend paying stock. A dividend is money that is paid back to shareholder for holding the stock. Companies such as Apple pay holder of record a dividend, on a quarterly basis, allowing the owner to benefit from the company’s earnings. Many investors want to own specific stock just to receive a dividend. Apple’s annual dividend at the writing of this article was $2.52 per share per annum.
One of the benefits of trading shares is the risk is narrowed to a specific sector, and can present volatile opportunities ahead and after the company’s earnings release. For example, if you want to have exposure to the FANG stocks (Facebook, Amazon, Netflix, and Google (Alphabet), you can purchase one or more of those stocks. Additionally, if you believe the earnings that will be reported is not currently priced into a specific stock, you can purchase or sell it ahead of its earnings release to benefit from the volatility. By purchasing and selling shares online, you can narrow your risk focus and benefit from the robust volatility seen in share prices.