Stocks & Shares: How do they work?

There is quite a lot of confusion about how these two financial instruments are related and how each of them works.

Many use the terms stocks and shares interchangeably, but do they mean the same thing? And how do stocks and shares work?

Follow this article to find out exactly what their difference is, how they work, and which method to trade them on.

What is the difference between stocks and shares?

When traders talk about stocks, they’re usually referring to a broad concept of owning a stake in various companies. It’s like owning a small piece of many different businesses. So if you own tiny pieces in a bunch of other companies all at once – that’s what stocks mean.

On the other hand, shares are a bit more focused. When traders use the term, they’re specifically talking about a single unit of ownership in just one company.

Regarding shares, traders may also talk about having shares of various instruments such as mutual funds, exchange traded funds (ETFs), etc.

In contrast, stocks mostly refer to equities or securities that are traded on a stock exchange.

How do stocks and shares work for companies and traders?

When a company needs funding, it can create and sell shares. They can opt to sell shares through an Initial Public Offering (IPO).

Those who buy these shares become shareholders of the company and own a percentage of it. If the company does well and its value grows, the value of your shares will also increase. Large businesses often share their gains with shareholders through dividends.

Likewise, if you have bought shares in multiple companies, you’ll own their stocks and hence be called a stockholder.

Number of shares a company can offer

There is no fixed rule about how many shares a company can give.

The number of shares a company can announce depends on factors such as the capital structure, its official rules regarding shareholder approval and voting, and the laws of the country where the company is registered.

Share price value

Share prices start during a company’s IPO, where the price of one share is determined based on perceived supply and demand.

After the IPO, factors such as political announcements, regulations, global events, industry and economic news, and market competition and trends may affect the share prices.

Notable examples of economic events that can negatively impact the price of a financial instrument would be inflation and recession.

How to trade in stocks or shares

If you’re new to stock trading and want to give it a try, you can start with traditional stock exchange trading or you can consider trading shares through contracts for difference (CFDs). Each approach has its advantages and risks, so it’s essential to thoroughly research and choose the method that aligns with your financial goals and risk tolerance.

It’s wise to begin with a clear trading plan and gain knowledge through educational resources before trading real capital to the markets. This approach will help you build the necessary skills and confidence for your stock trading journey.

Stock exchange trading vs CFD shares

Here are a few points between the two to take note of.

Type of instrument

WithCFD trading, you can speculate on price changes without owning the underlying asset. A CFD comprises a contract between a trader and broker.

In traditional stock trading, you buy and hold physical shares of a company, becoming a partial owner with associated rights.

Ownership rights

With CFDs, you don’t own the stocks; but potentially gain or incur losses based on price fluctuations. However, traditional stock traders become shareholders with ownership rights, including voting rights and dividends.

Leverage

CFD shares trading offers financial leverage, allowing you to control more prominent positions with a smaller initial capital.

While leverage is also available in traditional stock trading, it generally requires more significant upfront capital to hold equivalent positions.

Costs and fees

CFDs typically involve spreads, overnight financing costs, and possibly commissions. Stock trading entails brokerage fees, possible commissions, and additional charges related to owning and managing physical shares.

Diversification

With CFDs, you can trade across various markets, such as shares, commodities, forex, and indices. Traditional stock trading focuses on buying and owning individual company stocks.

Type of broker

For both stock trading and share CFDs, you may need a broker.

If you are unfamiliar with what a broker is for stock trading, it is an intermediary who facilitates the buying and selling of stocks on your behalf or that of your institutional clients.

As CFD trading is done over the counter and not at a stock exchange, you will need to choose an online platform that can act as your broker.

Hence when trading CFD shares, it’s crucial to choose a platform that is well regulated, which can offer a seamless and hassle-free trading experience.

At markets.com, you can take your pick from a comprehensive range of instruments via a mobile app, or on its web platform.

How to boost your trading skills with shares CFDs

New to trading CFD shares? Follow these 4 main steps to get started:

1. Do comprehensive research before considering any stock for trading. The deeper your understanding, the better equipped you'll be to forecast future market movements accurately.
2. Maintain a regular trading routine to refine your skills. Balancing both passion and discipline is crucial to achieving sustained success in this field. Being consistent and patient will enable you to become more familiar with market dynamics over time.
3. Base your trading decisions on rational, well-thought-out assessments instead of emotional impulses. Applying logic and deliberation to your strategies can lead to more informed choices.
4. Start with smaller trades and a limited pool of funds. As you accumulate more experience and improve your understanding, you'll be better prepared to take on larger positions and manage more risks.

So, in a nutshell

Now that you understand the basics of stocks and shares remember that continuous learning and gaining real-world experience are vital for successful trading. You have the option to trade in the stock market or try CFD shares.

No matter which path you choose, it's important to be more cautious to avoid committing devastating mistakes. But note that experiencing losses is a normal part of being a trader. These losses can teach you valuable lessons and help you improve your trading skills.

Start your first trade in shares CFDs with markets.com

After you open a CFD trading account, don’t forget to brush up on your trading knowledge. The best way to do this is through reading and research.

The Education Centre at markets.com is dedicated to equipping you with valuable trading insights, step-by-step guides, and definitions of trading terminology. This valuable resource is designed to support and guide you throughout your trading journey.

Now that you understand how stocks and shares work in the market, it is time to try CFD trading.

And the best part is that you don’t need to use real capital in your first trade. You can start with a demo account that uses virtual currency. After you gain confidence in your skills, you can place a deposit with your funds.

Join our community at markets.com now to start exploring the world of CFDs.

Check out this related article: How to trade CFDs on commodities

When considering "CFD shares" for trading and price predictions, remember that trading CFDs involves a significant degree of risk and could result in capital loss. Past performance is not indicative of any future results. This information is provided for informative purposes only and should not be construed to be investment advice.