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What are stocks, and how does stock trading work?

Most people are familiar with the term stock market – it’s a market where you can buy or sell stocks, but there is much more to it than just that.    Almost every country in the world has its own stock exchange or even multiple exchanges where people can buy and sell stocks, among other financial instruments.     These exchanges are a regulated environment. In certain countries, the same regulatory bodies that licence online brokers oversee transactions on their respective stock exchanges to ensure transparency and prevent fraud. For example, the United Kingdom’s largest stock exchange, the London Stock Exchange (LSE), is regulated by the Financial Conduct Authority (FCA). Every time a stock is traded (bought or sold), it is monitored by this regulator for discrepancies, ensuring compliance with its policies.  What are stocks, and how are they different from shares and equities? In this article, we’ll dive deep into all these details and explain everything a trader needs to know about stocks. <h2>Stocks vs shares vs equities</h2> A stock is a representation of a company’s ownership. The term stock is often used interchangeably with the term share. However, there is a difference. Stock implies ownership in general, regardless of its size, while a share is a unit of measurement of this ownership. Equity is another term commonly used, and it refers to the total ownership stake in a company without any debt involved.    For example, you may often see your balance being called equity on trading platforms. In this case, it’s the total amount of funds you own after deducting any loss you may incur if you have open trades.    To sum up all three terms – if Apple Inc. were to have 1,000 shares only and you owned 100 of them, you would also own Apple’s stock or a part of its equity.  <img alt="TFMKT-4086-Image1-1.png" src="/getmedia/ec1a6c59-0298-47bd-a30c-d9c992e3979e/TFMKT-4086-Image1-1.png" title="TFMKT-4086-Image1-1.png" /> <h2>How does a stock work?</h2> Most companies start as privately held. It can be either an individually owned business, where all assets and hence all the stock belong to one person, or a partnership with two or more owners, where stock is divided between them. In both cases, a company may seek to raise capital and attract investors to expand its coverage and services. To make an investment opportunity appealing, the business raising capital will offer partial company ownership in exchange for funding.  In simple words, third-party investors receive some ownership of a company for providing their capital to it.     For example, let’s say your friend opens a startup, and you provide USD 10,000 to help it grow, and receive partial ownership in this startup on pre-defined terms and conditions in return. As you now are a shareholder, you will receive your share of the profits, and have the right to vote on decisions.  If a startup does grow into an established company, more capital might be needed to allow the firm to grow. At this stage, a company can go public and sell shares on the stock market to raise more capital.    This is when a company gets listed on a stock exchange and goes through an Initial Public Offering (IPO) – the process of devising an investment plan, setting share prices, their total number and making them available to the public.   <h2>How many shares can a company have?</h2> An individually owned business can have as little as one share representing 100% of a company’s value and belongs to the owner – that’s the minimum possible. Once a company goes public, there is no limit to the number of shares it can issue. Apple, for example, has billions of shares. However, the law of supply and demand works in this case, too, and the more shares there are available on the market, the lower they are usually priced. That’s why large corporations issue shares gradually, carefully evaluating demand to prevent a significant price drop. Apple added new shares to the market only five times in over 40 years, every time making sure that investors anticipated it. <h2>Types of stocks</h2> Besides private and public stocks we discussed above, the two main types of stocks are common and preferred. <h3>Common stocks</h3> Common stocks are the most popular type of issued stocks. In most cases, shares available to the public belong to this category. Common stocks tend to be more volatile than preferred stocks, offering higher potential reward but also higher risk to traders. The holders of common stock have voting rights and the right to receive dividend payments, although the latter is not guaranteed. <h3>Preferred stocks</h3> On the other hand, preferred shareholders tend to offer more predictable income, with higher and fixed dividend payouts. However, they usually always come with no voting rights and limited growth. In case a company goes bankrupt, the holders of preferred stock are also prioritised in being repaid compared to common stock owners.  <img alt="TFMKT-4086-Image2-1.png" src="/getmedia/44b32dcd-b4d6-4ceb-936b-de9c739a910b/TFMKT-4086-Image2-1.png" title="TFMKT-4086-Image2-1.png" /> <h2>What is a dividend?</h2> A dividend means a distribution of a company’s earnings or profit to shareholders as a reward for their investment. It is usually paid quarterly in cash or in the form of additional shares. However, not all companies pay dividends and some reserve the right to reinvest their profit into the company’s growth instead of sharing it with investors. For example,  high-growth companies usually choose to reinvest instead of paying dividends. Even some of the giants that are profitable, like Amazon, Meta and Google (Alphabet), follow the same policy to ensure continuous growth.    When a company announces a dividend distribution, investors are only deemed eligible if they have bought shares before a set date, called the ex-dividend date. The average dividend payouts vary but typically fluctuate between 2% and 5% of a share price depending on the company’s industry. For example, in the energy sector, dividends average 5%, while healthcare companies often pay a little over 2%.  <img alt="Group-63232.png" src="/getmedia/6c3e696d-2936-48b7-a3e7-cd0a5821df92/Group-63232.png" title="Group-63232.png" /> <h2>What exchanges can a company list its stock on?</h2> Most companies can be listed on any exchange in the world as long as they meet the minimum requirements set by the exchange. The main defining factor in choosing an exchange often depends on where the target audience (potential investors) are located. Hence, most companies get listed on an exchange in the same country where their headquarters are. That’s why Apple is listed in the US, Mercedes-Benz in Germany and Xiaomi in China. Some companies list their stocks on more than one exchange in pursuit of a larger exposure. For example, the two major US stock exchanges – New York Stock Exchange (NYSE) and Nasdaq – have hundreds of non-American companies listed on them. These exchanges are the largest in the world by market capitalisation, meaning they have a lot of companies listed on them, including the largest corporations. This, in turn, leads to high liquidity and market movement  that presents many trading opportunities, attracting potential traders and investors. Not sure what’s the difference between stock trading and investing? Head to our next article where we explain it in detail and show <a href="/ae/trading-academy/stocks/how-to-trade-stocks">how to trade stocks with CFDs</a>.

4 min readBeginners

Stocks

How to trade stocks

Stock trading has always been a popular activity to generate passive income, and the COVID-19 pandemic only brought more demand to it. According to various research, stuck at home or laid off from their jobs, people started actively looking for other ways of entertainment and income. The user count of stock trading apps has almost tripled since 2019, and websites with educational content on financial markets have seen a four-times surge in the number of visits. However, not many websites offer a beginner-friendly explanation of the concept. In our article, we aim to help inexperienced traders understand how to trade stocks as we explore the basics of it and focus on one of the most popular ways of doing it – stock trading with CFDs. <h2>What is the difference between stock trading and investing in stocks?</h2> First of all, let's establish the difference between stock trading and investing in stocks, as both versions are widely spread. Many traders use these terms interchangeably or call any stock-related activity trading. It makes sense because whether it's day trading with a quick turnaround or a long-term investment portfolio, the end goal is the same – to make a profit once the price grows. However, there are significant differences. For example, you can trade stocks without buying them. Moreover, it is also possible to benefit when a stock price goes down, not only when it's gaining value. That's what sets trading and investing apart. At ThinkMarkets, we use the term investing when a trader physically buys an instrument. Investing in stocks means buying a company’s shares and acquiring its ownership along with the right to receive shared profit if their stocks pay <a href="/en/trading-academy/indices/stock-market-indices ">dividends</a>. It usually implies having a long-term plan – most investors hold their shares for an extended period of time, from several days to years or even decades, selling them for profit when their price grows significantly. Some buy and sell their shares regularly to get smaller but regular profits. On the other hand, other traders speculate solely on short-term price movements of stocks without buying them. We call this activity trading, and one good example of it is CFD trading. <h2>Why trade stocks with CFDs?</h2> CFD trading is very popular among traders because it offers multiple benefits, such as:   <ul> <li>Opportunity to capitalise on both rising and falling prices by going long or short;</li> </ul> <ul> <li>Accessing the underlying stock at a lower cost than buying it outright via leaverage;</li> </ul> <ul> <li>There are no ownership requirements, providing cost-effective and flexible access. </li> </ul> In addition, CFD trading is available on all global markets, making it an attractive way to trade multiple instruments at once. <h2>How to trade stocks with CFDs</h2> If you are not familiar with the concept of CFD trading, we discuss it in detail in our <a href="/en/trading-academy/cfds/what-are-cfds">CFD trading: a beginner’s guide.</a> To give a brief example, let’s say you decided to trade Apple shares. The current market price is USD 152.00. <h3>Going long</h3> If your research suggests that the price is going to increase, you open a long CFD position (buy). Keep in mind that when you trade stocks with CFDs, one contract usually equals one share. The price does go up to USD 162.00. The difference – USD 10, is your profit. If your prediction turns out incorrect and the price drops to USD 142.00, you lose USD 10. <img alt="" src="/getmedia/b1f80809-53c2-4530-a173-0bc72696d9fa/article-how-to-trade-stocks-long.webp" /> In the news reports, you may often hear such an event described as the price moved by ten points, not dollars. It’s because price movements on the stock market are measured by points, where each point equals USD 1: <img alt="" src="/getmedia/d7650b39-5092-497a-acf8-48b96a9e7cf7/article-how-to-trade-stocks-long-formula.webp" /> <h3>Going short</h3> In the opposite scenario, you can place a short CFD trade (sell) if you think the price is going to go down. If it does – you get profit, and if it moves in the opposite direction, you incur a loss. <img alt="" src="/getmedia/76d9c0a5-929f-41d7-af3a-d1d05dc1b2a6/article-how-to-trade-stocks-short.webp" /> As you can see, no matter whether the stock price appreciates or depreciates, you have an opportunity to capitalise on its price movements because you can trade in either direction with CFDs. In this example, the AAPL abbreviation is Apple’s stock ticker you’ll see across all trading platforms. It’s a unique code used by companies for easier identification, the same as USD stands for the United States Dollar in forex. <h3>Spreads</h3> It is also important to note that depending on whether you open a long or short position, the initial price will slightly differentiate. It happens because every financial instrument has two prices in trading: buy (bid) and sell (ask). A sell price indicates how much money you would receive if you were to sell a stock, should you own it. On the other hand, the buy price means how much you'd need to pay to buy a stock. In CFD trading, both numbers mean the price of a contract you can open. The difference between these two prices is called the spread, and it is the fee a broker charges for facilitating the transaction. The image below shows a spread of the Apple stock – 9.0 or 90 cents. <img alt="" src="/getmedia/0d85eb30-6f54-4138-9d19-79d65f072b7d/article-how-to-trade-stocks-spreads.webp" /> Keep in mind that the placement of a decimal point is different in index trading and trading stocks. The same 9-cent spread in stock trading would be marked as 0.9. <h3>Leverage in stock CFD trading</h3> CFD traders usually trade stocks with leverage. Leverage means funds borrowed from a broker to open a larger position. To place a trade with leverage, you only need to cover a small deposit called a margin. The bigger the leverage, the smaller the margin. For example, if you trade with 30:1 leverage in our previous example, you will only need to pay one 30th of USD 152.00, or USD 4.56, to trade a share of Apple worth over a hundred dollars. <img alt="" src="/getmedia/9f8ea23b-31bb-4185-bb37-33774d89a927/article-how-to-trade-stocks-leverage.webp" /> Your profit doesn’t get smaller. It’s still the same USD 10, which is more than your initial deposit. It’s important to understand that if your trade is unsuccessful, the loss will also remain the same and exceed your initial deposit. That’s why using <a href="/en/trading-academy/cfds/risk-management-tools-in-cfd-trading">risk management tools</a> like stop loss and take profit is crucial in CFD trading. However, before you start trading stocks with real money, it's advisable to practice your skills and learn how to use risk management tools on a risk-free demo account pre-loaded with virtual funds. ThinkMarkets' proprietary trading platform, <a href="/en/platform/download-thinktrader">ThinkTrader</a>, offers over 3,000 global stocks and favourable trading conditions for beginners and experienced traders. If you are looking for tips on identifying trading opportunities on stocks, check out our <a href="/en/trading-academy/stocks/what-affects-stock-prices">What affects stock prices?</a> article, where we explain factors affecting their prices.

3 min readBeginners

Stocks

What affects stock prices?

Over the long term, the stock market tends to appreciate in value. This is because as the economy grows, companies' earnings increase, which helps drive stock prices up. If you look at the chart of a popular index like the S&P500, which tracks the 500 largest US companies, you'll see that its value is higher today than it was 10, 20 or 30 years ago, even when you take into account stock market crashes, like the ones we saw in 2000, 2008, and 2020.These crashes can be hard to stomach for long-term investors as  the  capital gains they have generated over the years take a hit. The good news is over the long term, the stock market tends to bounce back, which means investors can recoup these losses.  On the other hand, <a href="/ae/trading-academy/cfds/what-are-cfds">CFD traders</a><a href="/ae/trading-academy/cfds/what-are-cfds"> </a>value a market crash as much as a rally because both present trading opportunities for them. In this article, we’ll explain how to identify these opportunities as we go through the main factors affecting stock prices.  <h2>Main factors influencing stock prices</h2> All the factors that may indicate an upcoming price change of a stock can be divided into three groups: macroeconomic, microeconomic and human. <h3>Macroeconomic factors</h3> All the factors that may indicate an upcoming price change of a stock can be divided into three groups: macroeconomic, microeconomic and human. <img alt="" src="/getmedia/5a527f95-9404-4bc3-96a5-ab43534f97ff/article-what-affects-stock-prices-macro.webp" /> As the COVID-19 pandemic proved, the global and local state of the economy can significantly influence stock prices. This influence can be both positive and negative, depending on the nature of the crisis. For example, tech companies like Amazon or Apple were thriving while the borders were shut and people were stuck at home, while their non-tech counterparts were tanking one after another. With a crisis like that, it’s quite hard to predict where exactly it’s going to hit. Although big market crashes are an exception, not the common stock market’s nature, and hence have to be analysed individually. The day-to-day stock market performance is much easier to analyse. Over the years, traders and analysts identified price movement patterns and established macroeconomic factors that can indicate an upcoming price change. Here are some of them:   Inflation and interest rates These two factors are usually linked together as they are correlated. Increasing inflation usually leads to increasing interest rates and vice versa. In a nutshell, the lower these rates are compared to their previous data, the better it is for stocks as it becomes cheaper for consumers and businesses to access credit.  Traders usually keep an eye on the <a href="/ae/economic-calendar">economic calendar</a> to follow these announcements and place their trades accordingly.    Gross domestic product (GDP) A growing GDP rate usually signals a strong economy and is reflected in the higher price of stocks. However, if the growth is too steep, it can indicate the opposite as, in the long term, it can lead to higher inflation, which tends to have a negative impact on the value of stocks. It is important to note that stocks tend to move just after the release of economic data as they discount the future. This means that major stock indices will move lower when the economy is at its worst as investors and traders position themselves for better times ahead.   Exchange rates <a href="/ae/trading-academy/forex/what-affects-forex-exchange-rates">Foreign exchange rates</a> are usually the product of the previously mentioned factors – a country’s low inflation and GDP growth lead to the strengthening of its currency compared to foreign currencies. Thus, a strong currency as an isolated factor of analysis can also indicate a potential increase in the prices of stocks that originate in the same country.   Political events The political climate in the form of either local events, such as presidential elections or geo-political tensions, like armed conflicts and wars, usually has a strong effect not only on stocks of participating countries but on global stock prices too. In the case of elections, it can be both positive and negative, depending on market sentiment. Wars, however, tend to bring distress and falling prices to the stock market. All the macroeconomic factors are usually very intertwined and need to be studied as an aggregate – both on the local and global levels. It is also important to keep in mind the economic, political and trading relations of a country where the stock you analyse originates with other countries, as their economies may influence each other. Moreover, it’s always good to keep an eye on the American economy as it usually has a strong global influence, with the US dollar being a globally accepted reserve currency. <h3>Microeconomic factors</h3> <img alt="" src="/getmedia/597c1913-938b-4722-b9f3-8f65d07a17e7/article-what-affects-stock-prices-micro.webp" /> In addition to global drivers, there are also factors on a smaller scale that may affect share prices, such as the company's performance. Any positive news, such as higher-than-anticipated reported earnings, new advanced product launches or efficient management restructuring, tends to drive a company's stock up. Negative events such as lower-than-expected profits, lawsuits, and any controversy or drops of confidence in company leaders can have the opposite effect and trigger price drops. One factor that stands out is the dividend announcement, which usually causes a short-lived price spike caused by dividend hunters. A consequential price drop often follows as a result of a sellout of the shares that were bought with the sole purpose of receiving dividends. Microeconomic factors are often reinforced and sometimes even triggered by market sentiment – the way traders perceive the event and the level of investor confidence, which brings us to the last group of factors affecting stock prices. <h3>Human factors</h3> <img alt="" src="/getmedia/70ce09e9-5764-4a22-9ee1-01aa97b52284/article-what-affects-stock-prices-human.webp" /> These are the factors that influence the stock market due to public activity. For example, a new product launch can positively or negatively affect a company's stock price, depending on how traders and investors feel about it. If they believe a product has potential and will gain popularity, it will attract more buyers and traders to the company stock. On the other hand, if they believe it will be a failure, they might start pulling their investments out and sell the stock, causing its price to decline. Increased demand for certain products or stocks, leading to their increasing prices, can also be caused solely by public activity. The infamous GameStop saga, for example, at one point brought a whopping 2,000% increase to the company's stock price, followed by an almost equal a large price drop and another surge in just a little over two months. The entire series of events was caused by public activity and sentiment. Factors like market sentiment are nearly impossible to predict with a fundamental analysis of a company or economy. That’s where <a href="/ae/trading-academy/what-is-technical-analysis-in-trading">technical analysis</a> steps in, but it is usually considered an advanced technique. If you are just starting out your stock trading journey, it is advisable to study the basics first and practice trading on a <a href="/ae/demo-account">risk-free demo account</a>. For example, ThinkMarkets’ proprietary platform <a href="/ea/platform/download-thinktrader">ThinkTrader</a> offers CFD trading on over 3,000 global stocks and USD 10,000 virtual funds to test and improve your trading skills.

3 min readExperienced

Stocks Market events

What are Earnings Reports and How It Affects Stock Prices?

Understanding earnings reports provides traders with invaluable information about the financial health and prospects of companies. By deciphering earnings reports, traders can make more informed decisions on buying, selling, or holding stocks, all while minimising risks and potentially maximising rewards.    These reports are the financial lifeblood of publicly traded companies, and comprehending their significance is the first step towards making informed trading decisions.    <h2 paraeid="{b457e087-b4a7-4d4f-9986-2beb6a7fd9a2}{249}" paraid="960882141">What Are Earnings Reports? </h2> Earnings reports, often referred to as quarterly earnings or corporate earnings reports, are periodic financial updates provided by publicly traded companies. They serve as a comprehensive snapshot of a company's financial performance during a specific quarter. Companies release earnings reports to fulfill regulatory requirements, maintain transparency, and keep shareholders and the broader market informed about their financial health.    <h2 aria-level="2" paraeid="{fc04172f-d300-426a-a8b2-dd29a4d1ac02}{6}" paraid="313468375" role="heading">Key Components of Earnings Reports: </h2>   Here are the fundamental elements that make up an earnings report:    Revenue  Revenue, also known as sales or turnover, represents the total income generated by the company. It is a critical indicator of a company's ability to generate income and sustain growth.     Earnings Per Share (EPS)  EPS is a measure of a company's profitability and is calculated by dividing the net income (profit) by the total number of outstanding shares.    Guidance  Guidance, also known as forward guidance, offers a glimpse into a company's expectations and projections for future performance. This forward-looking information can significantly impact investor sentiment and stock prices.    <h2 aria-level="2" paraeid="{fc04172f-d300-426a-a8b2-dd29a4d1ac02}{54}" paraid="40589137" role="heading">The Impact on Stock Prices </h2>   The release of earnings reports is often followed by market volatility. When a company releases its earnings report, it provides a comprehensive view of its financial performance over a specific period. This transparency allows investors and traders to gauge the company's health, profitability, and growth potential.     Positive results, such as revenue growth and higher-than-expected earnings per share (EPS), often lead to a surge in investor confidence, resulting in an increase in the company's stock price. Conversely, disappointing earnings can trigger a sell-off, causing stock prices to plummet.    <h2 aria-level="2" paraeid="{fc04172f-d300-426a-a8b2-dd29a4d1ac02}{74}" paraid="194869486" role="heading">Earnings surprises </h2>   One of the key concepts during earnings season is the notion of earnings surprises. An earnings surprise occurs when a company's actual earnings or revenue differ from analysts' expectations. These surprises can be either positive (beating expectations) or negative (falling short of expectations). Earnings surprises often lead to sharp price movements in the stock market.    When a company reports better-than-expected earnings, it tends to boost investor confidence. This positive sentiment may result in a surge in demand for the company's stock, driving up its price.   On the other hand, if a company fails to meet earnings expectations, it can lead to a rapid decline in stock prices as investors may sell their shares in disappointment.    The dates leading to and following the release of Earnings reports present traders with potential market opportunities. They can either go long or short depending on their analysis of the situation.    Ready to trade? Log in to <a href="http://portal.thinkmarkets.com/" rel="noreferrer noopener" target="_blank">ThinkPortal</a> to access your trading platform now!

4 min readExperienced