What are Stocks and Shares?

The term “stocks” and “shares” are often used interchangeably, but there’s a subtle difference:

• Stocks: Refers to ownership in one or more companies. For example, “I own stock in Apple and Tesla.”
• Shares: Represents a single unit of ownership in a specific company. For example, “I own 10 shares of Apple.”

Example

If you buy 100 units of a company’s stock, you own 100 shares of that company. Think of it like this:

• Stock = The whole pizza
• Shares = The individual slices

When a company wants to raise money, it can issue shares to the public through an Initial Public Offering (IPO). Once the shares are available, investors can buy them on stock exchanges like the New York Stock Exchange or NASDAQ. By purchasing shares, investors become shareholders, meaning they hold a stake in the company. Shareholders provide the company with capital, which can be used to expand its business, develop new products, or pay off debt. Another way to participate in the stock market is through CFDs. CFDs are leveraged instruments that allow you to speculate on the price movements of stocks, potentially amplifying both gains and losses.

What is an IPO?

An IPO is like a company’s debut on the stock market. Before an IPO, the company is privately owned, often by its founders, early investors or employees. After the IPO, the company becomes publicly traded, meaning anyone can buy and sell its shares on a stock exchange.

As a shareholder, you may have a claim to part of the company’s assets and earnings, but only after debts and obligations are settled. This means you can benefit from the company’s success in two main ways:

• Capital Appreciation: If the company performs well, the value of your shares may increase over time. For example, if you buy a share for $10 and sell it later for $20, you’ve made a $10 profit.


• Dividends: Some companies share their profits with shareholders by paying dividends. For example, if you own 100 shares and the company pays $1 dividend per share, you’ll receive $100.

Not all companies pay dividends. Younger, fast-growing companies (like many tech startups) often reinvest their profits back into the business instead of paying dividends. On the other hand, established companies like Coca-Cola or Procter & Gamble are more likely to pay regular dividends.

Shares can be categorised into public shares and private shares.

When it comes to stocks and shares, not all are created equal. Different types of stocks serve different purposes and come with varying levels of risk and reward. Understanding these types can help you make smarter investment decisions. Let's dive into the most common categories:

Common vs Preferred Shares

Common shares are the most widely traded type of stock. When people talk about “stocks”, they’re usually referring to common shares.

Example: If you own common shares of Apple, you might have voting rights and the potential to benefit from both dividend payments and price appreciation.

Preferred shares are a bit different. They're often considered a hybrid between stocks and bonds because they offer most stability but less growth potential.

Example: If you own preferred shares of Coca-Cola, you might receive a steady 5% dividend annually, but you won’t have a say in company decisions.

Differences between common and preferred shares.

Understanding why shares prices fluctuate is crucial for investors looking to navigate the stock market effectively. Several key factors influence stock prices, ranging from company-specific events to broader economic trends. By examining these factors, investors can gain insights into market dynamics and make more informed decisions.

Key Factors Affecting Stock Prices

1. Supply and Demand: The fundamental principle of supply and demand dictates that when there are more buyers than sellers, stock prices rise and when there are more sellers than buyers, prices fall.
2. Company Earnings: A company’s financial performance, particularly its earnings, plays a crucial role in determining its stock price. Strong earnings report often lead to higher stock prices as they indicate the company’s profitability and growth potential. Conversely, disappointing earnings can lead to a decline in stock prices.
3. Economic Trends: Broader economic factors such as interest rates, inflation and global events also impact stock prices. For example, rising interest rates can make borrowing money more expensive, reducing corporate profits and leading to lower stock prices. Similarly, economic recessions can decrease consumer spending and business investment, negatively affecting stock prices.
4. Investor Sentiment: Market sentiment, influenced by news, rumours or social media, can cause significant fluctuations in stock prices. For instance, a positive tweet from a high-profile individual like Elon Musk can boost investor confidence and drive-up stock prices, while negative news can have the opposite news.

Case Study: Elon Musk’s Tweet

In 2020, Elon Musk tweeted about Tesla, stating, “Tesla stock price is too high imo.” This tweet caused a significant drop in Tesla’s stock price, dropping as much as 12% Friday before closing 10.3%, demonstrating how influential investor sentiment can be [1]. *

* This example demonstrates the potential impact of social media, but it is crucial to understand that social media is not a reliable source of investment advice. Always conduct thorough research from reputable sources before making any investment decisions.

How Global Events Impact Share Prices

Global events can have profound effects on stock markets, often leading to increased volatility and significant price fluctuations. Here are a few examples:

1. Economic Recessions: During economic downturns, consumer spending and business investments typically decline, leading to lower corporate earnings and consequently, lower stock prices. The 2008 global financial crisis is a prime example, where stock markets around the world experienced sharp decline due to widespread economic instability.
2. Interest Rate Changes: Central banks, such as the Federal Reserve, adjust interest rate to control inflation and stabilise the economy. When interest rates rise, borrowing costs increase, which can reduce corporate profits and consumer spending, leading to lower stock prices. Conversely, lower interest rates can stimulate economic activity and boost stock prices.
3. Geopolitical Events: Political instability, wars and trade disputes can create uncertainty in the markets, leading to increased volatility. For instance, the trade tensions between the US and China have historically caused fluctuations in global stock markets as investors react to the potential economic impact.

When it comes to the stock market, there are two main approaches: investing and trading. While both involve buying and selling stocks, they differ significantly in terms of goals, timeframes and strategies. Understanding these differences is crucial for deciding which approach aligns with your financial goals and risk tolerance.

Long-Term Investing vs Short-Term Trading

Investing is all about buying and holding stocks for the long-term – typically years or even decades. The goal is to build wealth gradually by benefiting from the company’s growth over time. Investors focus on companies with strong fundamentals, such as stable earnings, competitive advantages and growth potential. However, past performance is not indicative of future results.

Trading, on the other hand, involves buying and selling stocks frequently to profit from short-term price movements. Traders aim to capitalise on market volatility rather than long-term growth. They use tools like technical analysis, charts and market trends to identify short-term opportunities. For example, a trader might buy shares of Tesla at $700 and sell them a week later at $750, making a $50 profit per share. However, this is a simplified example, and actual market conditions will vary. Trading can also be done using Contracts for Difference (CFDs). As a CFD broker, Vantage offers trading through CFDs.

Ready to get started on your trading journey via CFDs? Open a live account with Vantage today and get started with a library of free resources to fuel your learning journey!

So, when do you choose to invest or trade?

An individual saving for retirement may invest in a diversified portfolio of stocks and bonds for steady long-term growth. On the other hand, someone looking for more immediate returns may engage in active trading, aiming to capitalise on short-term market fluctuations and take advantage of timely opportunities.

What are the Risks and Benefits of Investing vs Trading

Investing offers steady returns over the long term. One of the key benefits of investing is the potential for compounding returns, where reinvested dividends and capital gains grow exponentially over time. Additionally, investing requires less time and effort compared to trading, making it a more passive approach. However, investing does come with risks. Market downturns can affect portfolio value in the short term, and it requires patience, as returns may take years to materialise.

Trading, while offering the potential for quick profits, comes with higher risks. The use of leverage in trading can amplify both gains and losses, making it a high-stake approach. Traders need to be skilled at analysing market trends and making quick decisions, as even small mistakes can lead to significant losses. Additionally, trading requires significant time and effort to monitor the markets and manage trades.

Trading stocks can seem intimidating at first, but once you understand the basics, it becomes much more approachable. There are two main ways to trade stocks:

1. Buying actual shares
2. Trading CFDs

Buying Actual Shares vs Trading CFDs

When you buy actual shares, you are purchasing a portion of ownership in a company. This method is typically associated with long-term investing. Shareholders benefit from dividends and have voting rights in the company.

On the other hand, trading Contracts for Difference (CFDs) allows you to speculate on the price movements of shares without owning the underlying asset. CFDs offer the advantage of leverage, enabling you to control larger position with a smaller amount of capital, but they also come with higher risks and do not provide dividends or voting rights.

Difference Between Owning Shares vs Trading CFDs

Vantage offers a user-friendly platform for trading CFDs on various markets, including stocks, forex, commodities and indices. Here are the steps to get started:

1. Create an Account

Open a Live Account with Vantage. Once you’ve opened an account of your own, choose between MT4 or MT5 trading platforms, select your account type and choose your account currency.

2. Fund Your Account

After opening your account, you’ll need to deposit funds. Vantage offers multiple payment methods including bank transfers, credit/debit cards and e-wallets. Choose the method that is most convenient for you.

3. Analyse the Markets

Before placing a trade, it’s important to analyse the market. Determine which products you wish to trade. Vantage offers stocks via CFDs from well-known companies including Apple, Amazon, Tesla and more. Use technical analysis and fundamental analysis to make informed decisions. Take advantage of Vantage’s free resources like the academy page, market analysis and tools to boost your trading journey.

4. Open and Monitor

Once you’ve analysed the market, it’s time to place your trade. Decide whether to buy or sell. Set your position size and for trading CFDs, choose your leverage level.

5. Monitor and Close

After placing your trade, monitor its performance. Use tools like stop-loss orders and take profit orders. When you’re ready, close your trades.