Online Stock Trading – The Basics
Understand the basics of the stock market and learn to trade stocks, futures and CFDs
It is important to understand precisely what shares are before you invest in them. Once you are familiar with the stock market and the basics of stock trading, you will be better poised to invest in online stock trading.
Stocks are traded on stock exchanges – locations where buyers & sellers come together and decide upon a price to value a security.
You have likely seen the frenetic activity of traders wildly gesticulating as they try and secure buy and sell decisions on the trading floor. There is another type of exchange – the virtual exchange, where electronic trades are placed.
In both instances, the rationale behind the stock market is the facilitation of trade between buyers & sellers. Without it, the price discovery process for determining value would be far more difficult.
A Brief Introduction to the Stock Market
Long before online stock trading was an option, traders traded on real brick and mortar stock exchanges.
When it comes to stock markets, there are two key markets: the primary market and the secondary market. The initial public offering of shares (IPO) is executed in primary markets, and investors trade shares of companies in the secondary market without the participation of the issuing company.
It is this market that comprises the stock market we know today. Over the years, several stock exchanges have sprung up, including the New York Stock Exchange (NYSE) – one of the most prestigious stock exchanges in the world.
It was formed in 1792 when the Buttonwood Agreement was signed. You will find many of the world’s largest companies listed on the NYSE, including Coca-Cola and McDonald’s.
On the trading floor of the New York Stock Exchange, a specialist will match buyers and sellers. Prices are still determined by auction, but more-so by more prevalent electronic processes, that render human involvement more limited, though still significant.
The OTC market (over-the-counter) was popularized primarily by NASDAQ. Here, there are no floor brokers and, unlike the New York Stock Exchange, NASDAQ has no physical address: it is a network of interlinked computers with electronic trade executions.
This process has reduced the bid/ask spread and increased the efficiency of trading. The NASDAQ emerged in the 1990s out of the technological boom of the time – born of the National Association of Securities Dealers, now known as the Financial Industry Regulatory Authority. Nowadays, major technology companies are listed on NASDAQ, including Oracle, Dell and Microsoft.
The NASDAQ rivals the New York Stock Exchange as a major repository for companies wishing to list. Several other exchanges operate throughout the US, including the American Stock Exchange (AMEX).
This exchange is largely reserved for derivatives and small cap stocks. Other major stock exchanges around the world include the Hong Kong Stock Exchange (SEHK), the Tokyo Stock Exchange (TSE), the London Stock Exchange (LSE) and the Johannesburg Stock Exchange (JSE).
Nevertheless, it should be remembered that the NYSE still has the greater financial clout, with a larger market capitalisation than the NASDAQ, LSE and TSE combined.
Trading Stocks Online
Nowadays, electronic communication networks (ECNs) have all but eliminated the role of a third party when securities are traded. These networks connect individual traders and major brokerages so that direct trade can be conducted without a middleman.
These ECNs charge fees for every transaction that they process, and traders across the world can engage in safe and secure on-line trading with one another. In the US, the Securities and Exchange Commission (SEC) requires that these ECNs be registered as broker-dealers.
Among others, traders can enjoy speedy execution of trades, automated trading and passive order matching. These systems are geared towards retail investors and institutional investors alike.
On-line brokers also facilitate stock trading for everyday people. Traders can easily access the markets and a wide range of tradable assets on their platforms. There are stringent rules in place that determine how investors must conduct themselves in respect of minimum account balances, minimum trading amounts, fees and commissions.
Inactive accounts may be subject to penalties, so it is incumbent upon investors to read the fine print. For example, one of the requirements is a minimum of 50% equity for an investment in a stock.
After you have bought your shares, you will be required to maintain equity above 25% of the share’s value. Failing this condition, the trade may be closed out early.
What is Futures Trading?
Another interesting form of trading is futures contracts. These originally emerged between farmers as sellers, and dealers as buyers. Both parties would commit to future exchanges of produce and payment, for example, grain for cash.
Farmers would agree to deliver a predetermined volume of wheat or corn at a later date at a fixed price. Both parties to the agreement would benefit from such a contract and costs would be known well in advance.
A written contract was signed and a small amount of cash would change hands as a guarantee of future payment. Of course, futures contracts rapidly evolved and dealers often sell futures contracts they do not want to other dealers. Likewise, the farmer also has the option to sell his futures contract to another farmer. Owing to supply and demand factors, futures contracts can be valuable tradable assets.
Contract for Difference – What is CFD Trading?
Contract for Difference (CFD) is another form of financial derivative that was introduced in England. These tradable instruments track the movements of the underlying assets they represent. Profits and losses can be realized when the asset movements are in sync with the position that has been taken.
It should be noted that you do not ever take possession of the underlying asset with CFDs. Traditional brokers require high margins to open big positions in stocks, but CFD brokers require substantially lower percentages.
It is not uncommon to find a 5% Margin on a CFD trade. With CFDs, you get to enjoy higher leverage, access to the global markets from one platform, zero fees, and no day trading requirements, among others.
Alvexo offers CFD trading with a leverage of 10 to 1. This means that if you purchase $10,000 worth of shares, you need to put down $1,000 in equity. There are several other requirements that must be met prior to being able to trade stock CFDs with us. We require an ECN account or a Gold account, for one. All transactions are executed on the standard MT4, Web-Trader or the Alvexo Mobile Application platform.
Alvexo provides a comprehensive trading platform for our investors. We are primarily focused on Forex, but we also offer investors a wide range of other assets, including indices, commodities and stocks.
We encourage our investors to diversify their portfolios as much as possible, to hedge against risk, and to achieve healthy profits. One such way to do this is by investing in shares, otherwise known as stocks.