If you are interested in stock trading in the UK, it is imperative you understand what it is and how it works. This article will explore what stocks are, how they work, and the benefits and limits of stock trading. It will also give you an overview of things to consider when choosing a broker for investment activities.
What is stock trading?
Stocks are shares issued by companies. Simply put, stock trading is the buying and selling of stocks in the stock market with the aim to profit from fluctuating share prices. It is one of the most popular forms of trading in the world, and UK traders can participate in local stock markets such as the London Stock Exchange (LSE).
How stock trading works
Stock trading is relatively straightforward. Every day, the stock market fluctuates, and different stocks increase and decrease in prices based on various factors, such as the overall economy, a company’s prospects, and trader sentiment – to name a few.
When a trader foresees that the price of a particular stock will rise, they will attempt to buy stocks that they can sell at a higher price later to make a profit.When a trader foresees that the price of a particular stock will decrease, they may ‘short sell’ stocks – which is, borrow stocks from a provider to sell them, then buying them back (and returning the stocks to the provider) when prices are lower.
Benefits of trading stocks
The most significant benefit that traders strive for is thepotential for profit. The fluctuations in stock prices mean that many traders can find opportunities in the market throughout the day, which can lead to potential profits when markets move in their favour.
Another benefit of trading stocks is that traders do not need a huge capital to get started. There are different types of stocks available for trading, with some that requires little money to get started. This is a great thing for traders who are risk-averse or prefer to open small positions.
The third benefit that traders may find is that of dividends. When traders buy stocks, they may sometimes receive payouts from companies simply by being a shareholder. Dividends are a small sum of money that companies pay their shareholders quarterly or annually, when they perform well. Not all stocks pay dividends, and there may be rules on how long a trader must have held a stock to receive dividends. However, it is an additional perk for traders who tend to hold onto their stocks for a long time before selling them.
Limits of stock trading
Nevertheless, stock trading is not perfect, and there are limits to what traders can do in the stock market.
The first and most obvious limit has to do with the stock market hours. There are different stock markets around the world, and they ‘house’ different company’s shares, depending on which market the company has chosen to be listed on. The stock market usually opens in the morning (following local time) and closes in the late afternoon. When the stock market is closed, traders cannot buy or sell trades.
This means that traders who leave their positions overnight put themselves in a relatively vulnerable position. If the market unexpectedly dips, they are not able to close their positions. They may also incur overnight charges – which some brokers charge – for leaving their positions open overnight.
Another limit of stock trading is that generally, traders do not get to utilise leverage.Traders ‘leverage’ their trades by borrowing a sum of money to open a larger position size than they normally can with their capital. Leveraged trading can lead to huge profits when done correctly, which makes it popular with traders. This limits the profit potential of stock trading.
Choosing the right broker for you
When it comes to trading, choosing the right broker can take you a long way. Consider these factors before opening an account:
- Fee structure
- Services offered
- Markets and products offered
- Account tiers offered
- Educational resources offered
- Customer support
Closing remarks
Stock trading has been popular for a long time. With an increased ease of access in the past few decades, almost anybody who wishes to participate can do so. Its relatively simple trading theory also makes it easy for novices to pick up the activity. When trading, always remember that there are no guarantees in the stock market, and you should never risk more than you can afford to lose.
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