The world of trading and investing has developed over the years and has now evolved into the digital landscape. Online trading for stocks and shares holds its advantages for individuals interested in the financial markets but also has its disadvantages. So, let us explain further the ways in which you can benefit from online stock trading.
Advantages and Disadvantages of Online Stock Trading
What are shares?
To fully understand how to trade shares online, and the benefits of doing so, you must know exactly what they are. Sometimes known as stocks, shares are a fraction of a company, its value, earnings, and assets and are usually traded on a stock market.
Those who own a part of a company like this are called stockholders, or shareholders, and, for the company, are a way to earn money to invest in the business. Traders can sell and buy shares in a company to make a profit and diversify their investment portfolio, which is commonly done through an online broker. The fluctuation in the price of the stocks determines the value of the company.
Trading shares with CFDs
One of the benefits of trading stocks online is that it gives the opportunity to trade using contracts for differences (CFDs), which also comes with its own host of advantages. Traders can open CFDs on all the main financial markets on an online trading platform, such as Plus 500 forex trading, trading in commodities, and of course, stock trading.
Trading stocks CFDs enables the trader to speculate on the price movement of shares, without owning said underlying asset. This means they can take a position on both a rising and falling stock market. With share CFDs, traders can open a Buy position if they believe that the value of the underlying stock will rise. Whereas, if they predict the value to fall, they can open a Sell position. This potentially could lead to a profit on a falling market, where traditionally a loss would be incurred.
The downside to trading stock or share CFDs is that due to the lack of ownership of the share itself, the trader isn’t entitled to any voting rights towards the direction of the company, or benefit from the payout of dividends.
Experienced traders would use both traditional share trading and CFDs to take full advantage of price movements in the stock movement, as a way to hedge their losses, and diversify their investment portfolio.
Market access and liquidity
The fundamentals to begin trading online are quite simple; with ever-developing technology, some risk capital, an internet connection, and a computer is all it takes. Once an online broker or trading platform has been selected, access to the stock market is easy, and almost guaranteed.
Through online trading, you also are able to access international stock markets, all in one place. When trading stock CFDs, the provider can also have extended hours compared to the traditional stock market, so traders can continue after the underlying exchange has closed for the day. Although, it is worth researching the specifics, as sometimes a cost is incurred for holding a position overnight.
As online stock trading has become easier to access, those participating in the market have also increased. This wealth of traders means the liquidity of the market has increased, the spread between the bid and ask prices have tightened, and it is more of a streamlined process to open and close a position within the market.
One of the main advantages of online stock trading is the use of leverage, which has been more readily available through online platforms. Trading share CFDs also enables the exposure to competitive leverage ratios. This allows traders to have greater exposure to the market, without having to invest large sums of capital. As well as effective use of capital, it also can enhance the returns of the investment.
However, just as much as leverage is a huge advantage of online stock trading, it also one of its disadvantages. It can magnify any losses, as it is based on the full value of the position taken. Therefore, you should always research the leverage for the stock you intend to invest in.