Stocks

In this lesson you’ll learn:

• Which factors could influence stocks
• What financial ratios are worth looking at while analysing stocks
• The difference between a physical share and a CFD

Each segment of the financial market is governed by its own laws. Take currencies – their value is determined mainly by what’s going on in the country’s economy, by the central bank policy or by moves in interest rates. Commodities, on the other hand, focus mainly on a relationship between supply and demand. Then there are stocks. Stocks are interesting instruments as they are not only connected with what’s going on inside companies, but they can also be a reflection of the economy as a whole. Additionally, while a larger than 5% change in the value of a currency or a commodity is considered to be unusual or extraordinary, it’s quite commonplace for stocks.

What are stocks?

Let’s begin with a simple definition: a stock is a security that signifies ownership in a corporation and represents a claim on part of the corporation’s assets and earnings. That means that when you buy a stock of a specific company, you become its owner. You own part of the company’s assets, and have a right to participate in its earnings (you obtain a right to receive a dividend). Of course, there are many types of stocks, but it’s worth focusing on common stocks as they have the biggest market share.

As you become a majority stakeholder or an owner of a company, that makes trading stocks a bit more complicated. You not only decide on what to do with the securities you have bought, but also have a right to decide on company’s future by participating in the general meeting of shareholders. Common stock owners can vote on the corporation’s affairs, such as the Board of Directors, mergers and acquisitions and takeovers.

What affects stocks?

As always, there’s no easy answer to such question. The truth is that there is a lot of factors that could affect stocks prices. Let’s highlight the most important ones:

• Earnings – earnings are crucial in analysing stocks. The more the company earns, the more expensive its shares should become – in theory. When a company is making money it could pass the profit onto shareholders in the form of a dividend. It could also buy back its share or invest, which should lead to a rise in the company’s value. As the amount of stock remains more or less unchanged, a rise in company’s value leads to a higher price of each share. It’s important to remember that sometimes a company with a high price of its stock might not be making much money. However, the rising price means that investors are hoping that a profit will appear in the future. If not, prices could fall sharply as happened during the dot-com bubble. That is why earnings are crucial to watch while trading stocks.
• The industry or sector – Companies are doing their business within specific sectors of the economy. For example, Apple is one of the leading high-tech companies, which means that it won’t compete with Coca-Cola, but will definitely look at what’s Microsoft doing. Aggressive competition within a sector could have a significant impact on company’s profits, thus pushing lower the value of its stocks.
• Finances – The financial situation of a company determines its ability to exist in the long-term. A deterioration in this area could lead to a dramatic moves in company’s stocks, with banks shares during 2008 crisis as the best example.
• Economic conditions – Stock prices depend not only on what’s happening in the company, but also on what’s going on outside of the company. For example, deteriorating growth or even a recession could signal a downfall in earnings or even bankruptcy, which could affect stocks. On the other hand, higher economic growth could improve the outlook for a particular company, leading to a rise in its shares.

Of course there’s a lot of factors to watch, but these four are crucial to follow while trading stocks.

Look at the ratios:

Valuing a company is definitely not an easy task. Financial statements, outlook for earnings, industry conditions and all the variations that come with that can be overwhelming. However, there’s a simple way to compare stocks between each other and to weigh up if an investment in a specific company would bring you profit. You could use financial ratios to determine if there’s a trading opportunity. Let’s look at the most popular ratios that could be helpful in your analysis:

• Earnings per share (EPS) – this is a ratio that calculates the amount of net income earned for every outstanding share. In other words, this amount is the money earned by every share if the entire profits are divided by the total number of shares at the end of the year. In some ways, it also reflects the profitability of the company from a shareholder’s perspective. The higher it is, the more attractive are stocks.
   
• Price to earnings (P/E) – Price to earnings ratio is the most popular investment valuation indicator. Despite its imperfections, it’s most widely reported by market participants. It is a valuation of a company’s current share price compared to its per-share earnings. A high ratio means investors have to pay more for today’s earnings, while low means that they become cheaper. What’s more, stocks with a high P/E could be overpriced, which would make an investment unattractive. The general rule is that the lower the P/E ratio, the more attractive the stock.
   
• Dividend Yield (DY) – this is a ratio that indicates how much a company pays out in dividends each year relative to its share price. Dividend yield is represented as a percentage and can be calculated by dividing the value of dividends paid in a given year per share of stock held by the value of one share of stock. The ratio is a useful tool for so called “dividend investors” that are looking for stocks that have a stable growth and pay a solid dividend.

There is of course a lot of ratios that could be used in analysing stocks. You should choose those that will be useful in your trading strategy, just like with the one mentioned in the Dividend Yield’s case.

CFDs on stocks:

PRIMAL TRADE offers CFDs on stocks, though these are not exactly stocks themselves. Although they move just like the underlying asset, they could also give you additional possibilities. Let’s look at the main topics connected with equity CFDs.

1. CFD trading enables you to go long (buy) if you believe a share price will rise, or go short (sell) if you believe a share price will fall. CFDs are therefore much more flexible than physical share dealing, giving you the ability to take advantage and potentially profit from any share price move, up or down, if the market meets your predictions.
2. You can trade equity CFDs with leverage of up to 1:10. That means that you could trade equity CFDs with lower margin than normal stocks require.The margin required for opening a position depends on the market cap, liquidity and volatility of the particular share. Please bear in mind however that leverage works in both ways, and you could lose all your deposited funds, so be careful to manage your risk.
3. While trading CFDs you have to pay a daily financing fee called swap points. That is because of trading on margin.
4. You may look for companies paying dividends and benefit from cash adjustments being equivalent of net (long positions are subject to a plus cash adjustment) or gross dividend (short positions are subject to a minus cash adjustment). Rights issues and spin-offs are handled in a similar way, as a cash adjustment is based on market price when listing of rights or spun-off stocks starts. Open positions are subject to corporate actions adjustments if they remain open after trading hours on the expiry date.
5. Transactions on equity CFDs may cause incur tax costs, depending on the specific underlying market regulations.
6. Buying a CFD doesn’t make you an owner of the company. On the other hand, buying a stock does. That means that you can decide on the company’s future if you are an owner of its shares, which is impossible to do while owning CFDs.

As you can see, there are some differences between CFDs and typical stocks. However prices of both instruments normally behave the same way. That means that you could enjoy most of the benefits connected trading stocks without actually owning them.

This article is provided for general information and educational purposes only. Any opinions, analyses, prices or other content does not constitute investment advice or recommendation. Any research has not been prepared in accordance with legal requirements required to promote the independence of investment research and as such is considered to be a marketing communication. PRIMAL TRADE will accept no liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly for use of or reliance on such information.
Please be aware that information and research based on historical data or performance does not guarantee future performance or results.

In this article you will learn:

• Stocks as financial instruments
• What is the stock market?
• How to buy stocks
• Investing or trading?
• Fundamental vs technical analysis
• Conclusion

Investing in stocks has gained in popularity in 2020 following the Covid-19 stock market crash. This should not come as a surprise – we live in a low interest rates environment as major central banks eased their monetary policy. This means that saving money through safe instruments (e.g. savings accounts or government bonds) has become extremely tough or, in many cases, impossible. Apart from that, top global brokerage firms have made stock trading simple, convenient and low-cost. Many would-be investors are probably wondering – what is the stock market, what is stock trading and, finally, how do I invest in stocks? In this article, we answer all those questions and more.

Stocks as financial instruments

Let us begin with the explanation of stocks, which is essential before making any stock market investment. Stocks (also known as equities) are securities that represent the ownership of a fraction of a company. You might also come across the term “shares”, which in theory is slightly different compared to “stocks”. Shares might refer to different kinds of investments, e.g. mutual funds, ETFs or privately held firms. On the other hand, stocks refer exclusively to securities traded on a stock exchange. However, the terms “stocks”, “equities” and “shares” are used interchangeably in everyday situations.

As corporations issue stocks in order to raise funds to operate their businesses, shareholders are entitled to receive dividends and voters’ rights as, technically, investors own a portion of the company (that portion depends on their stake). The key thing to understand about how the global stock market works is to digest the whole idea of trading – how is it possible that one can acquire a part of a company? The answer is quite simple – investing in stocks is possible for investors from around the world (both institutional and retail) as publicly traded companies are listed on a stock exchange (also known as stock market or bourse). 

Source: PRIMAL TRADE

What is the stock market?

As it was already mentioned above, companies may be listed on a stock exchange. The process of becoming a publicly traded company is called an initial public offering (IPO). When a firm becomes public, its shares can be bought and sold on a secondary market, namely on the stock exchange. Therefore, a stock market acts as an intermediary – it is a centralised location where buyers and sellers conclude transactions. Traditionally, a stock exchange was a physical place, but it has changed a lot due to technological advancements and now an exchange might be electronic as well.

The price of a stock might go down or up – fluctuations in the share price are caused by changes in the supply of and the demand for the stock. Generally, if the company has a successful business with promising perspectives, its share price should go up. The fundamental situation of the firm is absolutely critical, therefore investors focus on financial performance and react to earnings reports. However, there are also other factors that affect stock prices, for instance, macroeconomic data from key economies, the level of interest rates or the market sentiment reflected in key stock market news. Experienced investors and analysts are constantly trying to identify the best stocks to invest in. As a result, one can assume that in the long-run share prices reflect all information – the idea has been known as the efficient market hypothesis (EMH). The PRIMAL TRADE Research Department prepares daily analysis and comments on the current events on both local and global stock markets. Our analysts prepared a list of 10 most interesting stocks for 2021 as well – you may find the report here.

Source: howmuch.net

Please be aware that the presented data refers to the past performance data and such is not a reliable indicator of future performance.

How to buy stocks?

Even though we’ve already touched on how the stock market works, you may still be wondering – how can I buy stocks? In order to gain access to the stock exchange, a would-be investor first needs to open a brokerage account. In the past, investors needed the direct assistance of a stockbroker in order to buy or sell securities, for instance, via telephone. However, the industry has changed a lot in recent years and top brokerage firms have developed easy-to-use trading platforms and trading apps. As a result, investing in stocks has become easily accessible, as people are now able to buy stocks with just a few clicks.

Nevertheless, what hasn’t changed is the importance of choosing the right broker. The best broker should not only make stock trading convenient and low-cost, but also support its clients in terms of education and market news.

Once you’ve opened and funded your brokerage account, you are able to place your first trades and monitor your positions. It would be recommended to become comfortable on the trading platform before you start trading as well. Brokers usually offer some tutorials, but at the same time brokerage firms tend to adjust their platforms so that they become more and more intuitive. Now any would-be investor might think – what does trading stocks look like in practise? How do I choose the right companies? Below, we’re going to present several major concepts of investing in stocks.

Investing or trading?

At the beginning, it is important to understand the difference between investing and trading. While both words are often used interchangeably, they do represent two different approaches of market participants. Investing is usually associated with long-term investors who apply a buy-and-hold strategy. Their goal is to select promising stocks and hold them for months or even years. This group of investors pays attention to fundamentals of certain companies or sectors. Broadly speaking, there are two types of investments – growth stocks and value stocks. The first case represents companies that are expected to deliver high levels of profit growth in the future. As their stock prices could potentially outperform the market, investors are able to benefit from it. There are also value stocks, which are usually described as well-established businesses with good fundamentals. Such companies often pay dividends, which can be another source of income for investors.

On the other hand, trading is often seen as a short-term approach. Stock traders usually intend to take advantage of quick price movements. For instance, they might buy a certain stock before an earnings report release or after an unexpected price drop, hoping that the shares will rebound. Some traders hold their positions for less than a day, which is called day trading. Traders are generally experienced market participants that spend a lot of time monitoring the market and looking for market inefficiencies. Experienced traders apply sophisticated strategies and stick to their rules, for instance, they always place a stop-loss order. Apart from that, they might also speculate that certain stocks will fall, which is called shorting a stock. Some people, who have accumulated enough capital and proper experience on the stock market, choose to trade stocks for a living.

Fundamental vs technical analysis

There are two main approaches to investing money in the stock market – fundamental analysis and technical analysis. Both concepts have their loyal supporters who often disagree. Some believe that fundamental analysis is the only appropriate approach, while others claim that technical analysis gives better results. However, as it is usually the case with such dilemmas, the truth lies somewhere in the middle.

Fundamental analysis is a method to assess the intrinsic value of a stock. Investors tend to analyse not only strengths and weaknesses of a certain company, but also the overall economic conditions. Institutional and experienced retail investors often build complex models in order to calculate the target price of a stock, given their own assumptions about the company’s future earnings. As a result, they are able to verify whether the stock is undervalued or overvalued at a time. Brokerage firms cover a great deal of listed companies and research departments often release their equity research reports, which may be particularly helpful while investing in stocks.

On the other hand, technical analysis is based on a chart created by price movements. In this case, market participants try to identify patterns and look for various signals in order to determine where the market is moving. Experienced investors and traders use a wide variety of indicators and make buy or sell decisions based on them. Even though technical analysis is a wide subject, a would-be investor does not need to know everything about it in order to become successful. There are certain simple concepts that are sufficient to embark on stock trading, for instance, support and resistance levels, moving averages or volume analysis. There are also technical analysts among brokerage firms’ employees, meaning that research content often includes comments based on technical analysis– once again this could be helpful in learning how to trade stocks.

Which approach is better then? Generally, it is said that traders often apply technical analysis while long-term investors focus solely on fundamentals. That is correct only to a certain extent. “Technical analysis is all that matters in the short-run, while fundamental analysis is all that matters in the long-run,” someone once said. Here it is worth pointing out that price movements depend on many factors, including the overall stock market sentiment, so it probably wouldn’t be particularly wise to rely on just one stock trading strategy (either technical or fundamental analysis). Applying different concepts seems to be a better solution, and it is a common practice for fundamental analysts to make use of technical analysis in order to find the best entry points. Meanwhile, technical analysts pay attention to some fundamentals from time to time as well. 

Conclusion

Investing in stocks is a long journey full of learning, potential victories, as well as failures. It helps to build character as psychology plays a significant role in both investing in stocks and short-term stock trading. It should be noted that would-be investors should not feel discouraged due to lack of knowledge, as even the greatest investors in history did not know how to buy stocks at the beginning of their journey. Starting with small steps and learning through experience will probably give the best results. As the Internet is full of resources about stock trading for beginners or the basics of fundamental analysis, keeping informed about stocks has never been easier. 

Is it possible to invest in stocks with PRIMAL TRADE?

At the moment, PRIMAL TRADE offers stock CFD trading only. This includes over 1500 global stock CFDs, including Apple, Facebook, Amazon, and Barclays. CFD trading allows you to take a position on the price of an instrument without actually owning the underlying asset.

In this article you will learn:

• Stocks as financial instruments
• What is the stock market?
• How to buy stocks
• Investing or trading?
• Fundamental vs technical analysis
• Conclusion

Investing in stocks has gained in popularity in 2020 following the Covid-19 stock market crash. This should not come as a surprise – we live in a low interest rates environment as major central banks eased their monetary policy. This means that saving money through safe instruments (e.g. savings accounts or government bonds) has become extremely tough or, in many cases, impossible. Apart from that, top global brokerage firms have made stock trading simple, convenient and low-cost. Many would-be investors are probably wondering – what is the stock market, what is stock trading and, finally, how do I invest in stocks? In this article, we answer all those questions and more.

Stocks as financial instruments

Let us begin with the explanation of stocks, which is essential before making any stock market investment. Stocks (also known as equities) are securities that represent the ownership of a fraction of a company. You might also come across the term “shares”, which in theory is slightly different compared to “stocks”. Shares might refer to different kinds of investments, e.g. mutual funds, ETFs or privately held firms. On the other hand, stocks refer exclusively to securities traded on a stock exchange. However, the terms “stocks”, “equities” and “shares” are used interchangeably in everyday situations.

As corporations issue stocks in order to raise funds to operate their businesses, shareholders are entitled to receive dividends and voters’ rights as, technically, investors own a portion of the company (that portion depends on their stake). The key thing to understand about how the global stock market works is to digest the whole idea of trading – how is it possible that one can acquire a part of a company? The answer is quite simple – investing in stocks is possible for investors from around the world (both institutional and retail) as publicly traded companies are listed on a stock exchange (also known as stock market or bourse). 

Source: PRIMAL TRADE

What is the stock market?

As it was already mentioned above, companies may be listed on a stock exchange. The process of becoming a publicly traded company is called an initial public offering (IPO). When a firm becomes public, its shares can be bought and sold on a secondary market, namely on the stock exchange. Therefore, a stock market acts as an intermediary – it is a centralised location where buyers and sellers conclude transactions. Traditionally, a stock exchange was a physical place, but it has changed a lot due to technological advancements and now an exchange might be electronic as well.

The price of a stock might go down or up – fluctuations in the share price are caused by changes in the supply of and the demand for the stock. Generally, if the company has a successful business with promising perspectives, its share price should go up. The fundamental situation of the firm is absolutely critical, therefore investors focus on financial performance and react to earnings reports. However, there are also other factors that affect stock prices, for instance, macroeconomic data from key economies, the level of interest rates or the market sentiment reflected in key stock market news. Experienced investors and analysts are constantly trying to identify the best stocks to invest in. As a result, one can assume that in the long-run share prices reflect all information – the idea has been known as the efficient market hypothesis (EMH). The PRIMAL TRADE Research Department prepares daily analysis and comments on the current events on both local and global stock markets. Our analysts prepared a list of 10 most interesting stocks for 2021 as well – you may find the report here.

Source: howmuch.net

Please be aware that the presented data refers to the past performance data and such is not a reliable indicator of future performance

In this article you will learn:

• Introduction
• Why trade stocks?
• Investing goals & styles 
• Research – key criteria to look for
• Conclusion

Choosing the best stock to trade with may seem like a tough job. Too often many promising businesses are highly valued and investors think of them as bubbles, whereas stocks with low price to earnings ratios or high dividend yields can look attractive, but sometimes they fail as well. There’s no proven, always-working method for choosing the best CFD stock to invest in. However, for many years people have been trying to select potential winners and it is not likely to change anytime soon. Even despite the rise of low-cost index funds, it is said that active investing will survive as rising market share of ETFs and index funds is going to create opportunities in terms of active stock picking. In this article, we examine best practices for investors and key criteria in terms of researching the best companies to invest in. 

Why trade stock CFDs?

Let us begin with the idea of investing – why should people make an effort to invest at all? While investing is always associated with risk, not owning stocks at all isn’t necessarily a risk-free option either. Just think about having your savings in a bank amid a low interest-rates environment –  in many cases it is virtually impossible to earn an interest in a bank right now. Being familiar with at least one equation from the world of finance makes it easier to familiarise yourself with compound interest as well. It assumes reinvesting your earnings, which then earn interest as well. The idea might be seen as a secret formula of successful long-term investors.

Compound Interest=Initial Investment ×1+in 

Please be aware that the presented data refers to the past performance data and such is not a reliable indicator of future performance.

Investing 1,200.00 USD (or your local currency) a year seems realistic for most people. Source: The Motley Fool (fool.com)

If you’re a beginner in the world of stock trading, we recommend reading our article “Investing in stocks – what is stock trading?” where we explain some of the more basic terms, including stocks, stock market, fundamental vs technical analysis, trading vs investing.

Investing goals & styles

Having explained the power of investing, it is worth pointing out that investors should know their goals and investment style before buying stocks. Clarifying your goals makes things much easier – is it a long-term price growth of your portfolio or do you intend to make money through dividends? Are you saving for retirement (30/40/50-year time horizon) or maybe your goal is to achieve a decent rate of return in a decade and buy a new car or home then? Some investors may have a time horizon of just 2 years, which is fine as well. The key thing is to recognise your objectives, apply an appropriate strategy and remain consistent. Unfortunately, many investors tend to overreact amid market crashes and forget about their goals. Therefore, it is absolutely essential to ask yourself what your investing goals are.

Secondly, it is recommended to know your investment style as well. This can be difficult for beginner investors, as an investment style will likely develop through experience. However, it would be a wise move to get to know different styles and try to figure out which one fits you best. Would you rather be a passive trend follower? Maybe you would prefer to apply an active management style? Do you intend to buy stocks only after companies have released solid earnings? There are plenty of questions that investors should constantly ask themselves. As far as investment styles are concerned, one may consider the following major approaches:

• Active vs Passive portfolio management
• Growth vs Value investing
• Small Cap vs Large Cap company

Please be aware that the presented data refers to the past performance data and such is not a reliable indicator of future performance. 

The risk of a portfolio is going to depend on the investor’s investment style. Some strategies may be more risky, and can lead to greater losses, but in such cases the expected rate is potentially higher as well. Source: PRIMAL TRADE Research, based on the Morningstar Style Box 

Research – key criteria to look for

Let’s move on to the art of picking the best stocks to invest in. In this section, we will touch on the most important factors that investors should take into consideration while investing in stocks.

Sectors you understand

To begin with, it might be a good choice to invest in sectors that you understand and feel comfortable with. At the same time, it would be reasonable to avoid sectors that seem like a total mystery to you. Best companies to invest in can often be found in an industry that you represent. A quick example – an engineer could potentially research some good manufacturing stocks as he or she has an advantage here and knows the industry well. Many investors also tend to buy a stock if they love a product of a certain company. For instance, if you’re a tech fan and own a few products of a particular company (thereby understanding their business), maybe you should become interested in their shares as well? As you can see, researching top stocks is not limited to the computer screen – it is much more than that.

Growth and Value

It is no surprise that companies with strong fundamentals may be considered the best stocks to invest in. However, investors often find themselves at a crossroads amid the value vs growth stocks dilemma. Growth stocks represent companies that are expected to deliver high levels of profit growth in the future. Such companies have often demonstrated better-than-average gains in earnings. Meanwhile, value stocks usually represent well-established companies with strong fundamentals and predictable business models. One solution might be to actually diversify and have both types of companies in your portfolio. A broad exposure is still expected to provide a decent rate of return in the long-run, but the total risk is going to be reduced.

Table of contents:

• Benefitting not only from increases
• Benefitting from decreases during a slump in the market
• How to make money on betting against the market
• Betting against the market in theory
• How to make money on betting against the market – CFDs on stocks, commodities, indices and currencies
• Making money on betting against the market – summary

The financial markets provide a number of opportunities to manage one’s money and establish various investment strategies. It is generally assumed by the majority of people that making money on the financial markets is possible only by buying a given financial instrument cheaply and selling it for a high price. For example, if we buy 100 shares in a given company for e.g. GBP 100 per share because we expect that the company is going to perform better in the future, which is going to increase the value of the undertaking and in turn – the share price. If e.g. the share price increases to GBP 150 per share, then we will earn GBP 50 per share in this example by selling 100 shares.

Benefitting not only from increases

It seems that the majority of traders think that it’s only possible to benefit from the increases. That is that gold, crude oil, stocks, and foreign currencies should be bought when they are cheap and sold when they are expensive. This means thinking only in one direction. The direction of price increases. However, contemporary financial markets offer many other possibilities in every situation. At this point, economic crises such as the global financial crisis, the Greek crisis, and the Covid-19 pandemic should be listed. Also, the situation in which a trader thinks that a given company is not going to develop at a fast pace and its share prices will drop instead of increasing should be mentioned. Then there are also the bursting of economic bubbles, recessions, or economic slowdown when entire stock indices can fall, prices of crude oil can decrease, or a collapse in other instruments can occur.

Benefitting from decreases during a slump in the market

Benefitting from decreases in the value of stocks, commodities and indices can be a response to all those negative scenarios for the price. Thanks to such opportunities, the trader is not limited only to trade during a bull market, but can also use the bear market, crashes, collapses in quotations caused by various factors. This, in turn, can contribute to extending the range of investment opportunities and allow retaining flexibility under any market conditions. The only strategy for a large group of traders is betting on price increases or staying in the background and observing the events. But, thanks to the opportunity provided by betting on price decreases, there is a chance of making use of virtually any situation.

How to make money on betting against the market

Let us explain the mechanism which was initially behind the method of benefitting from declining share prices. A short position, short sale, short – these are the terms that originated at the time when the trader decided to bet on price decreases. These terms need to be understood in order to know what we are talking about at any time. In the classic case referring to shares, which was practiced on the largest stock exchanges in the world, there was a possibility to borrow shares from institutions that owned them, sell them on the market, repurchase them at a lower price and return them to their owner, while paying an additional fee for borrowing the shares.

Betting against the market in theory

A trader assumes that the shares of a given company are already too expensive, overvalued and that the company’s performance in the future will be poorer than it is now, which in the trader’s opinion should lead to a decrease in share prices. The trader does not hold the company’s shares, but he or she wants to make a potential profit when the downward trend occurs. One of the financial institutions is able to lend the trader 10,000 shares of the company in exchange for a commission. The trader borrows 10,000 shares and sells them at a market price of GBP 100 per share. In exchange for the sale of 10,000 shares for GBP 100 per share, the trader receives GBP 1,000,000. The share price drops to GBP 50 in accordance with the trader’s expectations. At that point, the trader decides to repurchase 10,000 shares on the market for GBP 50 per share. He or she spends GBP 500,000 for this (the example does not include the costs and commission). The trader returns 100,000 borrowed shares to the institution, while retaining the profit of GBP 500,000. In this way, he or she benefitted from decreases in share price.

What would happen if the price increased e.g. to GBP 150? The trader would have to spend GBP 1,500,000 to buy shares on the market, i.e. he or she would have to pay an additional GBP 500,000 to the initially received GBP 1,000,000. In order to secure its interests, the institution lending the shares may request that the trader pay the so-called margin. This can be the aforementioned GBP 500,000. Had the share price started to increase above GBP 150, the institution would have requested the trader to increase the margin, and if he or she had failed to do that, he or she would have to repurchase the sold shares immediately in order to be able to return them.

How to make money on betting against the market – CFDs on stocks, commodities, indices and currencies

A very similar mechanism occurs in the case of opening a short position on CFDs that make it possible to benefit from a decrease in the prices of shares or entire stock indices. The difference is that in this case, no one has to lend shares to anyone and only the difference in the transaction value is settled. It takes place in the same way as on the forward transactions market. Hence the CFDs name – contract for difference.

If we open a short position on 100 shares of the company whose share price is GBP 15 by means of CFDs on shares and spend GBP 1,500 on this (the example does not include costs), only the difference will be subject to settlement. If the share price increases to GBP 16, we will lose GBP 100, and if the price falls to GBP 14, we will gain GBP 100. In this case, the margin will also play a key role, because at the point when the price continues to increase and the margin is used up, the position will be automatically closed with a loss – like in the previous example.

Contracts for differences, which allow the trader to benefit from decreases in other financial instruments, operate on exactly the same basis. For example, if a trader expects that gold prices will decline from GBP 2,000 per ounce to GBP 1,700, he or she may open a short position (short) on CFDs on gold. In this case, if the price falls from GBP 2,000 to GBP 1,700, the trader may earn GBP 300 for each sold ounce of gold. If a trade with the exposure to two ounces of gold was opened, the potential profit will amount to GBP 600, etc. If, however, the gold price increases from GBP 2,000 to GBP 2,300, the trader will lose GBP 300 per ounce.

In the case of currencies, it is also possible to bet on the decrease in the value of one currency with respect to the other. For example, a trader expects that the USD/GBP exchange rate will decrease from GBP 4 for USD 1 to GBP 3.8 for USD 1. Then, the trader can open a short position on USD/GBP. If the transaction value amounts to 1 lot, i.e. 100,000 units of the base currency, a change by 1 pips will be GBP 10. If the USD/GBP exchange rate decreases by 2,000 pips from GBP 4 to GBP 3.8, the trader can gain GBP 20,000. However, had the USD/GBP exchange rate increased from GBP 4 to GBP 4.20, the trader could have incurred a corresponding loss.

Making money on betting against the market – summary

The possibility to open short positions provides the trader with high flexibility in terms of approaching the market as compared to the traditional possibility to benefit from increasing prices. We live in very dynamic times that are not free from economic crises or bubbles. Thanks to the opportunity to benefit from decreases in stocks, indices, commodities and currencies, the trader can bet against market bulls who are only counting on price increases. Moreover, the trader can in this way also secure, for example, the portfolio of shares held when he or she does not want to sell them due to a dividend payment, but sees that potential adjustment can occur. Thus, there are plenty of possibilities – from the classic speculation on price decreases to the so-called hedging, i.e. securing the position, and all of this can be easily and intuitively performed on PRIMAL TRADE’s trading platform, xStation 5.