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Quick Start Guide To
Trading Stocks, Traded Options, CFD's, and Spread-Betting...
It is important to read this alongside
our core advanced stock charting website, it is 100% free - simply open
clickcharts.com in a
separate window. This will provide the proper context to everything
discussed below.
In order to buy and sell stocks, you have
a number of possible choices. We will cover most of these instruments
over the next few paragraphs of this guide. Basically, you have a choice
of different instruments you can use to trade our stock picks/signals.
One of the easiest ways of trading stocks is in the traditional old
fashioned way of buying and selling stocks. A stock is priced at $5, you
buy 1,000 shares, they move up to $5.50, and you sell, for a $500
profit. Capital on this trade would have been $5,000 [1,000 shares
multiplied by $5 original buy price].
Another way of trading is to take advantage of brokers 'margins' which
allow you to trade the same stocks with less capital. You could buy
stock worth $5,000, but instead of putting up $5,000 capital, you could
put up just 25%, or $1,250 capital. this is known as 'margined' stock
trading. Some brokers offer 25% margin, others 50% or 33.3% [one-third],
etc. This is completely at the brokers' discretion. Note, you can lose
more than your capital if the market moves against you, so be aware of
this.
Other ways of trading
stocks is through CFD's and spread bets.
You may also choose to
trade 'options', all of which we will cover in some detail below...
Remember, how you trade our stock picks & signals is entirely up to you
- you may be perfectly happy with straightforward stock trading, or
margined stock trading. Or, you may prefer to trade spread bets or CFD's,
or indeed options. Learn as much as you can about these instruments,
practice paper-trading using these methods, then decide which one you
are most happy and at ease with. No matter which instrument you decide
to trade, the key is to be on the right side of the market.
So, let's get started - beginning with straightforward stock trading...
Straightforward Stock Trading
The simplest, most straightforward instrument one can utilize in order
to trade stocks, is to buy and sell stocks in the traditional way. To do
this, you simply open an account with a broker. Most account application
forms can now be completed within 15-20 minutes 'online' [example
brokers: www.interactivebrokers.com, or www.etrade.com, or
www.thinkorswim.com, etc.] or you may do this via regular mail. There
are a great number of brokers you may contact, all of whom allow you to
trade online from your PC/internet. Below is a list of brokers whom you
may contact...
www.interactivebrokers.com
www.interactivebrokers.co.uk
www.etrade.com
www.etrade.co.uk
www.datek.com
www.ameritrade.com
www.cybertrader.com
www.scottrade.com
www.tdwaterhouse.com
www.tdwaterhouse.co.uk
www.mybroker.com
www.comdirect.co.uk
www.stocktrade.co.uk
www.idealing.com
www.selftrade.com/uk/
www.thinkorswim.com
www.optionsxpress.com
The 'capital requirements' for trading straightforward stocks are 100%
of the value of the shares you are buying. So, if you wanted to buy 100
shares in Microsoft at $30 each, it will cost you $3,000. Typical
broker-commission rates for opening a straightforward share trade, is
around $7 to $10, and the same amount for closing. You can find cheaper
ones all the time, and many brokers offer a number of 'commission free'
trades just to get your business. One broker is presently offering 30
free trades [a saving of around $600] when you open an account. Rule of
thumb here: Shop Around!
Please note that international borders do not generally limit a person
from opening an account at any location he/she pleases. If you are based
in the UK, or the US or anywhere in the world, you should be able to
open an account without any problems [check this with the broker]. Start
by visiting the above websites…
Continuing with stock trading, we now move on to another, slightly more
advanced instrument for trading stocks - Margined stock trading...
Margined Stock Trading
As you know, when you buy a stock in the
traditional way [straightforward stocks, as described in the previous
section], you make the same percentage of profit as the movement in the
stock. For instance in the earlier example, if Microsoft moves up from
$30 to $33, then your profit on the 100 shares would be $300, or 10%.
This is fine for some traders...
However, many traders prefer to 'gear up’ their trading, allowing them
to control more stock with less capital. Typically, you can control
[buy] any amount of shares for around 25% of the capital deposit
requirements, which is a 4:1 gearing [some brokers offer 50%, or 2:1].
So, buying 100 shares at $30 does not mean you have to put up $3,000
capital, but around 25% [or $750]. This is possible through margined
stock trading. It is very simple...
All you are doing, is basically buying a stock, then putting up only a
quarter [25%] or a third [33%], depending on what the broker allows.
Now, if Microsoft stock moves UP from $30 to $33, then your profit would
still be $300, but your capital would have been $750 [based on a 25%
margin]. This is a 40% profit, which is better than 10%.
Check with the broker their margin requirements for stock trading - some
will offer 25%, others 33.3% [one third] or 50%. Remember though that as
profits are multiplied on the margin basis, so are the risks, you can
lose more than you put in, so be aware of this, and study this form of
trading to identify any margin you might like to take advantage of if
any.
Next, we will take a look at spread betting and CFD trading...
CFD (Contracts for Difference) & Spread-Bet Trading
Let's start with a briefing on CFD's... This is another trading
instrument you may use instead of straightforward/margined stocks. Take
a quick look further down this page for web addresses of CFD dealers,
who provide full information on how a CFD works. The letters "CFD" stand
for 'Contract-for-Difference'. A Contract-for-Difference is exactly as
the name suggests. Whenever you think [your opinion] the price of a
share is going to go up, it is very likely that somebody somewhere will
take an opposite view to you, and think that the share price is going to
go down. This creates an opportunity to place a type of cross-trade, if
you like. This is just like any other trade in life. Let us take
property for example...
The person you buy a property often sells
it to you in the fear that the price of the property may come down in
the near future. You buy the property taking an opposite view: that the
price will go up. This, in simple terms, is a ‘trade’. Winner gains,
loser loses, depending on whose opinion turns out to be the right one.
It happens with property, with gold, with antiquities, with shares and
indexes, anything where there are 'opposing' directional opinions. These
'differences' in opinion can be traded, through the contract
"for-difference" [of opinion].
Taking a quick example... Assume, on Monday you saw a BUY opportunity in
XYZ stock on your screen, which tells you that the stock is likely to go
up. Somebody else, an individual just like you, somewhere [anywhere in
the world] thinks the stock is going to go down, for whatever reason.
Now, in order for the two individuals to do a trade, one needs an
‘agent’ who puts the person who thinks the market is going to go up
[you] with the person who thinks the market is going to go down [the
other person]. This agent is the ‘broker’ or better known as a CFD-dealer.
With state of the art computers, this 'agent' can see on his screen any
person who wants to back his judgment that the market is going to go up,
and another person who wants to back his judgment that the price is
about to go down. The agent can potentially put the deal together, run a
'book', so to speak.
Assume the FTSE 100 index [the major UK
stock market index] stands at 4,800 points, you think it will go up, and
the other person thinks it will go down. Now, once you enter the market
to take an ‘up’ position, the CFD-dealer simply matches you with the
person who is taking a ‘down’ position. This matching thus neutralizes
the dealers’ position so his risk is zero. He is simply the ‘middleman’
or matchmaker. For his trouble in matching the two parties, he charges
what is known as a ‘spread’. In the old days of bookmaker speak, they
called it 'juice' or 'cut' - but 'spread' sounds so much more
professional doesn't it?
So, with the FTSE at 4800, he will quote two prices, eg., 4798 to 4802.
This means 4798 to take a 'down' position, and 4802 to take an up
position. That is a difference of 4 points. This is simply his juice or
profit margin [similar to an estate agent or realty agent who puts a
buyer and seller together and takes a tiny 'cut']. There is always a
two-way price quote [or bid & ask]. In this example, the person who
takes the ‘up’ position buys at 4802, the other person takes the ‘down’
position at 4798. The difference of 4 is the market-makers commission.
If you have a few minutes, check out the following websites, which offer
full, detailed information [including examples] of CFD stock trading.
You will also find their buy & sell ‘quotes’ [similar to the 4798-4802
example above] online…
www.onlinecfds.com [click on 'About CFD's')]
www.etrade.co.uk [click on CFD’s]
www.cityindex.co.uk [click on CFD’s and “Learn More”]
www.deal4free.com [click on Share CFD’s]
www.gnitouch.com [click on CFD’s]
www.igmarkets.com [click on CFD’s]
www.stocktrade.co.uk/ourservices/ifx.html
Full information packs and demo CD’s, dummy software trading platforms
etc., are all supplied by most dealers/brokers free of charge - all you
do is ask/request online. The great thing about CFD's [depending which
way you look at them] is that they also offer 'margined' trading. You
need only put up around 10% to 25% capital to trade.
Here’s another quick example of a CFD Trade: Say it is Thursday 19th
July. You see a BUY opportunity in Tesco, whereby the trend index in
both the stock and the major [FTSE 100] index are aligned. The price is
2.75 per share. You call your CFD broker, or check on the internet [eg.,
above sites] for the latest Tesco CFD quote [most quotes are available
online, in real-time]. The quote for Tesco is 2.74 to 2.76. You are
ready to trade...
As you know, this means that you have to buy the stock at 2.76 to take
an ‘up’ position. Somebody somewhere else [whom you will never meet,
because the trade is done by the broker/their computer] will take a
‘down’ position at 2.74 [the lower of the brokers quote]. The difference
of 2 points is the brokers' profit. Now, assume at around 4:00pm the
same day, Tesco stock hits 2.91, a gain of 15p since the start of the
trade. Remember, you entered the market at 2.76. Now, in order to close
your position and take your profit, you once again call the broker or
check online for the latest quote, ready to exit your trade and take
your profits early. This time, the quote is 2.90 to 2.91. In order to
‘sell’ your position, you have to take the lower of the two quotes,
which in this case, is 2.90.
The net result in this example is:
Opened an UP position @ 2.76
Closed the position @ 2.90
TOTAL PROFIT = 15p
The above profit is per share. So, if you traded 1,000 shares, then the
profit would be £150 [15p x 1000 shares]. More importantly, the capital
requirements to buy 1,000 shares would have been 2.76 [buying price]
multiplied by 1,000 shares [quantity] multiplied by approx 25% [typical
margin requirement for trading CFD’s, some CFD dealers offer 10%
margin], which equals £690.00. That is a profit of £150 on £690 capital,
or 21.7% return.
Most CFD brokers require you to place around 10% to 25% deposit on the
value of the shares to trade CFD’s. One of the most popular, leading
commission-free brokers is www.deal4free.com, who are certainly worth
consideration [great trading platform] if you wish to trade CFD's. Also
check out all of the other CFD brokers listed above.
Please note that CFD trading does require at least some experience from
the brokers, to prove that you do fully understand the risks/rewards of
this instrument [this experience could be in trading shares, or
spread-bets, detailed next].
For the lesser experienced and those with less capital, there is a new
instrument in the market: The MINI-CFD. Check out: www.finspreads.com/minicfds
- if you are a beginner/novice to trading, and have very little
experience and/or limited capital, then full CFD [as opposed to mini CFD]
trading will not be for you right away. However, there is another
instrument you can use to profit from stocks, and is a firm favorite
among our UK based traders: Spread-Betting...
An Introduction To Spread-Betting...
Similar in some respects to the CFD, spread betting can be done on a
large number of stocks. Some of the better websites to visit, in order
to start learning how to make money with spread betting is
www.cityindex.co.uk [simply click on the “Learn More” tab] or
www.deal4free.com, both of whom offer quick-learning pages on their
sites.
We start with a few opening basics about spread betting. Firstly, do not
be put off by the word ‘bet’ which carries for many people, a number of
totally unnecessary, negative connotations and preconceptions. It is
probable, the reason for classifying this instrument as a 'bet' is the
tax-free status that it affords. Spread betting is not like traditional
betting, where a ‘bookmaker’ gives you ‘odds’ and usually ends up taking
100% of your original outlay. Spread betting is, in a nutshell, the
offering of a ‘middleman’ in a cross-trade [very similar to CFD’s]
between one party [you] and another party [another person like you who
takes an opposite view on a stock price]. This is just like a CFD. To
explain further...
For example, if you bet that XYZ stock will go up, then, unlike
traditional betting, you are not betting against the dealer, but someone
else [another trader just like you who could be on the other side of the
planet] who has an opposite view of the market [he or she obviously
thinks XYZ stock is going to go down, while you judge that it will go
up]. For every pound won, there is a pound lost [or for every winner
there is a loser, as the saying goes] - as in every other stock market
transaction…
The spread-bet dealer is therefore simply an intermediary [rather like a
broker] between the two parties. He is neutral. This is as simple as it
gets, and creates a tradable marketplace where the spread bet dealer - a
middleman - employs a rather sophisticated electronic-book/system which
matches the buy/sell orders throughout the trading day [even overnight
in some cases] automatically and instantaneously. So, how do spread bets
work?…
Firstly, you deal through a spread bet-dealer. There are a number of
these in the city of London. These spread dealers will send you a full,
detailed, easy-to-understand information package which covers just about
everything you need to know [including many trading examples and
illustrations, etc.] in order to start trading spread bets. See listing
below...
www.finspreads.com
www.cityindex.co.uk
www.financialspreads.co.uk
www.igindex.co.uk
www.spreadex.co.uk
www.deal4free.com
www.cantorindex.com
Similar in some respects to ‘CFD’ trading, you can use spread betting to
back both rising and falling markets. Remember though, that spread-bets
are more geared towards the beginner. They tend to have wider buy/sell
spreads, but on the plus side, all profits are currently tax-free. So,
this is all food for thought.
Quick Recap...
We have covered four different instruments [straightforward shares,
margined stocks, the CFD, and spread-betting] in the last few sections.
As mentioned earlier, it is entirely up to each individual trader which
particular instrument he/she wishes to trade. Another instrument you may
choose to trade is the 'option'. We have created a separate, dedicated
site for traded option systems and studies - go there now
www.trendindex.net - included
are simple explanations of how options work, call options and put
options with additional resources for trading advanced option strategies
such as the ultra-conservative covered call option, spread options,
vertical spread, calendar spread, and others which will be added over
time.
The page you are viewing provides a free
guide to trading stocks, and the various ways in which this can be done
- it complements our central stock charting technology which you can
access [100% free for life]: www.clickcharts.com
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