The stock market can be an attractive opportunity to many investors, due to the fact that its nature tends to be highly liquid. This means that, in general, stocks can be sold and bought at a transparent and stable price.
However, like with any investment, stock trading does come with its risks. It’s always best to conduct extensive research into the market, and the company and shares in question, before parting with any of your capital.
With this mind, let’s explore the advantages and disadvantages posed when trading in the stock market.
Buying and selling
Arguably, the stock market is one of the easiest of which to buy and sell assets. Thanks to technological advances, you can simply trade shares through an online exchange or trading platform. Due to market liquidity, shares can also be easily sold during the trading hours that the exchange is open.
In a cyclical fashion, the more liquid the market, the more interest there is from traders, and vice versa. As a result, you’ll find that the spread between the bid and ask price of shares has tightened, and you can easily open or close your position on the market.
Another benefit of trading stocks online, is that you have access to global stock markets, all from one place. You can therefore take advantage of the different fundamental factors that are affecting the markets across the globe. For example, if a particular economy of interest is experiencing a boom, you could see a rise in prices of the shares of relevant national companies.
Diversifying your portfolio by trading shares in different locations, can help to not only vary your investments, but allows for the opportunity to hedge your losses in different stock markets. By not putting your eggs all in one basket, as the common phrase goes, you can prevent the impact of potential losses of any one stock.
Trading with CFDs
One benefit of the stock market is the ability to trade in financial derivatives, such as contracts for difference (CFDs). This allows you to speculate on the stock market without owning the underlying asset. CFD trading in itself comes with its pros and cons.
According to Skilling CFD trading platform:
“Share CFDs allow investors to not only benefit when trading in rising markets but also when trading in falling markets, since shares can be bought or sold with contracts for difference.”
Therefore, if you believe that the value of the stock will fall, you can open a sell position. This also offers the opportunity to hedge against any losses you may incur when stock trading in the traditional way. CFDs are also an effective way to diversify your investment portfolio.
When stock trading, you essentially own a share of the company, and a fraction of the company’s earnings. This means you could potentially benefit from payments known as dividends, where a portion of the company’s profit is paid to its stockholders. These are usually paid on a regular basis, and can be one way to earn a return when investing in stocks.
However, there is a downside if investing in stock CFDs. As stock ownership is not an aspect of CFD trading, you do not benefit from dividends as you would if you owned the underlying asset. You therefore do not have access to this additional bonus, and will have to factor this in to your trading strategy.
Long-term vs short-term
There is potential for stock traders to benefit from the market, for both short-term and long-term investments. In the short-term, there is the potential to profit over the course of just one day, as the shares market has the ability to deliver a significant rate of return.
On the other hand, if you are implementing a long-term strategy, then you could benefit from the fact that the stock market tends to rise in value over time. There are companies listed that consistently perform well over a long period of time, and are known to be stable. This can work in your favour, and allows for the potential to profit over time.