There are a range of public equity markets, also known as stock markets, operating around the world. The London Stock Exchange (LSE) is among the best known and oldest; there are others in major financial centres in Germany, France, the Netherlands, the USA, China and Japan as well as smaller ones in other regions.
Share trading involves the buying and selling of company shares. The number of shares that you can buy normally depends on your investment capital and the share price at the time of purchasing.
Naturally you will want to sell your shares at a profit and that’s normally achieved by selling the stock at a higher price than they were originally bought for. However, it is also possible that you may have to sell at a loss. You might do this to increase your liquidity or perhaps because your shares are falling and you think that the market will continue to fall. Therefore you sell the shares in order to cut your losses.
It is always advisable to have a strategy when trading shares. Of course, engaging in the market without a strategy may lead to profits, just as investing with one can result in losses.
Nevertheless, approaching your trading or speculative decisions according to a strategy has a range of advantages, perhaps the most obvious one is that when you make a profit, it is easier to see what you did right, and if you make a loss, it is easier to see what went wrong.
In addition, the very process of developing a strategy means you are consciously thinking through the potential future of the market and your position in it. This, in itself, can help to increase your understanding of the market.
Some companies may have experienced a poor financial reporting season or a crisis of some sort. Many banks, for example, saw their share prices decline sharply following the credit crisis and the fall of Lehman Brothers in 2008.
Buying into a company at the point at which its share price is extremely low can potentially be highly profitable should the share price recover. The risk, of course, is that some companies may not actually recover or do so only very slowly. In the UK, at the time of the banking crisis the shares in Northern Rock never recovered and the bank was nationalised. Barclays shares however saw a strong recovery over the next couple of years.
With share trading, diversification means spreading out your investments over a range of companies and/or sectors. The potential benefit of this strategy is that, hopefully, any potential losses in one company or sector are offset by a stable or rising performance elsewhere. This strategy makes your share trading potentially less risky, however if all of the sectors which you are investing in struggle, you may of course still see a significant loss.
Spread betting does carry a high degree of risk to your funds and can result in losses that are greater than your stake. Ensure that it fits your trading requirements as it may not be appropriate for all types of investor. Ensure that you only speculate with funds that you can afford to lose. Before trading, please ensure you fully appreciate all the risks involved and seek independent financial advice if appropriate.
The writer is a seasoned financial author offering strategic and tactical trading views on the spread betting markets.