Ways of trading stocks

In every financial market, there are several ways to trade stocks. In this lesson, we will focus on two: investing and trading with CFDs.

Investing in stocks

Investing in stocks is among the best-known forms of retail trading.

When investing, you purchase a stake in a company, as described in the introduction to stock trading. If the company’s value increases, so does the value of your investment.

Exchanges allow only authorized employees to buy and sell stocks directly from their order books, so most retail investors use stockbrokers. Brokers charge a commission for buying or selling shares on your behalf.

One of the main advantages of investing in stocks is the potential to earn dividends, which allow you to gain returns without selling your shares.

What is a dividend?

A dividend is a portion of a company’s profit paid to its shareholders. Many companies choose to reward investors with regular dividends, which can be paid monthly, quarterly, or annually. Some also pay one-off special dividends, often after a period of strong financial performance.

While dividends are typically paid from a company’s net profit, sometimes a company may pay them even during a profit decline to maintain demand for its shares.

If you own 1,000 shares of a company paying a dividend of $2 per share, you would receive $2,000 (1,000 × $2 = $2,000).

It is possible to build a portfolio focused solely on dividend income, targeting stable companies (so-called blue chips) that may not offer significant growth but provide consistent and reliable payments. This is known as a dividend strategy. Such companies are usually well-established, financially stable, and have a track record of paying steady dividends, making them attractive for investors seeking passive income.

Dividend Timeline

Stocks typically follow a set schedule for dividend payments, beginning with the declaration date and ending with the payment date when investors receive their dividend.
The most important date to remember is the ex-dividend date. To qualify for the dividend, you must purchase shares before this date. Anyone buying shares on or after the ex-dividend date will not be entitled to receive the dividend.

In a later lesson on corporate stocks, we will cover dividends in greater detail.

Stock CFDs

Stock CFDs (Contracts for Difference) differ from purchasing shares through a broker in that they allow you to speculate on price movements without actually owning the underlying asset.

When you open a stock CFD position, you agree to exchange the difference in the share price from the time you open the trade until you close it. You trade a specific number of contracts.

Each contract you buy or sell represents one share in the underlying market. For example, buying 500 Apple CFDs gives you the same exposure as buying 500 Apple shares. Selling 1,000 Netflix CFDs is equivalent to selling 1,000 Netflix shares.

As with regular investing, you pay a commission for executing a CFD trade.

Since you do not own the shares when trading CFDs, you are not entitled to dividends. On the other hand, CFDs offer leverage, allowing you to open larger positions with less capital, thereby reducing the initial cost of entering a trade.

Example: CFD vs Investing

Suppose you want to open a long position on 100 Walmart shares when the price is $130 per share. You can choose between investing in shares or trading stock CFDs.

• Investing in Stocks: Buying 100 shares at $130 would require an investment of $13,000 (100 × $130). You would need to pay the full $13,000 upfront.
  
  

• Stock CFDs: With CFDs, you use leverage. If the margin requirement is 5%, you would need to pay only $650 as initial margin (5% of $13,000).
  
  

In both cases, your profit or loss is calculated on the full position size ($13,000). If Walmart’s price rises to $140, your profit is $1,000 (100 × $10 gain). If the price falls to $120, your loss is $1,000.

With a CFD position, since you invested only $650, your profit or loss in percentage terms would be significantly greater. In this case, your return or loss could be many times higher than with direct stock ownership.