How to trade stocks and shares

Introduction

When people think about trading and financial markets, stocks are nearly always the first thing that comes to mind. For most retail investors, a stock portfolio is the most important part of their savings and investment plan, and the ability of stocks – fractional shares in the ownership of a company – to increase in value over time is unrivalled by other financial assets. The global stock market takes place on centralised exchanges, which can be national or international. From the Saudi Tadawul and the London Stock Exchange to the Euronext, there are plenty of opportunities to be found in trading stocks and shares.

“Equity markets are volatile, and proper risk management is essential to investors and traders alike”

Stock exchanges

Stocks can be traded directly as cash equities or via derivatives such as Contracts for Differences (CFDs). Cash equities represent one of the most fundamental and widely traded asset classes in global financial markets. Stock traders are active worldwide, participating in markets that open and close at different times across various time zones. For those looking to learn how to trade stocks, it’s important to understand that trading volume is dominated by major stock exchanges, including those in New York, London, Tokyo, and Hong Kong. The most important stock exchanges are the New York Stock Exchange (NYSE) and the NASDAQ. Many of the world’s most traded stocks are listed on these two exchanges, with tech companies such as Apple and Tesla concentrated in the NASDAQ exchange.

What are the most important stocks?

The most important stocks in the market are often large-cap companies that are components of major indices like the S&P 500 (the top 500 US companies), FTSE 100 (top 100 UK companies), Nikkei 225 (top 225 Japanese companies), and Hang Seng Index (the top 82 Hong Kong companies). These stocks are responsible for a significant portion of daily trading volume and include the most liquid stocks. However, though volume is concentrated in these well-known companies, opportunities for retail traders exist across a wide range of stocks, including mid-cap and small-cap companies. This diversity makes stocks for beginners an exciting field to explore.

How to invest in stocks

Stocks are used by both traders and investors. For long-term investors, stocks and shares are the most important asset they own, since they have the greatest potential to accrue capital gains over time. That makes learning how to invest in stocks a priority for anyone interested in financial markets.

To invest in stocks, you need to select and buy cash equities then hold them, profiting off any capital gains. ADSS clients include both traders – trading cash equities or CFDs on stocks – and investors – trading cash equities. Derivatives such as CFDs are not appropriate for investing, and instead are typically used as short-term trading and hedging tools. There are a few reasons for holding stocks in your investment portfolio: income through dividends, diversification of geography and business segment, and capital appreciation. The last of these accounts for the lion’s share of stock investment returns, but reinvesting dividends will also maximise your eventual portfolio value. To invest in stocks and shares, you will need to open an account, gather some capital to invest in your portfolio, and get an idea of your risk appetite and preferred market. Share selection – choosing which individual stocks to add to your portfolio – is a complex field, and many first-time investors skip this buy buying indices or mutual funds that include a diversified basket of stocks and shares.

Understanding stocks for beginners

Before proceeding, it is essential to learn a bit more about what stocks really are and how they work.

Stocks are units of fractional ownership in a business. For example, if you own 100 shares of Company One, and they have 1000 shares outstanding, you own 10% of the company. Of course, retail stock traders will never control positions anywhere near that size; for example, in 2024, Apple had over 150 billion shares outstanding.

How to buy stocks also depends on the market you are trading in. It’s important to note that stock prices are quoted in the local currency of the exchange where they’re listed. That means if you buy Saudi stock listed on Tadawul, you will make the purchase in Riyal, but if you want to buy a Canadian stock you will need to buy it in Canadian dollars. This is an important point for cash equities traders who want to deal in markets which do not use their home currency. CFD traders, on the other hand, do not need to worry about FX rates as they are not taking ownership of the underlying asset.

What is speculation?

When trading cash equities, you’re speculating on the changing value of a company’s shares, which will track both investor interest and the business performance of that company. For instance, if you believe Microsoft stock price will rise, you could buy shares, and hold them until the expected gains materialise. If your prediction is correct and the stock price moves in your favour, you can then sell the shares at a profit. Conversely, if you expect the stock price to fall, you can open a short position using a CFD. The big difference between cash equities and CFDs is that CFD traders do not take ownership of the stock – for this reason, long-term investors, or traders looking at longer term price moves, typically use cash equities and not CFDs.

What are stock tickers?

Stocks are typically referred to by their ticker symbols, which are unique identifiers assigned by the stock exchange. For example, Apple Inc. is traded under the ticker AAPL on the NASDAQ exchange. These symbols make it easier for traders and investors to quickly identify and trade specific stocks. Understanding these conventions is an important part of learning how to trade stocks, and each exchange has slightly different conventions. The Tadawul, for example, assigns stocks a number rather than the 2-4 letter tags common in other exchanges. Some stocks are traded on multiple exchanges, with different listings in each currency and a separate ticker.

What are some stock types?

Some shares have multiple classes or types, with different voting rights. It is quite common to see Class A and Class B shares, which are marked in the ticker following the company code. For example, Ford Motor Company has both Class A common stock traded under the ticker F, and private Class B stocks, F.B, which are owned by members of the Ford family. In most cases, only one stock type will be traded on the exchange, and the purpose of multiple share classes is normally for founders to retain control in a publicly listed company

Trading stocks for beginners

To trade cash equities or stock CFDs, the first thing you will need is a trading account. Consider running a demo account at first, where you can familiarise yourself with the trading platform and market price action without risking your capital, as you can trade with virtual money.

When you open a trading account, you must verify your identity. This usually comes in the form of submitting identity documents such as copies of national IDs or passports. Once your account has been verified, you can then decide how much capital you will use and fund the account. At that point, you are ready to access a trading platform to begin trading, and the real challenge is to learn how to trade stocks effectively.

To help you with this, ADSS offers extensive educational resources, including video tutorials, platform guides, dedicated risk management articles, and a comprehensive trading glossary. Familiarising yourself with the jargon of trading is an important part of understanding financial and trading news, which will give you the background to perform well in the stock market.

Stock trading with CFDs

For traders who wish to speculate on the price movements of stocks without purchasing actual shares, they can turn to derivatives such as CFDs. Instead of buying and selling stocks, they buy and sell contracts, depending on how they predict a stock will perform. Stock traders and stock CFD traders follow the same principle: buy low, sell high. The main difference between stock trading and stock CFD trading is that CFD traders may find opportunities in falling markets due to their ability to speculate on and potentially profit from downtrends.

Since CFD traders can easily share in both positive and negative price action on their selected assets, they seek out volatile markets. For them, volatility in asset prices creates opportunities for profits, regardless of direction.

Stocks are one of the more volatile financial assets. Unlike most currencies or commodities, it is possible for stock prices to fall to zero if a company goes out of business. Looked at on a larger scale, stock markets consistently trend upwards, with the major US indices always showing gains over 20-year plus timeframes. But specific stocks can underperform for years or even fail, creating considerable volatility in both directions, which is perfect for CFD traders.

Risk management in stock trading

Participants in financial markets are paid to accept risk. The stock markets began as a method for businessowners to share the risk, in the form of capital investment, of their business ventures. To do this, they used joint stock companies, with many investors providing the capital to fund business operations and sharing in both risk and reward.

Today, millions of retail investors share in the fortunes of companies via stock portfolios, from the very largest multinational companies down to small or micro-cap shares. This creates the need for increasingly sophisticated methods to measure and manage risk. But what is risk management in trading?

Trading risk management is the entire set of practices used to measure and manage the impact of volatility, credit risk, and other threats to your investment return. Equity investment is an inherently risky activity, so it’s important to understand how your portfolio may be affected. Risk management tools used by stock traders include stop losses, portfolio diversification, and position sizing. Learning about these methods is an important part of mastering stock trading, and you can find detailed descriptions of risk management techniques with ADSS.

The basic principle common to all risk management strategies is diversification or avoiding over-concentration. Simply put, that means not having a portfolio entirely focused on one region, sector, or a small number of companies. This diversification can be achieved either through a mixed portfolio of individual stocks or by using indices and ETFs.

Conclusion: trading stocks and shares with ADSS

Understanding stocks and shares is fundamental to successful trading and investing. Learning how to trade stocks isn’t something you can master overnight, but rather part of a continuous process of learning, which involves identifying gaps in your knowledge and improving. One way to get started on your trading journey is to open a demo account and start paper trading; as you learn and improve, you may start to see this reflected in your performance. Because understanding stocks and shares is such an important part of financial literacy, most traders spend more time on it than any other financial asset. Fortunately, much of what you learn when trading stocks and shares will also apply to other markets, including forex, bonds, and commodities. Whatever level you are at, becoming a better stock trader requires patience, practice, and study. When you are ready, open an account and start trading equities or equity CFDs with ADSS today.

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