How to buy and trade shares

If you’re ready to open a position on a share, here are three steps to follow:

Individuals who believe that a company will see strong growth will buy the shares, hopefully for a low price so that they can make a profit when they sell it at a later date. While individuals who believe a company will face trouble would sell the shares, aiming to make as much as possible for their shares so that they turn a profit or cut a loss.

You have to be registered to trade directly on an exchange, so most people will go through a stockbroker. In the case of leveraged trading, your provider will take the place of a broker – opening and closing positions based on your instructions. Today, the majority of retail stock trading takes place via an online trading platform.

What moves the price of shares?

Initially, a company will set a price at which it will list on a stock exchange – known as its IPO price. After that, fluctuations in the share price are caused by changes in the supply of and demand for the stock.

There is always a limited supply of a company’s stock. A company can make the decision to issue more shares, or buy back shares from investors to reduce supply, but the number of shares in circulation is always known.

If there are more buyers than sellers on the market, then demand grows and the share price will rise. However if there are more sellers on the market, indicating a fall in demand, then the share price will decline.

There are a number of reasons that the demand for a share can fluctuate over time, including:

• Earnings reports. Companies usually release interim reports on their financial performance once every quarter and a full report once a year. These influence the company’s share price as traders and investors use figures including revenue, profit and earnings per share (EPS) as part of their fundamental analysis
• Macroeconomic data. The state of the economy a company operates in will affect its growth. Data releases such as gross domestic product (GDP) and retail sales can have a significant influence on company share prices – strong data can cause them to rise, while weak data can cause them to fall
• Interest rates. If rates are high, individuals won’t need to take big risks to get healthy returns and can save instead, which may cause the stock market to see less investment. So if it looks like a central bank is likely to raise interest rates, demand for shares may fall
• Market sentiment. Share price movements aren’t always based on fundamental analysis. The view that the public, as well as market participants, have on a particular stock can also cause demand to fluctuate. This is how speculative bubbles are formed

Buying shares

Traders buy shares outright in the hope that they will increase in price and can be sold at a later date for a profit. They uphold the traditional mantra of buying low and selling high – known as going long. Traders may also take positions over a longer period of time, attempting to profit from share price changes as well as dividend payments.

With IG, you can buy shares by:

• Share trading. This enables you to have ownership over the share. You’ll usually only be able to go long but will benefit from dividends if they’re paid
• Trading ETFs. These funds can be used own multiple shares at once, such as entire indices or sectors.

Speculating on the price of a share

Traders use derivative products that take their value from the price of the underlying market. These do not require traders to own the shares so, while traders will not have shareholder rights or receive dividends, they can take a position to profit from both falling and rising prices. Traders will tend to hold positions over the short to medium term and focus on smaller market movements.

You can trade shares with IG by:

• CFD trading. You can go both long and short, and trade certain share pre- and post-market hours. You will also be trading on leverage with CFDs.

The risks associated with trading are extremely different. CFDs use leverage, a feature which enables traders to open a position for just a fraction of the initial outlay required of investors. While leverage magnifies your profits, it could also magnify your losses.

There are tools that traders can use to manage this risk, such as stop-losses that enable them to define their exit point for trades that move against them. Normal and trailing stops can be impacted by slippage, which is when market volatility causes a disparity between the price you have requested and the price your provider can execute the trade at. However, you can protect yourself against slippage by attaching a guaranteed stop-loss. Unlike other providers, IG doesn’t charge you anything upfront to use a guaranteed stop, but there would be a small premium to pay if it is triggered.

For example, let’s say you want to buy 1000 shares of a company at a share price of $1 per share. To open a conventional trade with a stockbroker, you would be required to pay $1000 (ignoring any commission or other charges). If you had opened your trade with a leveraged provider instead, you might only be required to put down a margin requirement of 20% on the same shares – this would give you a $1000 exposure, with just $200 needed to open the position.