All about trading stocks on Forex
Hello, friends! There is a huge selection of different financial instruments on Forex, and trading is not limited to only currency pairs . You can also trade cryptocurrencies , precious metals, oil, commodities like coffee, sugar, wheat, energies, stocks, bonds, futures, indices, and ETFs. In total, you can find thousands of financial instruments with which you will make your profit. In this article, you will learn what stocks are, where to buy stocks and how you can trade them profitably.
What are promotions?
Shares are securities issued by a company to attract investment. An investor who has bought at least one share becomes a co-owner of the company or a shareholder. He can take part in voting at a meeting of shareholders, receive dividends, and in the event of bankruptcy of the company, receive part of its property. The owner of the company is the shareholder who owns the majority of the shares. As a rule, to become the full owner of a company, you need to own 50% plus one share. Shareholders are not responsible for the obligations undertaken by the company. Of course, if the company goes bankrupt, the only loss for shareholders is the amount of money they have invested in their shares.
What do stocks look like?
Previously, shares were beautiful pieces of paper printed on stamped forms. But now all this is already a thing of the past. All shares exist only electronically on special brokerage accounts.
What are the stocks?
There are two types of promotions:
Ordinary shares give their owner voting rights that can be used in corporate decisions, but do not guarantee the receipt of dividends.
Preference shares do not provide voting rights, but give the owner the right to receive a certain percentage of the dividend payment before any decisions on dividends can be made for all other shareholders.
Convertible preferred shares enable the investor to exchange preferred shares for a predetermined number of common shares in the future.
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Depending on the investment strategy, the following classes of shares can be distinguished:
- Blue Chips. If we draw an analogy with a casino, then these are the most expensive chips. These include companies with a market capitalization of over $ 10 billion. They are included in the Dow Jones and S&P 500 indices in the US and EURO STOXX 50 in Europe. These are the shares of the most stable companies. If you are a novice investor, we recommend that you pay attention to blue chips. They have minimal risks, but the dividends are also not very large. To profit from such stocks, large investments are required, since their growth is also minimal. For example, the shares of the Ford Motor Company have gained only $ 3 over several years.
- Growing stocks. These are shares of companies that have been on the market for a long time, but have only recently begun to receive profits. Usually, the growth of such stocks exceeds the natural growth of the economy, which makes it possible to make good money. Dividends on such shares are small, but you can make money on the difference in share prices. However, there is a risk that the company will stop making profit, so it is better to sell shares after they have grown, taking profit.
- Cyclical stocks. These are shares of companies whose growth is directly related to the country’s economy. When the economy is on the rise, stocks go up, but if the market falls, the stock price goes down. For such stocks, the profit comes from the sale of the stock at a high price, not from dividends. It is very profitable to buy shares in companies during the economic crisis, as did Warren Buffett, and sell them at the peak of the market growth. For example, the stock of Walt Disney Co has grown from $ 40 to $ 100 in five years.
- Protected shares. These are stocks that do not have sharp jumps in the rate, and all profits consist of stable dividend payments. An example of such a company is Procter & Gamble Co. It is not affected by the economy and other external factors, the value of its shares grows slowly, and dividends are consistently paid to its shareholders.
- Speculative shares. These are the most profitable and risky stocks of innovative companies on the market. The profit on them is abrupt, and allows you to both quickly increase capital and lose it if the portfolio is not properly managed.
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Three strategies for trading stocks
- Stock price growth. Trading this strategy consists of buying stocks during a market downturn and selling them during a rally. If you are a novice trader, we recommend that you choose 10 companies from the Dow Jones index, for example, Coca-Cola Co, McDonald’s Corporation, Apple Ink and others, divide your capital into 10 equal parts and buy shares of these companies when they are in decline. And when they grow up, sell them. This is a long term investment strategy. The profitability of the strategy is about 16-18% per annum in US dollars. However, this does not mean that you will consistently receive 18% per annum. In one year it may be 30%, in another – 5%, but on average, over a long investment period, you will receive 16-18%.
- Stock price growth + dividends. This is another long-term investment strategy where you only buy stocks of companies that pay dividends consistently. The yield on this strategy is 12-14% per annum. If you reinvest dividend gains in buying new shares, this can provide a tangible increase in profits. Let’s also not forget that the shares of such companies, although slowly, are still growing, so in the long term you can expect a good profit from the sale of shares. Or receive passive income from dividend payments.
- Speculative strategy. This is the most profitable and risky strategy. It consists in buying undervalued shares of companies, as well as shares in which there is a decline, and selling them a short time after their growth. It should be remembered that the shares of some companies after their decline may not rise in value. Therefore, it is necessary to diversify your portfolio of shares, replacing them in time with more promising ones, as well as invest in the company no more than 5% of your capital and not trade with the last money.
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Where to trade stocks?
There are two ways to buy shares:
- On the stock exchange. The main advantage of this method is that when you buy shares through the exchange, you become their holder. The disadvantages include the complexity of registration and trading on the exchange (all operations are carried out through brokers), large commissions, the need to pay taxes. This method is more suitable for long-term investors.
- Through a Forex broker. By buying shares through a Forex broker, you do not become their holder, but trade on the difference in rates. At the same time, you get such advantages as the convenience of trading on the intuitive MetaTrader 4 trading platform, low minimum deposit requirements, trading both long and short, the ability to trade with leverage, etc. This method is suitable for traders and short-term speculators.
CFDs are virtually indistinguishable from normal stock trading, with the only exception that you are not the holder of them. In this case, you can not only buy shares, but also sell them, even if you do not have stock. Hence, unlike an exchange, you can trade in both directions. Please note that instead of dividends on shares in CFD contracts, a dividend adjustment is used, which is calculated at the time of dividend payment on shares with an open buy trade, or written off when an open sell trade. You can read more about CFD contracts here .
At the broker RoboForex there are the following benefits of CFD trading on stocks:
- over 9400 financial assets;
- leverage up to 1:20;
- minimum deposit of $ 10;
- convenient trading platforms MetaTrader 4, MetaTrader 5 and R Trader;
- fast quotes from the stock exchange;
- free constructor of trading robots.
Thus, stocks are a great tool for investing your investments. Earnings on stocks can be as high as 14-18% per annum in USD for long-term investments, or even more during speculative trading. In addition, unlike many other financial instruments, you can receive passive income in the form of dividends from stocks. To buy stocks, traders can use a Forex broker by trading stock CFDs in both directions. If it seems too difficult for you to trade stocks, then you can invest your funds in ETF funds or economic indices, which we will consider in the following articles.