Share Dealing and Stock Trading
Share dealing is perhaps the most orthodox form of investing, allowing businesses to capitalise while providing private investors and funds with the chance to get involved in some of the world's biggest companies. The global equities markets exchange billions on a daily basis between a diverse collection of traders and investment funds, and the countless tales of stock market hotshots hitting the big time apparently overnight continue to attract new blood to the markets in droves. But what exactly is share dealing, and how do share transactions generate value for the companies and traders involved?
Share dealing is the process of trading equity in publicly traded companies, allowing speculation on the future value of a company while enabling traders to shape how a given entity is managed. To put it another way, it is the dealing in 'shares' of company profits and decision making, which has a value variable to the immediate and anticipated future yield of the company concerned.
Shares are bought and sold largely as investments, in the hope that the ongoing dividend yield (i.e. the money paid by the company to its shareholders) will deliver a better return than other forms of investment. However, it is also possible to make money on sheer speculation, buying shares at a low price and selling when they reach a higher price. Indeed, it is often the case that share traders have no concern in exercising their rights as share holders in voting at company AGMs and choosing the board of directors, but are solely involved in buying to sell at a future date when the price of the shares rises.
Share transactions were originally formulated to give businesses the ability to raise capital, in order to fund large projects or, of increasing prevalence in more recent times, to provide the owners with the lucrative exit of which they've always dreamed.
A share, being at its most basic level a share in the profits of the company, is valuable to an investor, and effectively allows the business to raise money today against the security of future profits, simply by selling a proportion of its ownership. For the buyer, this share of ownership allows them to take an active role in the direction of a company, and with scale, affords a mechanism through which entire organisations can be bought and sold.
Today, the markets are largely automated, and publicly traded companies seldom know the details of individual shareholders, let alone scrutinising their credentials for ownership. Rather, shares are something of a commodity that are traded widely amongst faceless investors and funds the world over, who rely on the desire of businesses and other stakeholders to buy up successful companies in order to realise their profit.
In a nutshell, share dealing is the process of trading shares in large businesses, which have a value related directly to the market's perception of the underlying value of the business. While traders are seldom concerned about directing and guiding the company in which they invest, shares provide a viable mechanism through which investors can trade off the back of corporate success, while having their own say in future corporate governance.
Trading Shares for a Living
Understanding the share trading basics is only half the battle. Once you've got to grips with how markets work, the function and behaviour of shares and how pricing responds to different quirks and market outcomes, you're still only getting started, with much more to learn before you're ready to take on the markets.
Aside from the obvious starting points and information you'll find in any share trading guide, there are also a number of techniques and strategies for share trading success that are seldom shared. These tend to be figured out by a minority of astute traders after a while, but to begin with those that don't know these trade secrets are at a significant disadvantage.
The first so-called trade secret, which also doubles up as simply prudent portfolio management, is diversification, or spreading your investments across a broad portfolio of assets. The best way to think about diversification is to consider it in the context of putting all your eggs in one basket - if you drop that basket, you've pretty much ruined your chance of an omelette.
If instead you choose to spread your eggs, the chances of any singular collapse having a detrimental or damaging effect on your capital are far less significant. This is the premise underlying diversification - that by spreading the risks of a portfolio collapse across additional positions, traders can minimise the potential damage to their capital from any one rogue position or market.
Diversification spreads the market risk, i.e. the ever-present risk that arises by virtue of being exposed to a financial market. Generally, fewer positions equal higher risk, while a greater number of positions represents a lesser individual risk to each capital portion. That said, diversification isn't an infinite game, and boundaries need to be drawn to ensure you're not managing too many positions at once, or tying up too much of your capital at any one time. The notion of capital allocation and position sizing is a topic all in itself, suffice to say it's vital that traders stick to an approach that presents ample opportunity for profit without being spread unmanageably thinly.
While diversifying your portfolio is an important part of building a sustainable, secure trading account, it cannot alone bring success without further proactive measures. Containing risk on the whole is just as important as identifying opportunities for a profit, and the trader that's looking for optimum results will cater to both ends of this spectrum for best effect. Diversification merely spreads risk around - it does not eliminate risk, and therefore you should continue to trade in a cautious, prudent manner at all times as far as possible, to ensure you are both offsetting risk while ensuring your chance of a profit.