Share dealing is for most intent and purposes the default in financial trading, and certainly most people tend to think of shares when they think about playing the financial markets for profit. For those looking to get in to financial trading for the first time, share dealing might seem like an obvious route, but it’s not without its difficulties and those that don’t understand the mechanism of share trading and the purposes of it are unlikely to be able to progress to the level of sophistication required to trade successful. But what is share dealing in concept, and how exactly does it work in practice?
Companies are capable of delivering large projects and expansion to improve the prospects of returns from their shareholders, but this inevitably requires a source of funding to finance development. Shares are the main mechanism through which companies raise private capital, and having the ability to call on funding from the markets when necessary is an important part of listing on and trading securities in stock markets. Share dealing is the process of speculating on changes in the value of underlying shares, and it can be possible for traders to deliver substantial returns through shrewd investment in the capital markets.
Share dealing relies on an understanding of a few fundamental trading concepts – from what a share actually is to how and why it is traded. As part of the ongoing need for research and knowledge development, it’s important to look at share dealing at its most basic, to get a better feel for how the markets might behave and why they might behave in that way.
What Are Shares?
Shares are units of ownership in companies that allow proportionate ownership to be bought and sold fluidly. Traded on stock markets, shares allow the bearer to have a proportionate say in the company’s management through voting rights at general meetings, in addition to a proportionate share of company profits. Shares enable companies to be bought and sold, an essential economic function, in addition to affording speculators a basis on which they can trade for profit. But shares also help companies raise private capital to fuel their growth and corporate development, and in this sense equity financing can become something of a self-fulfilling prophecy, with capital used to fuel growth with in turn drives up the value of company shares.
How Are Shares Traded For Money?
Shares are bought and sold in publicly traded markets, such that amateurs are rubbing shoulders with professionals and even large investment funds and banks when trading in these markets. On the buy side, share prices rise to reflect the growing demand that comes from each incremental sale. On the sale side, this effect is reversed, which depresses the market value according to the proportion of the total issued shares that are sold. For traders looking to make money, the most significant returns are to be found in speculating on these price fluctuations, which have the capacity to deliver capital growth proportionate to the size of the investment.
In addition to capital returns, shares can also be traded for dividend returns, which represent shares of the profits of the companies held in ownership by a trader. These ongoing yields are declared at different points throughout the year based on company performance, and so traders can look to find higher paying shares as part of their investment research in order to find the best and most profitable positions to trade.
Are There Risks?
Share dealing is not without its risks, and traders should be prepared to lose the money that they invest in companies. While appropriate research and analysis can help prevent total disaster trades, they can happen and traders need to be aware that they are liable to the full extent of their investment for losses and well as gains in positions. Fortunately, share dealing enjoys less severe financial consequences for getting it wrong than other styles of investment (where traders can be liable to infinity beyond their original capital exposure), however it’s still important that traders take measures to deal with risk and counteract the threats to their trading capital by trading more shrewdly.
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.
Recap: What Share Dealing (Stock Trading) Is
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.