Share trading is one of the most popular forms of investment, providing the bread and butter transactions of millions of traders worldwide. From pension funds down to one-man bedroom traders, shares are a staple investment product, and one that most people readily think of first when they talk of trading and investment. But why exactly have shares become so popular as a means for trading, and what is it about shares in particular that lends them so well to being traded across international frontiers?
Underlying Value
One of the premier reasons for share trading’s popularity is the fact that shares have an inherent value that extends way beyond their face price. The difference between trading shares and, say, widgets, is that shares have a value to buyers beyond their price point because they are a prime mechanism for business ownership.
Like commodities such as wheat which are essential to the business of bread manufacturers, so too are shares essential components to investors, private funds and other businesses looking to expand their portfolio or takeover other organisations. Because shares are so fundamental to oiling the wheels of commerce, they are a starting point from which most trading activities begin, and deliver an essential function for both businesses and investors alike. This in-built, underlying value will always remain with shares, allowing them to be traded both for the practical reasons outlined above and for sheer price speculation.
Liquidity
Another reason why trading shares is a popular pursuit is the liquidity of the share markets. Liquidity in this sense means the ease with which securities can be bought and sold, and for a number of reasons the markets for publicly traded shares are extremely liquid – whether you’re selling shares in Sony on the Tokyo Stock Exchange or buying into BA on the London Stock Exchange, the market for those particular shares is constantly buoyed by supply and demand, not least because of the function of large institutional investors who act as market makers in guaranteeing this sought-after liquidity.
In practical terms, this means that unlike other forms of investment, there is always a ready and willing counter-party should you be looking to buy or sell your shares, meaning its possible to virtually instantly liquidate your position or to take on a position in any traded company you choose – a valuable asset, given the speed at which market prices can vary, which leads nicely to the next reason shares are traded so readily.
Volatility
Volatility in the vernacular is usually thought of as a negative trait, but for aspiring traders it can be the ticket to serious profitability. Volatility means the rate at which prices fluctuate over a given period – an asset with low volatility will stay at a relatively static price point, whereas an asset with high levels of volatility will swing wildly up and down, paving the way for significant earnings (and, of course, significant losses). The share markets are sufficiently volatile to give traders a real incentive to get involved, and some shares can jump considerably on relevant positive (and negative) market news. For this reason, as compared with some more static traded commodities, shares pose an attractive prospect for investors looking for a take-home profit.
Transparency
Another key to trading in stocks and shares is that they are amongst the most transparent commodity types, both in terms of the way in which they are standardised and in how their value is interpreted. Share values are directly related to the value of the underlying company, so when market news is positive, or the company releases better than expected trading figures, prices will invariably rise. Likewise, because of the rigorous oversight of the stock exchanges in ensuring standardised, transparent and fair markets, traders can sleep easy knowing that their involvement in the markets is on a fair and even footing, and that they are buying a standard investment product that can be readily sold at a future date.
While the preceding points represent a few of the arguments for share dealing, In actual fact there are a multitude of reasons why market participants choose shares as the vehicle for their trading. Depending on exactly what you’re looking to get out of your involvement in the markets, shares can be a stable and time-tested way to profit from price variations, with an underlying value of their own that will ensure your product continues to carry value going forward.