Trading Stocks with a Forex Broker
To make this clear, trading stocks is fundamentally different than buying stocks. When a company goes public i.e. holds an IPO (initial public offering), shares of the company are listed on a stock exchange. This way, retail and institutional investors are free to buy shares in the company and become stakeholders. This is a mutually beneficial arrangement since the company can raise capital from selling its stocks and the investors can get dividends depending on the number of shares they own and how much the value of the stock appreciates over time. If the company does well in the future, the value of the shares rises to make it a win-win situation for both company owners and shareholders. Trading stock online is more akin to currency trading and involves a lot of speculation.
There are multiple benefits to investing in stocks, but it can prove to be quite a limiting experience for several reasons. Enter stock CFD trading. CFD stands for a contract for difference and is essentially a contract between you and your broker to buy or sell some units of the underlying asset (in this case company shares) while paying the difference in price from the current going rate and the time of closing the trade. By offering CFDs on stocks, forex brokers have opened up the opportunities available in the online stock exchange to an even wider audience while making trading stock online a lot more favorable and accessible.
Benefits of trading online stocks
- Short selling
- Equities and indices trading
- Low entry requirements
Even though owning stocks in a well-performing company can be very lucrative, it’s mostly considered a long-term investment which will take some time to pay off. On the other hand, by trading stock online, you have the opportunity of making instant profits by speculating on future price movements. You can even speculate on the price of a company’s stock going down and make a profit if it does. This is called short selling which although is available on a traditional online stock exchange as well – it is quite challenging to do and comes with additional fees and costs.
Another great advantage of trading stock online is the multiple instruments available on the trading platform itself. Most forex brokers have an offering of multiple stocks and indices like NASDAQ and NYSE not including the commodities, forex pairs and other asset classes available for trading. You can monitor and speculate on the price of hundreds of assets directly from one single platform around the clock.
Also, since CFDs are leveraged investment products, you have the benefit of being able to trade on margin. Trading stocks on margin allow you to make trades with only a fraction of the actual value of the position. Leverage basically increases your buying power and profit potential but also your losses. If you are risk-averse, trading with high leverage is not recommended for this reason but a solid risk management strategy can help with balancing your exposure.
Example of trading Amazon stock CFDs
Let’s see an example of trading stocks with leverage:
Consider that Amazon’s stock is currently trading at 147/150. 147 is the price you would be selling and 150 the price you would be buying each CFD. The difference between this buy and sell price is the spread or the commission charged by your broker when you open and close a CFD trade. In this case we speculate that the value of the share is going to rise so we buy 100 CFDs at 150. Normally you would have to pay 15,000 USD to enter this position. However, the margin requirement for Amazon’s stock is set by our broker at 5% so we only need $750 (15,000 x 0.05) to make this trade.
If the price indeed rises by 10 points to 160/163 and we wish to close the trade to realize our profits, we sell at 160 and we now have 10,000 USD profit (10 x 1,000) not counting for any nominal fees we had to pay when opening and closing said trade.
As you can see the profit potential of trading online stocks is substantial but don’t forget that the same rule applies for losses so it’s crucial that you never invest more than you are willing to lose and that making a loss on a leveraged trade can often exceed your initial investment.
The spread charged by your broker may also eat away at some of your profits since you pay a fee at both entry and exit and this makes it a bit harder to manage especially when the price doesn’t make considerable moves. However, keeping track of the fundamentals i.e. relevant reports on the company’s performance can reveal countless favorable trading opportunities in online stocks.
If you are looking to diversify your investment portfolio, trading stocks with a forex broker should definitely be on your watchlist. As long as you find a reputable and regulated broker, you can couple the remarkable advantages found in trading online stocks with the superior trading conditions available in the forex market. The competitive spreads and low commissions available make trading stocks much more favorable for the retail investor and you also get access to a much more versatile market with thousands of asset classes.