Stock Trading: What Is the Best Way To Do It?

People probably talk about stocks or equities, bonds, derivatives, futures, commodities, and CFDs. All these are financial instruments, some representing ownership stakes in companies while others are debt contracts, obligations to deliver commodities, and so forth.

InvestingCube's S&R Levels

FTSE100

FTSE100 (6870.8)

Not in Sell Zone

STOP

SELL

TP1

6840

TP2

6750

The good news is that you can trade any of these instruments or assets individually or jointly through an index fund or ETF. This article zeroes in on stocks trading to help you learn about the stock market, how to pick stocks, and the platforms on which to trade.

The Stock Market and How It Works

A stock market, also known as a stock exchange, is an organized and regulated financial market where traders and investors can buy and sell financial securities. For instance, the London Stock Exchange, founded in December 1801, is a perfect example of a stock market.

When a company like Barclays Plc was transitioning from a private company to a public company, it issued an IPO (Initial Public Offering). This meant its shares were listed on a stock exchange -London Stock Exchange. This was on 01 November 1953. Barclays was able to raise capital from the IPO to fund its operations.

When company shares are on the stock exchange, traders can buy and sell the stocks at any time within the exchange’s trading hours. The prices at which the public buys and sell the stocks depend on the forces of demand and supply for the specific equities. The work of a stock market is to facilitate the exchange process, thereby providing liquidity for stockholders.

Why Trade in Stocks?

Stocks are an asset class that you can include in your investment portfolio. Owning stocks in one or many companies helps you build wealth. Here are some of the reasons why you should consider investing in shares.

The Potential to Earn Superior Returns

Compared to bonds, savings accounts, or commodities such as gold, investing in stocks has the potential to earn you a higher return over time. According to the Barclays Equity Gilt Study, 2019, the average annualized stock market return in the UK based on the FTSE 100 from 1984-2019 was 8.33%. Over the same period, government bonds averaged 5-6%.

Stocks Can Hedge Against Inflation

Owning stocks can help protect your wealth against the damaging effects of inflation. For instance, over the last 20 years, the inflation rate in the UK has averaged 2.55%. If you compare this to the over 8.3% investors realized from stocks, there is a clear shield from inflation.

The Potential to Earn Regular Passive Income

Owning shares entitles you to dividends as and when the directors of the company you’ve invested in declare a dividend distribution. Whether the dividends are paid quarterly, annually, or semi-annually, the payout can help you supplement your retirement income or paycheck.

Company Ownership

Stocks are a unit of ownership of a company. Therefore, if there is a company whose products you fancy, such as L’Oréal S.A., you may want to own shares in it and have the pride of being a shareholder.

Liquidity

You can buy and sell most stocks from a stock exchange. This means if you want to offload your shares quickly, all you need is to put a sell request through your broker. The order will be executed at the stated or next best price. This may not be the case with digital assets, bonds, and real estate investments.

What Are the Best Ways to Trade Stocks?

There are two main ways to trade stocks in the UK -owning the physical stock or through CFDs (Contract for Differences). With CFDs, you don’t own the physical stock; you simply get paid the difference between the open and exit prices if the trade has gone in your favour.

That notwithstanding, whether you want to own a physical stock or through CFDs, the procedure is the same, the only difference being the actual asset selection. So here is a quick run of what to expect.

Sign up for a trading account- To trade on a stock exchange, you must open a trading account through a broker. 

Pick your shares or stock CFDs -Depending on the asset the broker has listed on the platform, you can look for growth stocks or value stocks such as Airbus, Total SE, Deutsche Bank, etc.

Determine how you want to open your position: If the prices of the shares or stock CFDs you’ve chosen are falling, you may want to open a short position, and if they rise, you may want to go long. Some brokers have a news and analysis section to help you get the hang of the market.

Determine your position size– Once you have identified a specific stock or stocks you want to invest in, decide on how much you want to invest. Remember to put risk management measures such as stop loss and take profit to safeguard your positions.

Exit Your Trade -Depending on your trading plan, keep an eye on your portfolio and know when to close your position if your stop loss and take profit measures haven’t already been kicked in.

Where To Trade Stocks?

There are many brokers who can give you a platform to trade stocks at the London Stock Exchange. However, each broker has their strengths. For instance, trading with Admirals guarantees you secure trading. In addition, admirals offer clients solid support and demo accounts to help them practice their strategies.

Conclusion

Stock trading is one of the ways you can build and protect your wealth. Investing in stocks will give you a hedge against inflation, earn you superior returns relative to other instruments such as bonds and give you direct ownership of companies. You can buy stocks at the London Stock Exchange by opening a trading account with a reputable broker.