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Beginner’s Guide To Shares Trading: What You Need To Know To Become A Better Trader

Share trading and share investing are two different ways of making money from the equity market.


This article was written in collaboration with IG, the world’s No.1 CFD provider (by revenue excluding FX, June 2020). All views expressed in this article are the independent opinion of DollarsAndSense.sg based on our research. DollarsAndSense.sg is not liable for any financial losses that may arise from any transactions and readers are encouraged to do their own due diligence. You can view our full editorial policy here.

Since the start of the pandemic, more people are getting interested in the financial markets. A report by Deloitte shared that in the US, about 10 million Americans (about 3% of the US population) opened a new brokerage account in 2020. This trend doesn’t seem to be slowing down anytime soon, as the same report also mentioned that about 6 million Americans downloaded a trading app in January 2021 alone.

In Singapore, we observe a similar trend. The Singapore Exchange (SGX) achieved its record revenue for FY2020, crossing the $1 billion revenue mark, and recording a total revenue of $1.053 billion and net profit of $472 million. This comes off the back of an increase in interest and trades among people in Singapore.

Shares Trading VS Shares Investing

For those new to the financial markets, it’s worth noting that there are two main methods of buying shares from the financial markets.

The first is to invest for the long-term, based on the assumption that the shares of the companies we invest in today will increase in value over the long-term. The holding period for such investments can range from at least a few years to 10 years or more.

The second is to trade the financial markets, based on the understanding that prices of financial assets will fluctuate in the short-term, even if they end up generally stable in the long run. In this instance, traders can make profits when they successfully capture the price difference of assets in the short-term, whether within a day, a week or a month.

Before you think about getting started on shares trading, here are 4 things you should first know.

#1 We Can Trade Either Direction Of The Market With Shares Trading Via CFDs

When investing in the long-term, there are two ways to make profits from our investments – either through dividends and/or long-term price appreciation. However, we can’t make profits if the prices of the shares we buy decline over time.

When it comes to shares trading, we can use instruments such as a Contract For Difference (CFD) to gain exposure to the falling prices of these shares. A CFD is a contract between two parties – the buyer and the seller – to exchange the difference between an asset’s opening and closing price.AdvertisementAdvertisement

With CFDs, we don’t own the underlying shares itself. Rather, what we “own” are the profits or losses that are incurred through our CFD trades. For example, if we think the prices of a share will go down, we can opt for a short position for our CFD trade. If prices go down, we make profits. If prices go up, we incur losses.

To trade CFDs, we can open a trading account with a CFD provider such as IG. A broker like IG also allows us to trade over 17,000 markets across asset classes including shares, indices forex and commodities.AdvertisementAdvertisement Advertisement Advertisement

Read Also: Guide To Opening A Contract For Difference (CFD) Account In Singapore

#2 Shorter Time Horizon For Shares Trading

When we do shares trading, we are looking to capture short-term price movement, rather than trying to hold a view of whether or not a company will do well in the long-term.

To do this, traders typically lean towards using technical analysis to help them with their trades. Technical analysis refers to the use of price trends and other technical indicators to help predict price movements. This is usually more relevant when it comes to making short-term trades.Advertisement

For experienced traders, trading strategies will be adopted and executed to help guide trading decisions. Relying on these strategies for our trades is better than trading based on our instincts or emotions, which may cause us to make mistakes led by greed or fear.Advertisement

As trading time horizon tends to be shorter, it’s important that we have the ability to trade on-the-go. This is where having a mobile trading app that provides a good user interface with fast execution comes in handy. With IG, you can download its award-winning IG trading app that gives you access to all the features you need to analyse and trade anywhere you want, even when you don’t have your laptop or desktop with you.Advertisement

#3 We can use Leverage to increase Returns

As trades are typically short-term in nature, traders may not see high returns even if they are consistently successful in capturing the price movement. For example, if we buy a share that moves 5% in our direction within a week, that would be considered a good outcome. However, assuming we invest $1,000 in the trade, this would only give us a return of $50 – hardly anything to get excited about, considering the effort we put into planning, executing and monitoring our trades.

For most traders, what increases the potential returns from their trades and makes trading enticing is the ability to use leverage. Leverage trading refers to the use of borrowed capital to increase the position size of a trade, in hope of generating higher returns as compared to the capital invested.Advertisement

For example, IG allows for a margin of 10% for shares, or a leverage equivalent of 1:10. This means that with a capital of $1,000, we can take up a trading position of up to $10,000 worth of shares. If share prices go up by 2% (assuming we take a long position), our returns are 20%. However, this also means that if prices move against us, our losses are likewise magnified.

Source: IG

To mitigate these risks, traders need to set appropriate risk management strategies in place so that we don’t end up losing more than what we can bear. Some of these risk management tools include guaranteed stops or using a CFD product called knock-outs to trade. These tools ensure that we will never lose more than the stop-loss level that we have set for the trades. This way, we can limit our downside risk should prices move against us, while still enjoying high potential returns.AdvertisementAdvertisementAdvertisement

Read Also: Knock-Outs Trading: What You Need To Understand About This New Product Before You Start Trading It

#4 Consider Overseas Shares When Doing Shares Trading

Currently, there are more than 700 companies listed on the SGX, some of which are quite thinly traded and where prices don’t move by much, especially in the short-term.

To expand our trading opportunities, it’s important to consider shares trading with overseas companies. Using a CFD provider platform like IG, we can trade stocks in countries such as the US, UK and other international stocks beyond Singapore. This gives us greater opportunities to find companies that fit into our trading strategies, instead of being constrained to local stocks.Advertisement

When trading overseas shares, we also have to be aware of the time difference. For example, the core trading hours for the New York Stock Exchange (NYSE) and NASDAQ is from 9:30 am to 4:00 pm, Eastern Time (ET). This is 12 hours behind our time zone in Singapore. It also means that trading hours for NYSE & NASDAQ will start from 9:30 pm and end at 4:00 am – when most of us would presumably be asleep.

While most Singapore traders can only trade CFDs on US stock market from 9:30 pm to 4:00 am (Singapore Time), we can access pre-market and after-hours shares trading with IG. This extended trading hours with IG is from 4 pm to 8 am, Monday to Thursday, and 4pm to 5am Friday (Singapore Time).Advertisement

Read Also: Index Trading & Shares Trading: What To Know About These Products Before Trading Them

If you are thinking of starting shares trading, you may be wondering which trading providers you should use.

As a rule of thumb, as Singapore traders, we should consider using a trading provider that is licensed and regulated under MAS, rather than unregulated overseas brokers. This not only ensures that the trading providers we use are operating in compliance with the authority requirements, but also allows us to seek recourse if required.

Read Also: Inside IG: We Took A Inside Peek Into Their Singapore Office – Here’s What We Saw

For those who are new to trading, it makes sense to start first with a demo account. A demo account gives us the opportunity to practise shares trading using virtual dollars first, so that we can familiarise with the platform and strategies that we intend to use.

At the same time, we can also practise risk management to ensure that we understand how to limit the risks for any trades that we make through tools like guaranteed stop and knock-outs. We can open a demo trading account with IG and get S$200,000 in virtual funds to start practising. Once we are confident, we can then proceed to open a live account. With a demo account, we will also enjoy free and immediate access to IG Academy, where we can join online courses and live webinars to learn more about how we can improve our skills in shares trading.AdvertisementAdvertisementAdvertisement

 

Disclaimer

IG provides an execution-only service. The information in this article is for informational and educational purposes only and does not constitute (and should not be construed as containing) any form of financial or investment advice or an investment recommendation or an offer of or solicitation to invest or transact in any financial instrument. Nor does the information take into account the investment objective, financial situation, or particular need of any person.  Where in doubt, you should seek advice from an independent financial adviser regarding the suitability of your investment, under a separate arrangement, as you deem fit.

No responsibility is accepted by IG for any loss or damage arising in any way (including due to negligence) from anyone acting or refraining from acting as a result of the information. All forms of investment carry risks. Trading in leveraged products, such as CFDs, carries risks and may not be suitable for everyone. Losses can exceed deposits.

This advertisement has not been reviewed by the Monetary Authority of Singapore.

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