What are stocks?
Amazon, HSBC, Rolls Royce, BP, Microsoft – examples of famous companies whose stocks are traded on stock exchanges around the world.
But what is a stock?
A stock is simply a unit of ownership in a company. If you own a stock, or a share, then you own a part of that company.
For example, if a company issues 10,000 shares and you buy 100, then you own 1% of that company. If the company performs well, then the stock price will rise. If it performs badly, then the stock price will fall.
Can I trade stock in any company?
No. You can only trade publicly available stocks in companies that have floated on the stock market. When this happens, it is known as an initial public offering (IPO) and the company is regarded as a ‘public company'.
A major reason why companies decide to go public is to generate massive investment. This is because when you buy a stock, the company receives that money in exchange for your ownership in it.
For example, when Facebook (now Meta) went public, it made a historic $16 billion.*
*Forbes, It's Official! Facebook Raises $16 Billion in Historic IPO
Public vs private companies
However, despite the lure of major investment, many large companies choose to remain private.
Private companies are not listed on stock exchanges. However, they can still offer shares privately e.g. to its employees and select investors.
The advantages of remaining private are:
- The risk of an IPO – a lot of time, effort and cost goes into an IPO and there’s always the danger that the shares might not sell
- Lower reporting standards – in America, the US Securities and Exchange Commission (SEC) demands that public companies produce annual reports and are independently audited
- Loss of control – private companies don’t answer to shareholders and can keep their business plans under wraps
Examples of big private companies include Deloitte, Subway, Huawai, Aldi, and Bosch.
Where are stocks traded?
Stocks are traded on stock exchanges. The role of an exchange is to provide a safe and regulated environment where stocks can be traded, and to ensure that companies listed on the exchange meet strict corporate governance standards.
Stock Exchange opening times
Stock exchanges are not open 24/7. They have opening and closing times. Keep in mind the different time zones because you can’t trade a stock if the exchange is closed.
New York Stock Exchange (NYSE)
Open Mon-Fri, 9.30am – 4pm (EST)
Founded in 1792, the NYSE is the largest stock exchange by market capitalisation in the world – greater than the NASDAQ, London Stock Exchange and Tokyo Stock Exchange combined.*
Notable companies listed on the exchange are Alibaba, Johnson & Johnson, and Wal-Mart.
NASDAQ
Open Mon-Fri, 9.30am – 4pm (EST)
Located in New York, the NASDAQ (National Association of Securities Dealers Automated Quotations) is the second biggest exchange in the world.
It is a tech-focused exchange and includes such giants as Apple, Amazon, Intel, Cisco, and Microsoft.
London Stock Exchange (LSE)
Open Mon-Fri, 8am – 4.40pm (GMT)
First founded in 1698 as the Royal Exchange, the London Stock Exchange is the largest exchange in Europe.
Listed companies include Unilever, BP, GlaxoSmithKline, HSBC, and Royal Dutch Shell.
Tokyo Stock Exchange
Open 9am – 11.30am then 12.30pm – 3.00pm (JST)
Founded in 1878, the Tokyo Stock Exchange is the largest in Asia. Listed companies on the exchange include Sony, Toyota, and SoftBank.
Discover the benefits of trading stocks
*Statistica, Largest stock exchange operators, listed by market cap of listed companies 2020
Five reasons to trade stocks
1. Stocks may favour longer-term trades
Compared to forex, stocks can be less volatile on a day-to-day basis. As a result, they may favour traders who prefer to hold trades for longer periods of time.
However, be aware that stock prices can still experience big shocks such as in the event of a merger, scandal or significant profit warnings.
2. Stock CFDs enable price speculation without owning a stock
At FOREX.com, stocks are traded as CFDs. This enables you to speculate on the price of a stock without ever actually owning it.
- You can go long, meaning that you buy stocks in the expectation that they will rise in price.
- Or you can go short, meaning that you ‘sell’ the stock in the expectation that the price will fall.
Shorting a stock enables you profit when the price decreases in value. This is not possible in traditional stock trading where you take real ownership of the stock.
It is also worth noting that shorting can be used to hedge any stock exposure you have.
3. Owning stocks may reward you with dividends
Dividends are a financial sweetener for owning a stock.
If you own a stock in a company, that company can reward you with a slice of its profits. They are literally giving you money because you own their stock.
Dividends are used by companies as an incentive for investors to buy and hold its stock.
For example, Microsoft announced in late 2020 that it would be paying shareholders a dividend of $0.56 per share. So, for every share you own, you get 56 cents as a thank you for owning Microsoft shares.
The more shares you own, the bigger the dividend will be.
However, the above applies to owning actual stock, not trading stock CFDs which we provide.
Dividends and Stock CFDs
When you trade stock CFDs, dividends are not a tangible benefit.
This is because when a company pays out its dividends on the ex-date, the stock price takes a slight knock; money has flowed out of the company and into the pockets of the shareholders.
At FOREX.com, we balance the positive effect of the dividend against this dip in the share price.
What happens is that a dividend adjustment occurs at the close of business before the ex-dividend date.
- Long positions are credited
- Short positions are debited
Then all things being equal, the market then opens lower on the ex-date by the dividend amount.
Therefore, the dividend has not impacted your trade or any profit/loss you may have made.
How much money do I get from a dividend?
The size of dividend differs on a company to company basis. Some companies do not offer dividends at all.
The dividend amount will be decided by the board of directors and will be based on the company’s financial performance and other industry factors.
When are dividends paid?
The timings of the dividends are decided by the board of directors.
Dividends are usually paid out four times a year, but it’s also not uncommon to see frequencies of twice or once a year as well.
However, some companies have no set dividend schedule. Companies can also issue one-off special dividends.
When you buy a stock, you should always be aware of the ex-dividend date (ex-date). If you buy the stock after the ex-date, you will not be entitled to the dividend. Rather, you will have to hold the stock and wait until when the next dividend is issued.
4. Stocks allow to focus on a specific company
Compared to forex, there are fewer factors that affect the price of a company stock. This enables you to concentrate on the key fundamentals of a company such as profit margins.
5. Stock CFDs give access to leverage
In November 2020, the cost of a single Amazon share was $3,124. This high price puts it out of reach for many retail stock traders.
However, at FOREX.com, you trade stock CFDs, which are leveraged.
Leverage means you only have to put up a fraction of the deposit. At the time of writing, you’d only have to put up 5%* of the $3,100 to trade it.
Please note that although leverage can magnify your profits, it can also magnify your losses. This is a critical trading concept to understand.
*Up to $7,900 trade size