Share Trading
Start Trading Shares across International Markets with a Low-Cost Online Solution. Learn About Shares Below then Proceed to Trading Strategies
READ ABOUT SHARE TRADING AND PROCEED TO STRATEGIES
- What is Share Trading01
- Key Features of Share Trading02
- Trade Both Long and Short03
- Calculating Profits and/or Losses04
- Share Trading Examples05
- Key Benefits of Shares06
- Margin Lending07
- Risks of Share Trading08
- Styles of Share Trading09
- Tools & Resources10
- How to Open an Account11
- Supported Brokers12
Introduction to Share Trading
Navigate down the page using the buttons below to learn more about Share Trading.
1. What is Share Trading?
Shares, also known as stocks or equities, are one of the most popular financial instruments.
In simple terms, shares (stocks, equities) represent ownership of a company that is listed on an exchange. When companies want to raise capital, they issue shares. Investors who believe that the company will expand further, and therefore appreciate in value, buy shares and own part of that company. The more shares you buy, the bigger part of the company you own.
To buy and sell shares, you need access to a stock exchange, which can easily be achieved through a Stock Broker. MyTradingAdvisor enables you to Trade Shares Online by getting you set up with an account held and funded with Interactive Brokers. Interactive Brokers gives you online access to over 120 markets across 31 countries including New York Stock Exchange (NYSE), NASDAQ, the London Stock Exchange (LSE), the Australian Stock Exchange and More. Opening an account via MyTradingAdvisor gives you full access to global share markets, deep discount commissions and access to our Traders Room where we’ll help you Create an Income from Share Trading.
2. Key Points of Share Trading
Company Shares are exchange-traded and give you an entitlement to share in the earnings of a company and have a say in how the company is run (the amount of say depends on your percentage shareholding and structure under which your shares are owned). The earnings from a company are either retained by the company for additional capital expenditure or used to buy back shares or earnings can be distributed back to you in the form of a dividend. As a shareholder, you participate in both an increase/decrease in the value of a company (capital growth/capital loss) and the dividend distributions from the company to you.
SHARE TRADING KEY POINTS:
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Entitlement to dividends
By owning shares, you become a shareholder, which means you are entitled to a share of the company’s earnings if a portion of those earnings are distributed as a dividend. Dividends are paid out on a quarterly or semi-annual basis, but it varies between companies and the dividend amount is decided by the company and its board of directors. Companies might not necessarily payout all of their profits as a dividend as often a portion of the profit is retained for company expansion.
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CUSTODY WITH ONLINE BROKERS
With most online brokers, such as Interactive Brokers the shares you buy in your account are owned by a custodian or a sub-custodian who takes ownership of the stock on your behalf. A custodian is generally a large institution that holds stock under a trust structure on your behalfs, such as BNP Paribas, Bank of New York Mellon, Interactive Brokers, ABN Amro and a large number of other well-known institutions. You are the nominee under the trust structure, which means you are the beneficial owner of the shares. The advantage is that this is a low-cost structure with a lot of flexibility. The disadvantage is that the stock is not registered under your name at the share registry directly.
3
INVESTMENT
Investing refers to buying the actual share through an exchange with the aim to profit in the long-term. Such an investment is usually held for a number of years, in some cases even decades, before materialising profits. When you own shares you are also eligible for dividends (the amount of profit a company distributes back to the shareholders). Investors are typically looking for a combination of capital growth, income from dividends and dividend growth. Dividends are a great way to generate a passive income, but you do need to keep a loose eye on a companies fundamentals to make sure it can keep growing its dividend over time.
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STOCK EXCHANGES
Stock Exchanges generally have a Clearing House. Clearing Houses clear and settle Share Transactions executed on the Stock Exchange. The primary role of the Clearing House is to guarantee the settlement of obligations arising under the Stock Transaction registered with it. This means that when your Stock Broker buys or sells Shares on your behalf, neither you nor your broker needs to be concerned with the creditworthiness of the other side of the trade. The Clearing House will never deal directly with you, rather the Clearing House will only ever deal with its Clearing Participants – that is your broker (where your broker is a Clearing Participant), or where your broker is not a Clearing Participant, your Stock Broker’s Clearing Participant.
When a Stock Transaction is registered with the Clearing House, it is novated. This means that the Stock Transaction between the two brokers who made the trade is replaced by one contract between the buying broker (or its Clearing Participant) and the Clearing House as seller and one contract between the selling broker (or its Clearing Participant) and the Clearing House as buyer.
In simple terms, the Clearing House becomes the buyer to the selling broker, and the seller to the buying broker.
You, as the client, are not party to either of those Stock Transactions. Although your Stock Broker may act on your instructions or for your benefit, the rules of the Clearing House provides that any contract arising from an order submitted to the market is regarded as having been entered into by the executing broker as principal. Upon registration of the stock trade with the Clearing House in the relevant Clearing Participant’s name, that Clearing Participant will incur obligations to the Clearing House as principal, even though the trade was entered into on your instructions.
The Clearing House ensures that it is able to meet its obligation to Clearing Participants by calling a margin to cover any unrealised losses in the market if the transaction incurred a borrowing component though this is more relevant to Margin Lending clients or Stock CFD Traders.
5
TRADING SHARES
Trading shares, compared with investing, is a more hands-on activity with daily or weekly monitoring of your account, which involves buying and selling with the aim to capitalize on shorter-term fluctuations. The purpose of trading is to generate income to supplement a primary source of income with the possible secondary goal of perhaps one-day trading for a living.
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GO LONG AND SHORT
Traders can speculate on markets going up or down. If a trader shorts a stock they are hoping for the stock to fall in value, so they can profit. This can be a great strategy in down markets, but typically most traders look to trade short term microbursts generally to the long side as stocks spend more time going up than down, on average.
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MARGIN LENDING
Share traders typically employ the use of leverage to magnify potential returns. Because share traders are only holding stock for short periods of time, the downside risk can be lower than a buy and hold approach but only if you can avoid adverse moves or a series of losing trades. As such there is more potential for a trader to utilise margin lending (or even stock CFDs) to produce a return, not only on your own capital but on the borrowed capital as well. Unfortunately, the success rate on trading is rather low, so most traders get themselves into trouble with leverage because leverage also magnifies losses. MyTradingAdvisor provides guidance on Managing Risk, Margin Lending and Compounding Strategies to help you grow your trading account over time without risking the Farm.
8
COMMISSIONS
Traders need to save money on commissions and interest, hence trading online through a trading platform is the best option. MyTradingAdvisor facilitates trading on sharemarkets around the world through Interactive Brokers. Your brokerage account is held and funded directly with Interactive Brokers. MyTradingAdvisor provides training, troubleshooting, support and advice via our Traders Room but your counterparty risk on your brokerage account is direct with Interactive Brokers, not MyTradingAdvisor.
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TAX
Profits made from trading in shares are treated as income and are typically subject to income tax and/or capital gains tax depending on the jurisdictions and may also be subject to stamp duty and GST. Investing is typically more tax effective and less fee intensive than trading so carefully consider your options before taking the plunge.
3. Take Both Long and Short Positions
Stock traders can typically trade shares in both Long or Short directions but there are times when Trading Short is prohibited, particularly during bear markets. Keep an eye on whether a Short-Selling ban is in place through your broker before placing a trade to go short.
You can take both “long” and “short” positions on stocks. If you take a long position (i.e. you “purchase” shares), you may profit from a rise in the price of the stock, and you will make a loss if the price of the stock falls. Conversely, if you take a short position (i.e. you “sell” a stock without owning it, or in other words your broker borrows the stock from other clients and allows you to lend the stock against the stock they hold to someone else without you having to own it in the first place), you may profit from a fall in the share price, and you will make a loss if the share price rises. If you are short a stock, you will need to buy the stock to close out the transaction.
Trading Tip: Short Trading sounds complicated, as a trader, you don’t need to understand the mechanics of what is involved behind the scenes as this is your Stock Brokers problem and to be fair it’s pretty confusing. Just understand that you can sell the stock without first owning it and you will make money if the stock falls in price and lose if it rises in price. Given markets tend to rise over time it is more difficult to make money consistently from shorting stock than going long stock.
4. Calculating Profits and/or Losses:
If you Close Out a Stock Transaction, the amount of any gross profit or loss made on a Stock Transaction (i.e. before fees, commissions and other costs) will be equal to the difference between the price the Stock was opened and the price the Stock was Closed Out, multiplied by the number of Shares held. The indicative price for a Stock at which you can enter into or Close Out is available on your Trading Platform.
EXAMPLE 1:
Assume you purchase 500 shares in AAPL (Apple Computer) on the Nasdaq Exchange in the USA and the price at which you enter into the stock transaction is US$150 (made up for illustrative purposes). You later Closed Out the stock trade by “selling” at a higher level of US$175. The resulting gross profit on the transaction would be US$12,500 being sale level (US$175) less buy level (US$150) x 500 (the number of shares purchased). The net profit is determined after deducting your Stock Brokers commissions (charged on both Opening and Closing Out the transaction) and any other charges as set out by your Stock Broker.
EXAMPLE 2:
Assume you purchase 100 BHP Shares on the Australian Stock Exchange (i.e. you enter into a “long” position) and the price at which you enter into the stock is AU$25 (example only). You later Closed Out the Stock Trade by “selling” (or exiting the “long” position) at a lower level of AU$20. The resulting gross loss would be $500 being sale level (AU$20) less buy level (AU$25) x 100 (the number of shares purchased). The net loss is determined after adding commissions and any other charges.
5. Share Trading Examples
We have described how Share Trading works and the basic points of Shares.
Shares are a great trading instrument and very low cost to trade with the added benefit of not needing to leverage, thus avoiding interest and carrying costs. Given the sharemarket is already very volatile without leverage, shares represent an excellent vehicle with which to start trading.
In order to start trading shares, you need at least $5,000 USD to open an account with Interactive Brokers via MyTradingAdvisor. This will allow you to take five or more trades of $1,000 or less across a number of different stocks. Ideally larger amounts of capital give more flexibility to pyramid into individual stock positions or provide additional diversification.
Further advantages for stocks over derivatives when using leverage is that Margin Lending only requires interest to be paid on the borrowed amount, whereas with Stock CFDs interest is payable on the full face value of the position. For example let’s say you have $10,000 and you buy $20,000 worth of stock, of which $10,000 is your money and $10,000 is borrowed. With Margin Lending, you pay interest only on the $10,000 borrowed amount whereas with a Stock CFD you pay interest on the full $20,000.
6. Key Benefits of Share Trading
Share Trading provides a number of benefits which must be weighed against the risks of using them. The benefits of Share Trading are as follows:
CAPITAL GAINS
DIVIDEND INCOME:
DIVERSIFICATION
RAPID PROFIT (LOSS) POTENTIAL:
LEVERAGE
With most online brokers, such as Interactive Brokers the shares you buy in your account are owned by a custodian or a sub-custodian who takes ownership of the stock on your behalf. A custodian is generally a large institution that holds stock under a trust structure on your behalfs, such as BNP Paribas, Bank of New York Mellon, Interactive Brokers, ABN Amro and a large number of other well-known institutions. You are the nominee under the trust structure, which means you are the beneficial owner of the shares. The advantage is that this is a low-cost structure with a lot of flexibility. The disadvantage is that the stock is not registered under your name at the share registry directly.
AUTOMATED TRADING
TRADE FROM ANYWHERE
7. Margin Lending
Stocks purchased using Margin Lending are subject to margin obligations i.e. you must have sufficient Net Free Equity in your Trading Account for security and margining purposes. You are responsible for meeting all margin obligations with your broker.
TYPES OF MARGIN
INITIAL MARGIN
When purchasing Stock with a borrowed component under a Margin Lending agreement the initial margin is the minimum deposit required to purchase shares. The initial deposit requirements differ depending on the Trading Platform you choose and the broker you choose. In choosing a Trading Platform and broker, you should carefully consider the Margin Requirements of each Trading Platform as Margin Calls could have an adverse impact on your investment. In general, most brokers allow you to borrow at least 50% of the value of the stock for Large-Cap securities. Mid-Cap and Small-Cap stocks will generally require a larger deposit given their higher risk profile.
Your broker may, in their sole discretion and without the need to notify you, change the percentage Margin Requirements for a Trading Platform from to time.
Unlike a CFD trade where the initial margin is lower, with Margin Lending you only pay interest on the borrowed portion of your purchase. This is an advantage over CFDs where you are charged interest on the full face value of your position.
VARIATION MARGIN
As the value of your Stock position will constantly change due to changing levels of the stock market, the Margin Requirement (being the minimum Net Free Equity you must maintain in order for your broker not to Close Out some or all of your Stock position) required to keep your positions open will also constantly change. This is commonly referred to as Variation Margin. The amount of your Margin Requirements (being the Initial Margin and any adverse Variation Margin) at any one time will be displayed on the open positions report made available through your Trading Platform.
Any adverse price movements in the market must be covered by further payments from you (unless you already have sufficient “Net Free Equity” in your Trading Account). Your stock broker will also credit the Variation Margin to your Trading Account when a position moves in your favour.
Your stock broker will determine the Variation Margin for a Margin Lending Transaction by reference to changes in the value of the Stock. In other words, each contract is effectively “marked to market” on at least a daily basis. “Marked to market” means that an open position is revalued generally in real time or at least on a daily basis to the current market value. The difference between the real time/current day’s valuation compared to the previous real time/day’s valuation respectively is the amount which is debited (in the case of unrealised losses) or credited (in the case of unrealised profits) to your Trading Account. The valuations are calculated using the closing value (at the close of trading on each day) of the Underlying Instrument as determined by the relevant Pricing Source. Intraday “marked to market” revaluations will be based on the last available value of the Underlying Instrument as determined by your stock broker in their sole discretion.
CAPITAL GAINS
Margin Calls are made on a net Trading Account basis i.e. should you have several open positions with respect to a particular Trading Platform, then Margin Calls are netted across the group of open positions. In other words, the realised and unrealised profits of one Transaction can be used or applied as Initial Margin or Variation Margin for another Transaction.
When trading with any broker, it is your responsibility to monitor your Variation Margin obligations. Any notification of a Margin Call could be via a ‘pop up’ screen or screen alert which you will only receive notice of if you access your online Trading Account via your Trading Platform. There may be instances where your broker does not provide you with a Margin Call notifying you of an obligation to meet a Variation Margin. This does not waive your obligation to meet that Variation Margin. If you fail to meet a Variation Margin yur broker may in their absolute discretion (but without an obligation to do so) Close Out, without notice, all or some of your open Transactions.
FAILING TO MEET A MARGIN CALL
If you do not meet Margin Calls immediately, some or all of your positions may be Closed Out by your Stock Broker without further reference to you.
Most Stock Brokers generally apply risk limits (referred to as Default Liquidation Thresholds) to ensure that the percentage of your Trading Account balance which you are using at any one time to satisfy Margin Requirements (Margin Utilisation) does not exceed certain pre-defined levels. If your Margin Utilisation exceeds the Default Liquidation Threshold for your Trading Platform, a Margin Call will generally be applied to your Trading Account. If you do not meet a Margin Call immediately, your Stock Broker may Close Out some or all of your open Transactions without notice to you.
The Default Liquidation Threshold is determined by the Stock Broker for your Trading Platform. It is implemented for risk management purposes and may be varied by the Stock Broker at any time.
With Shares if you fail to meet a Margin Call, then your stock broker may in their absolute discretion (but without an obligation to do so) Close Out, without notice, all or some of your open stock positions and deduct the resulting realised loss from your Trading Account. You may be required to provide additional funds to your stock broker if the balance of your Trading Account is insufficient to cover those losses. If a Close Out occurs you will not be able to enter into another Transaction until you transfer additional funds to your broker.
8. Risks of Trading in Stocks
PRODUCT RISKS
CHANGES IN THE PRICE, VALUE OR LEVEL OF THE UNDERLYING INSTRUMENT
Trading on the Share Market involves a high degree of risk.
If there is an adverse change in the value of the Stock, you will show an unrealised loss on your account. If you trade Shares using Margin Lending and you receive a Margin Call, you will be required to transfer additional funds immediately to your Stock Broker in order to maintain your position i.e. to ‘top up’ your Trading Account balance. Those additional funds may be substantial, particularly in situations where there is a large gap in the price of the stock. If you fail to provide those additional funds immediately, the Stock Broker may Close Out some or all of your open positions. You will also be liable for any shortfall in your Trading Account balance following that closure.
You should be aware that the risks you face differ depending on which Trading Platform you choose to trade through. These include pricing and counterparty risk.
OTHER VARIABLES THAT COULD LEAD TO LOSS
1
INCORRECT DETAILS ARE ENTERED:
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EXERCISE IN STOCK BROKER’S DISCRETION TO CLOSE OUT:
3
ORDER ACCEPTANCE RISK:
4
STOP LOSSES:
5
MARKET CONDITIONS:
6
EXCHANGE RATE RISK:
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LIQUIDITY:
8
ONLINE STOCK BROKER RISK:
PRODUCT RISKS
There are a number of risks that arise from the processes by which the shares are entered into or settled, including risks associated with using internet-based Trading Platforms. Such risks include, but are not limited to:
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Risks related to the use of software and/or telecommunications systems such as software errors and bugs;
2
Delays in telecommunications systems;
3
Interrupted service;
4
Data supply errors; and
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Faults or inaccuracies and security breaches.
TRADING IN SHARES VS. TRADING SHARE CFDS
Below we have summed up the differences between Share Trading and Share CFD Trading to help you decide what product is most suited.
TRADING IN SHARES
- Own the asset
- No interest costs on fully funded positions
- Leverage can be achieved with Margin Lending
- Margin Lending not as leveraged as CFDs
- Subject to stamp duty in certain jurisdictions
- Eligible for dividends, if applicable
- Fees apply
- Suitable for all types of traders
TRADING IN SHARES CFDs
- Trade on the price of the underlying market
- Interest payable on the full face value of the position
- High amounts of leverage are available
- No shareholder rights
- Lower capital requirements
- Generally (but not always) lower minimum brokerage
- Suitable for day traders and traders with medium-term strategies
9. Styles of Share Trading
Today Share Traders have the ability to create income from Share Trading in a number of ways ranging from active to passive.
DIVIDEND AND OPTION PREMIUM TRADING
DISCRETIONARY TRADING
HYBRID APPROACH
SYSTEMS TRADING
