Basics of trading shares and currency pairs

Introduction to stock markets

A stock, also called a share or equity, means a piece of ownership in a company. Stock market refers to a marketplace where companies, investors and the general public sell and buy stocks of publicly-listed companies.

There are different ways to buy stocks. They can be bought in an initial public offering, or IPO, when a company sells them to investors to raise funds. Stocks can also be traded between investors in a secondary market. This means that investors who originally bought the stocks from a company can sell them to other interested investors. Stocks can be traded in stock exchanges or over-the-counter (OTC) markets.

Stock exchanges are centralised marketplaces that function as primary and secondary markets. A ‘centralised marketplace’ means that all trades are reported to the central entity and all the participants in the market have access to the same stocks at the same price. Major stock exchanges include New York Stock Exchange (NYSE), Nasdaq (the US tech-focused exchange), and the London Stock Exchange (LSE).

An OTC market is decentralised ‘over-the-counter’ marketplace where stocks are traded between private counterparties, such as retail brokers and independent traders. One of the main differences compared to stock exchanges is that in the OTC market providers can present assets at their own selected price.

How is shares trading different to investing in shares?

Investors buy stocks often with the expectation that they can be later sold at a higher price to make profit. Instead of buying shares directly, online traders speculate on the price movement of a share and make profit if their prediction is correct. Traders don’t get any ownership over the company or right to dividends, as traders don’t directly own the underlying asset.

The US, UK and EU stock markets are among the most popular markets for stock traders. Online stock markets are open five days a week, often following the market hours of the stock exchanges.

Stock trading is usually leveraged which means traders can control bigger trading volumes whilst investing only a small margin. For example, if the leverage is 1:20, it means by investing $100, you can place a trade worth $2,000. The leverage offered depends on the product and the broker.

Both profit and loss are calculated based on the whole size of the trade, not just the invested margin. Therefore, using leverage allows bigger profits but it’s important to remember that it also exposes traders to bigger losses. When using leverage, always consider how much capital you are willing to risk.

Introduction to currency trading

Buying or selling currencies in small amounts is familiar to many who have had holidays abroad. However, currency pairs can be bought and sold in much bigger volumes on online marketplaces with the aim of making profit. This is called currency trading.

Currency market is one of the largest financial marketplaces in the world, with daily trading volumes exceeding trillions of dollars. It’s a non-centralised market which means it doesn’t have a central exchange, and products are typically traded in the over-the-counter (OTC) market.

Online trading with currency pairs allows trades to make profit from the price movements in the market, without directly owning the asset. There is constantly a lot of activity in the market, keeping prices moving and creating interesting opportunities for individual traders. Changes in demand and supply can be created by several things including monetary policies and geopolitical events.

Currency trading, like shares trading, is often leveraged, meaning that smaller initial deposits let traders control bigger trading volumes.

Currencies are traded in the major financial centres of the US, Europe, and Asia, meaning that when markets close on one continent, they open on another. Therefore, currency pairs can be traded 24 hours a day, five days a week. The trading hours are more flexible compared to other financial products that follow the opening and closing times of the New York Stock Exchange, such as shares and ETFs.

Beginners’ tips for trading currencies

Anyone with sufficient funds can explore opportunities in the currency market by opening a trading account with an online broker. Let’s have a look into the basics of currency trading and some useful terminology before you get started.

Currencies are always traded in pairs because when you buy one, you sell the other. Currency pairs are normally divided into major, minor, and exotic pairs. 

• Major currency pairs include the US dollar as the base or quote currency, and these pairs account for up to three-quarters of all currency trades. EURUSD and GBPUSD are examples of major currency pairs. Major currency pairs often face fewer liquidity problems due to the continued demand for these currencies in the market.
• Minor currency pairs are other significant currency pairs that don’t include the US dollar, like EURGBP and GBPAUD.
• Exotic currency pairs include the currencies of smaller or emerging financial markets. Exotic pairs often experience higher volatility which allows opportunities for profit, but they also might experience liquidity issues as the trading volumes are lower and there might not always be demand.

There’s a lot of specific terminology in the currency market that beginners should be aware of.

Base currency is the currency seen on the left of a currency pair, whereas the currency on the right is called a quote currency. For example, in the EURUSD pair, the Euro is the base currency, and the US dollar is the quote currency. The value of the base currency is always one, and the exchange rate shows how many units of the quote currency are needed to buy one unit of the base currency. If the EURUSD exchange rate is 1.0972, it means 1.0972 dollars is worth 1 euro.

Ask price means the price at which you will buy the currency, and bid price is the price at which you will sell it. Spreads are the difference between the bid and ask prices offered by the online broker. For example, for the EURUSD pair, the bid price offered by the broker could be 1.09721 and the ask price 1.09722. This would be a spread of 0.1 pips.

A pip in currency trading means a one-digit movement in the fourth decimal place of a currency pair. Because the price changes in currency pairs are usually relatively small, the trades are made in big volumes in order to achieve bigger profits. Currencies are usually traded in lots, a standard lot size being 100,000 units of the base currency.

Benefits of trading shares and currency pairs

If you are interested in investing in stocks, why should you try trading online? Let’s explore some of the main benefits:

• Easily accessible online

Shares are traded on online trading platforms and are easily accessible online to anyone with internet connection and a computer or mobile device. However, online trading may be subject to restrictions in some countries so make sure you open an account with a regulated broker.

• Ability to go long or short

With investing, you can only make profit if the price of a stock rises. Shares trading allows you to profit from falling prices as well - if you predict the market movements correctly. When opening a trade you can choose a long position, predicting the price will rise, or short position, anticipating a decrease in the price.

• Cost-effective way to enter financial markets

Trading shares online is a more cost-effective way to access the stock market than investing in stocks directly. Depending on the company, buying stocks can require a lot of initial capital to get started. Because of leverage, you can trade stocks from some of the world’s top companies and explore financial opportunities at a fraction of their full price. 

• Potential for bigger profits

Leverage presents a potential for bigger profits but equally losses as well. Compared to investing in stocks by directly buying them, there is a possibility to make higher profits with online trading as leverage allows you to control bigger trade sizes. Choosing a trading strategy that focuses on finding opportunities in quick price movements can also provide profits faster than in investing.

Now all you need to do is open a trading account to start trading in the global markets. Opening an account can be done in minutes and as soon as you have deposited funds to your account, you are ready to open your first positions.

When you invest money, there are always also risks included. Market analysis, trading plan and risk management tools are crucial for all online traders as they help to make smarter trading decisions and limit the risk of losing investment capital.