Getting Started

Trading stocks has gone on for hundreds of years, and yet, in the 21 st century's global economy, it is an activity that perennially increases. Recent decades have seen incredible investment and advances in stock-market technology as well as share-related instruments. As a consequence of that, never before have the benefits and excitement of the stock market been available to so many people. Certainly since the 1980s, it has not been unusual for the man and woman on the street to possess shares and, at the very least, dabble in the markets.

On a global basis, individuals trade stock shares and 'contracts for difference', or CFDs, a share-based product that adds flexibility to an individual's trading options. Whether they are trading shares and CFDs from companies with household names like BHP or Commonwealth Bank, or entire indices like the 00 Index, they put their money to work for them in a more dynamic and intriguing way than depositing it in a bank appears to do. And they do so every day.

And the fact that you're here suggests you want to join in too. This is an ideal place to learn about shares and CFDs, as well as the tools and information you will need to start trading them. So let's get started.

In this first section, we will explain the following to get you on your way to making your first trade:

• What you need to know about shares
• What you need to know about CFDs

Shares - Pieces of a Company

Shares are pieces of a company, with every individual share representing part-ownership. So even if you own just 1 share in a company that has issued 1,000 shares, then you still own 0.1 percent of that company. Likewise if you own just 1 share in a company that has issued 1,000,000 shares, then you own 0.0001 percent of that company.

Companies alone decide how many shares they issue. Traders and other market participants cannot create their own shares and are restricted to trading those shares that the company has issued.

Traders buy and sell shares to capitalize on a share's price movement. If a share rises in value whilst you own it, then you make money. So if you bought a Google share (GOOG:xnas) for $400 and then sold it after the price soared to $500 you would make $100 ($500 - $400 = $100).

If you sell a share short (which means you borrow the share from your dealer and sell it on the open market), and the price of that share goes down, you make money. For example, if you borrow a share of Google from your dealer and sell it on the open market for $600, buy it back for $500 and then return it to your dealer, you make $100 ($600 - $500 = $100).

It Is Not Necessarily Just About Making Money

As a shareholder, you are entitled to vote for members of the company's board of directors - and on other issues that are brought before the owners of the company. So you can take a real and proactive interest in its management.

But money is very much what stock trading is about. Companies issue shares to raise money. Very often this is not because they do not already make money but because management sees a potential to generate more product or service if the company has more money to invest. They might, for example, realise that they could easily double production of electroplaters if they had the capacity. If there are plenty of orders, if there is little competition, if the profit margin is good, if demand is anticipated to rise, if such production could easily be managed, then such an investment would probably be sound.

When companies need money, they raise it in two ways. They borrow it from lenders or receive it from investors. The latter don't just give cups of money to companies for nothing. They want something in return. They want pieces of the companies, and by selling shares, companies are able to oblige them.

Publicly-traded companies usually have thousands (and sometimes millions) of individual owners because they ordinarily issue millions of shares and every share has an owner. All of these owners must understand that they share risks as well as profits. As we all know, because the mantra of the Advertising Standards Authority repeatedly warns us of it, the value of investments can fall as well as rise.

The following table illustrates what will happen to the value of your shares based on whether you bought or sold the share to enter your trade:

Share prices fluctuate on a daily basis. Traders must predict the direction they believe a share price is going to move and place their trades accordingly. You will learn more about share analysis and how to anticipate price movements in later sections.

Stock Traders

Stock traders who want to buy or sell a share submit their orders to IC Markets, and IC Markets takes care of the rest. It really is very simple. The complete process is as follows:

1. You submit an order to IC Markets
2. IC Markets submits the order to the appropriate stock exchange
3. he exchange fills the order by matching it with another order (or orders)
4. The exchange confirms to IC Markets that the order has been filled
5. IC Markets updates the order in your account

All of this takes just seconds because IC Markets provides a trading platform that enables near-instantaneous order execution for individual investors like yourself.

Re-use of Collateral

IC Markets allows up to 60 percent of collateral invested in certain shares and ETFs (Exchange Traded Funds) to be used for margin trading activities (Forex and CFD trading). So if you hold eligible shares worth $20,000 you can re-use up to $12,000 of this as collateral for trading Forex and CFDs.

Contracts for Difference (CFDs)

Contracts for difference (CFDs) bear comparison with the stocks and stock indices on which they are based. But they are beneficial because they give users extra leverage. Whereas stocks are certificates of company ownership, CFDs are simply contracts between two parties (you and your dealer, in most cases) that decide how much money you will make/owe depending on where the price of the underlying stock or stock index moves. So, in a sense, they're like virtual shares.

Whereas there are a limited number of stock shares available for each company, there are no such limits on CFDs. Companies don't issue CFDs or determine how many are available - traders do. Providing there are traders willing to buy or sell CFDs, and dealers or others willing to take the opposite side of the trade (which can mean believing the opposite of what you are convinced will be the case), the number of CFDs you can trade on each share or share index is effectively limitless.

Despite their differences, CFDs and stocks work in much the same way. CFDs alone cannot gain or lose. A stock, on the other hand, can gain or lose all by itself. Yet a CFD attached to a stock share loses or gains in parallel with share. As the share price rises, the CFD moves. Conversely, as the share price falls, the value of the CFD moves.

CFDs and stock shares are like people and hot-air balloons respectively. People cannot fly unaided. Yet balloons fly by themselves. But if you put people inside their baskets, they fly underneath balloons as passengers. As the balloons rise, the passengers also rise. As the balloon descends, the passengers likewise descend.

Every CFD has a specific underlying stock or stock index on which it is based. If you trade a CFD for the Nikkei 225 Index (an index of Japanese stocks that trade on the Tokyo Stock Exchange), for instance, the performance of your CFD is based on the price performance of the Nikkei 225. If you buy the Nikkei 225 CFD and the price of the Nikkei 225 rises, then the value of your CFD will also rise. Conversely, if you sell the Nikkei 225 CFD and the price of the Nikkei 225 moves lower, then the value of your CFD will also move higher.

The following table illustrates what will happen to the value of your CFDs based on whether you bought or sold the CFD to enter your trade and the price movement of the underlying asset:

CFD values fluctuate daily as the price of the underlying asset climbs or falls. Stock traders must determine in which direction underlying assets should move so they can place CFD trades accordingly. You will learn more about how to analyse underlying assets, and predict where prices will go, in later sections.

As an aside, it is perhaps worth mentioning that CFD holders are not entitled to vote for members of the company's board of directors or on other issues that are brought before the owners of the company. CFDs also give you no ownership rights whatsoever in a company.

Along with being quite easy to trade, CFDs enjoy another tremendous advantage over stocks: leverage.

Leverage

CFDs bestow leverage, and leverage is the one characteristic of CFDs that intrigues individual investors the most. Levers employ a small amount of power to achieve a big effect. The physical world is full of levers. Our bones are levers through which we apply force, using muscles, to do everything from tap on a keyboard to land a knockout punch. And CFDs are the stock market's levers. They can sometimes allow traders to use smaller amounts of money to achieve disproportionate gains in the same way that a small child can lift their dad off the ground on a see-saw if both child and dad sit in the right places.

The same principle applies to CFDs. You can make money by simply investing your own money, but you can make much more money if you can use the tool of financial leverage by borrowing money from your dealer. You can also lose more money when trading with leverage.

Incidentally, be warned that, whilst some dealers allow you to use leverage to buy shares on margin, the maximum leverage you can use is limited and not all traders will qualify

You can lever your CFD accounts, or increase their investing power, by using some of your own money to enter a trade and then borrowing the balance from your dealer. So you might buy or sell a CFD on some popular shares and indices using as little as 10 percent of your own money and borrowing the remaining 90 percent of the price from your dealer.

The leverage employed when trading CFDs is decided by the margin you post for each trade.

Margin

The CFD market proffers exciting possibilities for those traders whose dealers are willing to lend money to enable them to increase the profit-generating potential of all trades. Before your dealer loans money, you will need to show that you have sufficient to cover any and all losses you may incur. This money, set aside by your dealer for safe-keeping, is called margin.

For example, if you bought an Exxon Mobil CFD, you would perhaps be required to set aside 10 percent of the share price as margin. With a share price is $90 you must set aside $9 to prove to your dealer that you can cover losses of at least $9 (a 10 percent loss) should your trade move against you.

But the aforementioned 10 percent margin is a contrived example. Different CFDs have different margins. CFDs corresponding to shares and indices that are actively traded need smaller margins because their high levels of liquidity make it easier to enter and exit trades quickly. Dealers therefore can be confident that they can rapidly close out your positions without incurring unexpected losses if the going gets tough. CFDs covering stocks and indices that are not actively traded need bigger margins since their low levels of liquidity make it harder to enter and exit trades quickly.

Many novice CFD traders often mistakenly believe that the money they set aside as margin is a deposit on stock shares or indices. It is not. They borrow 100 percent of the price from the dealer. The margin only assures the dealer that there is money to cover any losses as they occur.

CFD Financing credit/debit rates

As it is a margined product, you finance the traded value of the CFD with an overnight credit/debit charge. In return for that charge, your dealer is flexible in its lending. When you hold a CFD overnight (e.g. you have an open CFD position at close of market i.e. 17.00 New York time) your CFD position will be subject to the following credit or debit:

• When you hold a long CFD position overnight, you pay interest, meaning that you are debited an amount calculated using the relevant Inter-Bank Offer Rate for the currency in which the underlying share is traded (e.g. LIBOR) plus a mark-up (times Actual Days/360 or Actual Days/365).
• When you hold a short CFD position overnight, you receive interest, meaning that you are credited an amount calculated using the relevant Inter-Bank Bid Rate for the currency in which the underlying share is traded (e.g. LIBID) minus a mark-down (times Actual Days/360 or Actual Days/365).

The credit/debit is calculated on the total nominal value of the underlying share(s) at the time the CFD contract is established (and irrespective of whether it is long or short).

If you open and close a CFD position within one trading day, you are not subject to these credits and/or debits.

CFD Traders

CFD traders who wish to buy or sell CFDs submit their orders to IC Markets, and IC Markets takes care of the rest. With CFDs, however, IC Markets fulfils orders in one of two ways. It either sends the order to a centralized CFD exchange or it acts as the counterparty to the trade.

When you submit an order for a CFD that trades on a centralized exchange, IC Markets will handle your order the same way it would handle a stock order viz:

1. You submit an order to IC markets
2. IC Markets submits that order to the appropriate exchange
3. The exchange fills the order, matching it with another order (or orders)
4. IC Markets receives a confirmation that the order has been filled
5. IC Markets updates the order in your account

When you submit an order for a CFD that does not trade on a centralized exchange but is to be fulfilled by IC Markets instead, the order process is slightly different, viz:

1. You submit an order to IC Markets
2. IC Markets fills the order
3. IC Markets updates the order in your account

Regardless of the type of CFD you buy or sell, the entire process happens within a matter of seconds. It is virtually identical in that respect to trading a stock.

Short Selling CFDs

The short selling of CFDs directly on exchanges (where IC Markets does not market-make) is subject to the rules of the host nation's share market. When trading Australian CFDs, for example, you might find that the volume of CFDs you can short trade in a single day is limited due to limited borrowing availability in the underlying market.

The forced closure of positions if CFDs are recalled can occur. This can easily happen if the share becomes hard to borrow due to takeovers, dividends, rights offerings (and diverse merger and acquisition activities), or due to increased hedge fund selling of the share.