So you want to trade stocks. But where and how can you carry out your stock and ETF trades? There are different ways for individual investors to open an online trading account and trade stocks. In this lesson, we’ll explore each of these ways and help you understand the ins and outs of each type of stock trading account.
So strap yourself in, and let’s get started.
Over the past few decades, trading stocks has undergone numerous changes. New markets have opened up, and the transformation from a floor into an electronic screen-based trading system has made it easier for traders to communicate via computer systems. A few decades ago, traders had only one option to execute stock and ETF trades- to open an investment account with a licensed brokerage firm and place orders via phone. Today, things are quite different and there are two main options to trade stocks – via traditional share trading platforms or CFDs brokerage services firms.
So let’s explore each of these and what are the pros and cons of each method.
Share trading, also known as traditional stock trading, refers to buying and selling stocks directly from the stock market. In other words, you are trading shares of the underlying company, and you essentially own physical shares of the company.
Typically, this is the ideal method for long-term investors as they receive dividends and voting rights. Additionally, unlike CFDs, there are no overnight fees for holding ETF and stock positions overnight.
Share trading is the most common and oldest way to trade stocks. As a matter of fact, when you open a trading account via your private bank or an investment account at one of the largest investment banks, you are trading ‘real stocks’ versus other market participants in the stock market. Every order you place on your online trading platform or mobile phone is transferred automatically to the exchange. Moreover, on the best stock trading platforms, you can even see your order in the exchange’s level 2 order book.
Now, let’s see the pros and cons of share trading:
First, it is crucial to understand the concept of CFDs. Contracts for Differences were developed in 1974 in Britain as a new way to trade gold outside the commodities market. But since the early 90s, they have become a very popular route to trade financial assets. Their popularity largely stemmed from their price model and the simplicity they offer. CFD online brokers are known as discount brokers, providing an easy and less expensive way to trade stocks and other financial derivatives.
At basic, CFDs are a derivative trading instrument, which means that you are speculating on the asset’s price change versus other traders or your brokerage firm outside the exchange. It is very similar to telling your friend – “I think Apple stock price is going to rise, let’s make a bet”.
As such, with Contract for Difference (CFDs), you’ll be speculating on stocks’ price movements without taking any ownership of the company and using a margin amount as leverage to open a trade. Keep in mind that leverage is the main benefit of CFDs, although it works both ways and it also increases the risk of losing your capital.
CFDs and share trading both provide a channel to get exposure to stock trading, and each has its pros and cons. It would be unfair to say that one is better than the other as it ultimately comes down to personal preference.
But if you are still wondering “where can I trade stocks”, then we want to help you make the right choice.
In a nutshell, share trading is the right route for investing in stocks if you are a conservative long-term investor. You avoid the overnight fees, and you’ll be able to get fixed income from dividend payments. What’s more? Share trading is also ideal for those looking for a robust trading platform that enables you to trade stocks, exchange-traded funds (ETFs), mutual funds, bonds, and options trading.
On the other side of the coin, if you plan to trade stocks and other financial assets actively, then CFDs is the best option for you. You get high leverage, commission-free trading, fractional share trading, and the ability to short-sell stocks.
When you buy and sell CFDs, you do not pay a fixed fee per trade to your online broker. Instead, you pay the buy and sell spread – that’s the only trading fee you are required to pay for your online broker besides the overnight fee (for comparison, the best traditional online stock brokers typically charge fees that range between $4-$10 per trade).
Moreover, suppose you decide to open a brokerage account with a reputable online broker; In that case, you get access to some of the best trading platforms, trading tools, and educational resources in the market. And at no cost. In sum, CFDs are a great tool for active traders to trade stocks.
So there you have it. Each way claims advantages over the other. Ultimately, it all comes down to you and your investment objectives. What’s your budget? What’s your trading style? Do you want to make a passive income or make a trading career? What’s the best way for you to start trading stocks – with discount brokers or full-service brokers? Well, you know the answer to every question.
And before you make a decision, make sure you understand what stock brokers are and what are the most important factors to consider when choosing a stock brokerage account. Once you have done that, we suggest you visit our broker spread comparison page to find some of the best online brokers and stock trading platforms in the market.
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