As online trading has developed products such as CFDs and Spread Betting have seen their popularity rise in terms of the amount of accounts opened for each product. However while these are considered the two most popular forms of online trading futures and shares continue to be used by independent traders and investors.
Although the rise in popularity of spread betting can also be attributed to the popularity it has developed in the sports industry, spread betting is now considered to be the most popular form of online trading. Originally created to allow traders to trade with broader options than conventional trading, spread betting allows traders and investors to bet on the outcome of an assets movement in the market, rather than simply buying contracts in the company. Previously, traders and investors could only purchase stock in an asset meaning that whatever price the asset was worth, was what the trader or investor had to purchase (e.g. one contract in Apple = £500). However what spread betting allowed traders to do was bet on the direction an asset would move in, meaning that as opposed to purchasing one contract for £500 to potentially make an additional £50 if the stock moved up to £550, they could purchase £10 a point on the price of Apple going up, meaning if it moved up to £550, a trader could potentially make £500 (50 points x £10 a point). Unfortunately whilst spread betting gives traders the option to make large profits from smaller investments, there is also the possibility of making massive losses and losing your initial investment if the trade moves against you. So even though you have the opportunity to make £xx a point for every penny the stock moves in your favour, you can potential lose £xx a point for every penny the stock moves against you.
CFD trading (Contracts for Differences) is a form of online trading where by traders make money from the price difference between when a contract was purchased and when it was sold. For example a trader can purchase 5 contracts in Abercrombie and Fitch for $50 each, totalling $250. If the price of Abercrombie and Fitch rises to $60 a contract and you decide to sell your contracts, the total amount of your 5 contracts will be worth $300, meaning you will make $50 profit from that trade. People often opt for CFDs over other forms of trading such as spread betting because there is less of a risk if the trade moves against you. As opposed to spread betting where traders can potentially lose £xx amount per point for every penny an asset moves against you , in CFD trading, although you still have the potential to lose money on an asset moving against you, the amount you stand to potentially lose is lower than spread betting. For example as with the scenario above, if Abercrombie and Fitch moved from $50 a contract down to $40 a contract, the total value of your 5 contracts would then be $200, meaning your loss would be $50. If you placed a spread bet at £10 a point on the stock going long, when it went short by 10 points, your total loss for that trade would be £100, so although there is only a £50 difference between the losses of both products, it is harder to recover from a bigger loss than a smaller one.
Trading shares is considered the most recognisable form of online trading due to the potential weight owning shares in a company can hold. As opposed to other forms of online trading, the ownership of shares has the potential to give the owner, not only future financial rewards, but also have a say in how the business is run through voting options. Although shares can be purchased, they are also frequently offered to investors or board members of certain companies in lieu of money, meaning that the owners of the largest amount of shares in a business or company are often their biggest investors.
Shares, or stocks as they are more commonly referred to in financial trading, come in two forms; Common Stock and Preferred Stock:
– Common stock, usually allows the owner to a voting right that can be used when the business is making cooperate decisions, and the weight their votes carry are determined by the amount of common shares they own. For example, if someone owns 200 common shares in a company, but the combined total of all the owners voting shares is 2,000, the person with 200 common shares has a 10% influence on the final voting and although this may seem small, sometimes to smallest percentage can have the largest effect on a final decision going one way or the other.
– Preferred stock, despite not holding any voting power, owning preferred stock legally allows the owner to receive a guaranteed level of dividend payments before dividends are issued to shareholders. This means that if a company posts profits, preferred stock owners are entitled to a percentage of the profits before it is distributed to other personnel.
The reason investors are more drawn to shares as opposed to other forms of trading, is because they feel they are getting “more bang for their buck.” As opposed to spread betting and CFDs, purchasing shares/stock in a business can give investors a sense of ownership in the company, although owning shares/stock in a company does not entitle share holders to access to the businesses building, materials or other facilities. It also means that investors can purchase a high number of shares at a lower price when a company first opens or begins to expand, and hold those shares for a number of years, so if the company develops their shares will increase in value. Similarly, it is commonplace for people to sell varying numbers of their shares for money.
The most obvious comparison to another form of online trading is with CFDs in the sense that the more shares you buy in a business the more potential return you are entitled to. However, as with CFDs in the event a company goes bust or begins to drop in value, the value of the shares begin to drop in value as well.
Futures contracts are considered the most popular form of day trading online because the basic principles around trading futures is that you bet on the outcome of an asset at a predetermined future date.
Believed to have been originally created in Ancient Greece, a farmer named Thales would pay other farmers for exclusive rights to use their olive presses, but he did this in the winter months when no olives could be harvested. He predicted that he could make a larger profit by securing the rights to the olive presses when the farmers could not harvest the olives as they felt there was no guarantee the trees would be fruitful come the autumn time. However when Autumn came around and the olive trees were indeed fruitful, Thales was able to charge the farmers large amounts of money for the use of his olive presses as he had brought the exclusivity for every available press, effectively cornering the market.
This same principle can be effectively transferred to financial trading today in the sense that traders and investors look to corner the market, by purchasing stock before other traders have the opportunity to. In anticipation of anything from a company going public to the price of barrels of oil increasing, investors look to purchase futures contracts in order to get the most out of their investments. As opposed to waiting for companies to post good figures or go public and the subsequent rise and fall of the stock prices, investors look to purchase stock at an earlier date when the stock often costs less, this way when the figures or news are eventually released and the stock performs how they anticipated, investors have the peace of mind to know that they purchased their contracts earlier and usually at a lower cost.
However the biggest, and most obvious downside to trading futures online, is that, as the trade is set to working on a specific date, unlike CFDs and Spread Betting, the contracts are limited to a shorter period of time so if the stock performs worse than you anticipated and doesn’t recover before the stock closes, you have no chance to recover.
Risk warning: Spreadbetting, CFD trading and Forex are leveraged. This means they can result in losses exceeding your original deposit. Ensure you understand the risks, seek independent financial advice if necessary. The value of shares and the income from them may go down as well as up. Nothing on this website constitutes a solicitation or recommendation to enter into any security or investment.