KEY CONCEPTS
UNDERSTANDING
STOCKS
TABLE OF CONTENTS
WHAT ARE STOCKS?��������������������������������������������������������������������������������������������������������� 3
HOW STOCKS ARE TRADED������������������������������������������������������������������������������������������� 3
WHY TRADE STOCKS?������������������������������������������������������������������������������������������������������ 4
TERMINOLOGY�������������������������������������������������������������������������������������������������������������������� 5
AN EXAMPLE OF A STOCKS CFD TRADE������������������������������������������������������������������� 7
INTRODUCTION TO BINARY OPTIONS
WHAT ARE STOCKS?
Stocks, otherwise known as shares or Investors who buy shares in a company do
equity, represent a stake in a company’s so with the hopes that the company will rise
assets and earnings. The value of a in value, thus enabling them to sell their
company is divided into units of equal size, shares at a higher price. By offering stakes
and each unit is known as a share. on a stock exchange, companies can in turn
raise capital to reinvest into their business.
Every unit can be offered for sale to
investors who then become shareholders in Share prices are influenced by many factors,
the company. As an example, if a company such as the company’s earnings, the state
is worth $400 million and issues 100 million of the economy, industry legislation, the
shares, each share would be worth $4. As company’s management team and supply
the value of the company increases, so does and demand.
its share price and vice versa.
HOW STOCKS ARE TRADED
Stocks are typically traded on exchanges,
which are places where buyers and sellers
can meet and agree on a price. Some
exchanges are physical locations where
transactions are carried out on a trading
floor.
As part of capital raising efforts,
companies offer shares to
investors, or part ownership in
their business.
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WHY TRADE STOCKS?
Stock trading has many advantages, some of which include:
ü Vast market
There are over 8000 publically traded companies to choose from that operate in a range of
industries.
ü Low margin
You do not need a large margin to trade stocks, and transaction costs are typically low. The
stock markets are also usually free from common commission systems that can make other
markets less accessible.
ü Low currency conversion fees
At Hedgestone, you can trade international shares with low transfer fees on foreign cur-
rency balances.
Trade stocks anytime around
the globe and around the clock.
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INTRODUCTION TO BINARY OPTIONS
TERMINOLOGY
SHARES OUTSTANDING DIVIDENDS
Shares outstanding is the total number Dividends are defined by the proportion
of shares that is issued by a company. of company profits that are paid out to
Authorized shares is defined by the number shareholders. Anytime a company makes
of shares a company is allowed to issue a profit, the corporation’s management
and is determined when a business is first decides whether to reinvest it in the
established. business or to pay it to shareholders as
dividends.
MARKET CAPITALIZATION
RISK
This is the market value of a business, which
is determined by multiplying the company’s When investing in the stock market,
price per share by the shares outstanding. there is a risk that you may lose your
investment principal. The greater risks
CORPORATE ACTION you take, the more opportunities you’ll
have for losses and/or gains. It is crucial
This occurs when a publically-traded for both experienced and novice traders
company makes changes to the business to understand the implied risks prior to
that affects its shareholders, such as a investing in stocks.
merger or acquisition. A corporate action
has signficant implications as it concerns its
share price and performance.
RISK:
LOSS GAIN
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TERMINOLOGY CONTINUED
DERIVATIVES
Share derivatives are contracts that are valued based on the price of an underlying share,
which is traditionally available to trade on a stock exchange. Contracts for Difference
(CFDs) are an agreement to exchange the difference in the value of a share from the time a
position is opened until it is closed.
COMMON STOCK
The majority of all shares are offered as common stock. Common shares represent
ownership in a company and a payout on a portion of the company profits, otherwise
known as dividends. Shareholders have one vote per share to elect board members who
oversee crucial decisions made by management.
PREFFERED STOCK
Preferred stock provides part ownership in a company, but typically does not offer any
voting rights. With this stock type, dividends are always fixed, unlike common stock that has
variable dividends. One advantage to preferred stock is that preferred shareholders are
paid before common shareholders in the event of company liquidation.
Speculators trading stock CFDs are able to benefit from shorter time frames, in
comparison to traditional stock investments.
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INTRODUCTION TO BINARY OPTIONS
AN EXAMPLE OF A STOCKS CFD TRADE
Ø SELECT AN UNDERLYING ASSET
You’re interested in trading a Google share CFD. Our price is currently set at 300.50 /
301.00.
Ø BUY OR SELL
You choose to ‘buy’ 5000 shares at the offer price of 301.00, as you believe the market will
rise. If you believe the market will decline, you could alternatively ‘sell’ at the bid price of
300.50.
Ø MARGIN CALCULATIONS
We charge commission twice on stock CFD trades: once when a position is opened and
again once it is closed.
In this example, your total exposure is 5000 shares x 301.00p = 15,050 EUR. Commission is
therefore 15,050 x 0.1% = 15.05 EUR to open the position. The margin required on Google
shares is 5%, so to enter this trade, you would need 15,050 EUR x 5% = 752.5 EUR in your
account.
Ø CLOSING YOUR TRADE
At 5pm, Google shares are higher and are now trading at 305.50 / 306.00. You choose to
close your trade by selling 5000 shares at the bid price of 305.50.
Ø YOUR PROFIT / LOSS
Profits are calculated according to the difference between the opening and closing prices
in points. In this case, 305.50p – 300.50p = 5p. Because you bought 5000 shares and the
market moved in your favor, your gross profit would be 5000 x 5p = 250 EUR.
Ø NET PROFIT / LOSS
To get an accurate calculation of your net profit or loss, you will need to deduct the
commission fees for opening and closing the trade. In this case, 15.05 EUR + 15.28 EUR =
30.33 EUR.
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