Chances are, you’ve come across the terms “stocks” or “shares” at some point in your life. Maybe it was in the news when a company’s stock hit an all-time high or when a major player experienced a sharp drop. Or perhaps you’ve heard these terms tossed around in a Hollywood film set in the bustling heart of Wall Street. While the idea of stocks may seem familiar to many, have you ever stopped to consider what they truly mean, how they work, and why they matter?

Simply put, stocks represent the ownership of a company. When you purchase stock, you become a shareholder, which means you own a small portion of the company. This ownership entitles you to a fraction of the company’s profits and assets, depending on how many shares you own. Stocks are primarily bought and sold through stock markets, which act as the trading platforms for these transactions.

Why Do Companies Issue Stocks?

Companies issue stocks to raise capital for various purposes, including funding expansion, reducing debt, or increasing their borrowing potential. Here are a few reasons why companies decide to issue shares:

  • To reduce debt: By issuing stocks, companies can raise money without taking on more debt. This influx of capital helps ease financial burdens and provides a buffer against future liabilities.
  • To improve access to loans: When a company raises funds through stock issuance, it reduces its reliance on borrowing. As a result, they may become more attractive to lenders, increasing their chances of securing loans in the future.
  • To fund expansion: By selling shares, companies can generate cash to invest in new projects, products, or market growth. A company with a strong investor base is better positioned to capitalize on opportunities for expansion.

Why Do People Invest in Stocks?

Investors buy stocks to generate profits and diversify their portfolios. When they purchase shares, they not only gain a potential financial return, but they also acquire voting rights in some cases and a claim to a portion of the company’s profits. Here’s why people turn to stocks as an investment:

  • Inflation protection: Historically, stocks have outpaced inflation, offering returns that surpass inflation rates over time.
  • Liquidity: Stocks are liquid assets, meaning they can be bought or sold quickly, allowing investors to convert their holdings into cash when needed.

However, it’s important to remember that stock prices fluctuate constantly. The value of a stock can go up or down, which means that investing in stocks can be profitable but also carries the risk of loss.

How Do People Trade Stocks?

Most individual investors don’t directly buy and sell stocks on their own; they typically use brokers (often online platforms like PFD Markets) to handle trades on their behalf.

Trading Stock CFDs

In addition to traditional stock investing, traders can gain exposure to stocks through trading Contracts for Difference (CFDs) on platforms like PFD Markets. Unlike owning stocks, trading CFDs allows traders to speculate on the price movements of stocks without actually owning the underlying shares. With CFDs, traders can profit from both rising and falling markets.

CFDs also allow for leveraged trading, meaning traders can control a larger position with a smaller initial investment. While this offers the potential for higher returns, it also magnifies the risk, as losses can exceed the initial investment. It’s crucial to understand the risks involved before diving into CFD trading.

What’s the Difference Between Trading Stock CFDs and Investing in Stocks?

Trading stock CFDs and investing in stocks are fundamentally different approaches. Stock investing typically focuses on long-term growth, where investors buy and hold shares with the expectation of benefiting from the company’s success over time. In contrast, CFD trading is often short-term, with traders looking to profit from short-term price movements in either direction.

Your choice between stock investing and CFD trading depends on your goals and risk tolerance. If you’re aiming for long-term gains, traditional investing may be a better fit, while CFD trading could appeal to those who want to speculate on shorter-term price movements. For a more detailed comparison, click here.

Stock Markets

Stocks are typically traded on stock exchanges, which are regulated platforms where buyers and sellers meet to exchange shares. These exchanges provide transparency and liquidity to the markets, helping to set fair prices for stocks. Below are some of the largest stock exchanges, ranked by market capitalization as of December 2024:

  • New York Stock Exchange (NYSE) – $27.69 trillion
  • NASDAQ Stock Exchange – $24.56 trillion
  • Shanghai Stock Exchange – $8.15 trillion
  • Euronext – $7.33 trillion
  • Japan Exchange Group – $6.54 trillion
  • Shenzhen Stock Exchange – $6.22 trillion
  • Hong Kong Stock Exchange – $5.43 trillion
  • London Stock Exchange – $3.8 trillion

Each exchange has specific requirements for companies wishing to list their shares, including criteria for market capitalization, number of shares, and earnings performance. When choosing an exchange to list on, companies consider factors such as:

  • Location and accessibility of the exchange
  • Type of exchange (e.g., regulated or over-the-counter)
  • Cost of listing and regulatory compliance
  • Accounting and reporting standards

Key Terms in Stock Trading

  • Annual Report: A comprehensive report on a company’s performance, typically released once a year.
  • Ask: The price a seller is willing to accept for their shares.
  • Bear Market: A market characterized by falling prices.
  • Bid: The price a buyer is willing to pay for shares.
  • Broker: A person or platform that facilitates trades on behalf of investors.
  • Bull Market: A market characterized by rising prices.
  • Dividend: A portion of a company’s earnings paid to shareholders.
  • IPO (Initial Public Offering): The first time a company offers its shares to the public.
  • Liquidity: The ability to buy or sell an asset quickly without affecting its price.
  • Volatility: The degree to which a stock’s price fluctuates.

How Can You Trade Stock CFDs?

PFD Markets offers an innovative way to trade stocks through CFDs, giving traders the ability to speculate on price movements of top companies without needing large investments in the underlying stocks. This allows for leverage, which amplifies potential profits but also increases the risk of loss. Traders can take a long or short position, depending on whether they expect the stock price to rise or fall.

It’s important to note that CFDs are complex financial instruments with high risk, especially when trading with leverage. Always be aware that losses can exceed your initial investment, and be sure to fully understand how CFDs work before engaging in this type of trading.