What is share trading?

Mar 23, 2023 | CMC Invest

Understanding share markets

There are few things in the world as widely known and little understood as share markets. Even if for many it remains a foreign and seemingly impenetrable world, the reality is that share trading is actually more accessible and easier to follow than almost any other investment activity.

When you buy or sell shares, the trader enters into a contract to exchange the legal ownership of the shares for money. This exchange is called ‘settlement’ and usually occurs two business days after the trade takes place. You can purchase shares through a broker, using individually-held electronic funds or leverage your share trading using a margin loan from a margin loan provider.

What are shares?

Shares are units of ownership in individual companies. Owning shares entitles the holder to a proportion of the companies’ profits. When you share trade, profits come from increases in the value of company shares and the payment of dividends to shareholders, and these are based on company performance.

Investors have seen the stock market offer better long-term returns than many other investments. With low minimum investments, you don’t need significant capital to get started and there are thousands of companies across a wide range of market sectors for you to choose from.

Shares are units of ownership in individual companies; owning shares entitles the holder to a proportion of the companies’ profits.

What affects stock prices?

Share prices fluctuate constantly in the short term according to investor demand, which is driven by factors like news events, market fundamentals, the macro economy and market sentiment. For instance, if a supermarket chain announces that its sales have been growing at a faster than expected rate, its shares may rise as investors price in the likelihood of higher earnings growth. Alternatively, a negative piece of economic data – such as job figures or GDP – may spark fears of a recession or tougher trading conditions and lead to a market-wide sell-off.

A company’s share price is driven primarily by its fundamentals: how fast its sales are growing, how resilient its earnings are, and what its competitive advantages are. Investors and traders can try to answer these questions by reading analyst reports or by looking through the company’s own financial statements.

Whether you are looking for short-term or long-term opportunities, however, it’s important to remember that the market is always forward looking. It’s what’s in a company’s future, not its past, that matters. A business that has just posted record earnings but warned its sales are likely to fall in the year ahead would likely watch its stock price fall.

Share prices fluctuate constantly in the short term according to investor demand, which is driven by factors like news events, market fundamentals, the macro economy and market sentiment.

Growth anticipation

The primary driver of a company's valuation is its ability to grow earnings and eventually dividends. There are a number of ways that a company can increase its earnings over time:

Growing the business

Companies can increase sales by entering new markets, entering into partnerships and joint ventures, winning new contracts or customers, developing and launching new or improved products, improving marketing and sales offerings and more.

Raising prices

During positive economic times, some companies gain the ability to charge higher prices for their products as demand increases. This is particularly significant for resource producers during bull markets for commodities.

Cost controls

A company can improve its profitability by reducing expenses. To measure this, investors often look at expenses such as administrative, sales and marketing, interest and depreciation to determine how efficiently management is running the business.

Risk of disappointment

It's important for investors to recognise that while companies can enjoy great success, there are also numerous risks that could cause them to lose money or see business decline dramatically. Fear of negative outcomes can limit the upside potential for shares or even cause declines.

Operating risks​

There are many possible problems that a company may face as a part of normal business, including machinery breaking down, the entry of new competitors, price wars, input cost increases, adverse economic conditions, lost contracts or customers and more.​

Political risk

This varies by country but relates to the potential that a new government could gain power and implement adverse economic policies such as tax increases, new regulations, asset nationalisations, and other initiatives.

Currency risk

​Companies operating in multiple countries run the risk that increases and decreases in currencies relative to each other could impact the company's revenues or cost structure and may increase or reduce the earnings power of foreign operations.

Legal risk

This relates to the possibility that the company could be sued. This particularly appears in sectors where there can be disputes over patents and intellectual property which could lead to significant damage awards or injunctions against doing business.

This article is for educational purpose and not to be regarded as investment advice, a recommendation, or an offer or solicitation to subscribe for, buy or sell any investment product. All forms of investments are subject to risks, including the possible loss of the principal amount invested. Losses can exceed your initial deposit. You should carefully consider your investment experience and objectives, financial situation, and risk tolerance level, and consult an independent financial adviser prior to dealing in any investment products. The contents in the article may have been obtained or derived from public or other sources believed by CMC Invest to be reliable. However, unless otherwise specifically stated, CMC Invest makes no representation as to the accuracy or completeness of such sources or the information, and accordingly accepts no liability for loss whatsoever arising from or in connection with the use of or reliance on the information. Please visit www.cmcinvest.com/en-sg/ for important information. This advertisement has not been reviewed by the Monetary Authority of Singapore.

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