Investing CFDs in the stocks market: What you need to know19.11.2021by Philippe Orphanides
The stocks market is one of the most widely used means to invest aiming to be profitable. But is also generally considered to bear a certain amount of risk. However, following a number of basic rules could allow traders to have enough control over their investment.
Investing in the stock market consists of buying CFDs on shares of listed companies. With this in mind, a trader must have a perfect mastery of the stock market and listed securities.
In addition, a good knowledge of the concepts of fundamental analysis and technical analysis is essential to make informed investments in the stock market. If you are new to finance, there are still ways to educate yourself and train in the stock market.
Important steps at the beginning of your trading journey
Invest capital that may be lost
It should be borne in mind that in the stock market, the profitability or loss of investment is intrinsically linked to the behaviour of stock prices.
When you’re new to the stock market, diversification remains a solution that allows you to limit the risk of loss. For example, it’s never a bad idea to mix asset classes and include equity, commodities and crypto in your portfolio.
Define an investment strategy
With profitability as a goal, it is important to put in place a strategy that allows you to achieve your goals. With this in mind, certain elements must be taken into account. This includes the adoption of an investor profile, the definition of an investment period, the earnings objectives to be achieved, and the maximum amount of losses that your capital is ready to bear.
Taking into account these elements lay the foundations for a roadmap, a dashboard that makes it possible to determine the amount of the stock portfolio to invest.
Stay patient and show serenity
If you are the dynamic type and not too patient, investing CFDs in the stock market is not for you. Indeed, the stocks market is a very active sector which also involves sometimes very great risks. Strategies and methods should be designed to mitigate them.
Learn from your mistakes
An investor does not succeed with a magic stick. The key to success is perseverance and the strength to learn from one’s mistakes. Yes, an investor can experience a moment of failure once in a while, but honesty and humility are behaviours that inevitably allow you to be successful in this type of market.
Favour quality stock CFDs to invest in the stocks market
Many companies are listed on the stock exchange. But they do not all have the same values. For a beginner, it is a risk to invest in the stock of a company that does not have a sustainable competitive advantage.
Big companies like Facebook, Google, Coca-Cola, Tesla, etc. are companies with low volatility stocks, which implies low and stable returns. This is in fact a sign that the company will maintain certain profitability for many years to come.
Diversify investments and think for yourself
In general, new investors make the mistake of investing in only one asset. This is a mistake that increases the risk of losing your capital. To limit this risk, it is recommended to invest each time in one or more securities, holding a diverse mix of stocks, commodities, crypto and ETFs for example.
Determining the direction: a key to reading markets
It is important for traders to learn how to analyse the market, as it will help them determine how the market may move.
This is an important step before opening positions and every trader needs to continuously develop such skills and knowledge.
There are three main methods of determining the direction of an asset:
- Fundamental Analysis is the method where traders analyse the events within the economy and region in order to determine the medium to the longer-term price movement of an asset. Economic and political events can deter the level of supply and demand eventually affecting the price of the asset. It includes looking at earnings reports, price to earnings ratio, return on shareholder equity ratio, general stock market conditions and the market’s risk appetite. Currency trading may require the analysis of additional types of data, such as monetary policy, job figures or Regularly going over such information will help stock traders have a good grasp of what affects global markets.
- Technical Analysis is the analysis of the charts and price movement with the aim of predetermining the price movement in the short to medium term. This method looks at the trend, traditional price patterns and momentum amongst other elements in order to position their trades in the appropriate direction of the market.
- Sentimental Analysis refers to traders analysing general market conditions and sentiment amongst traders. For example, instead of only analysing the stock in the subject, the trader will also analyse the general stock market conditions and sentiment within the specific industry. Sentimental analysis can also cross with Technical and Fundamental. Market sentiment is usually described as bearish or bullish, and when bears are in control, asset prices go down. When the market is bearish prices go up. But it is worthy to note that emotion often drives stock markets, so the market sentiment is not always the same with fundamental value. It can be seen through the lens of feelings and emotion, but fundamental value refers to business performance.
Each type of analysis has its benefits and weaknesses. For this reason, most professionals typically advise traders to include aspects of all three methods as part of their analysis.
Investing CFDs in blue chips
Blue-chip stocks refer to a certain type of investment. They are well-established and reliable companies with strong positions in their sectors. They are usually successful and predictable, which allows them to regularly pay out dividends.
Blue-chip stocks generally tend to advance and decline less than the overall market. Here are a few of these stable dividend stock CFDs to trade on Axiance: Meta, Google, Coca-Cola, Johnson&Johnson, Amazon, Visa.
An alternative segment to look at: Penny stocks
Penny stocks are generally considered highly speculative investments:
- They are illiquid;
- Have a high spread;
- Are poorly capitalized;
- They tend to be more volatile and unpredictable;
- Are less followed by financial analysts. And most importantly;
- The companies are not required to publish their financial results.
A fuzzy definition
The term itself is not really appropriate as there is no exact definition of a penny stock. Some consider it to be any stock that trades for pennies or below a dollar.
The stocks of very large companies might trade under a dollar, just as many small companies trade at more than one dollar, so the size is not the main criterion.
Low prices, big difficulties
Investing in stocks that are quoted in cents is also psychological. Some savers tend to feel that owning 100 shares at a price of 0.40 euros is more consistent than owning 10 securities worth 4 euros.
The starting point is however identical: 40 euros. Above all, the lure of volatility comes into play. When a stock quoting 0.40 euro increases by 0.10 euro, its share price jumps by 25%. A gain of 0.10 euros on security at 4 euros represents a capital gain ten times less, of 2.5%. But beware, this calculation is also valid on the downside.
Keep in mind that the penny stocks category also include companies in deep financial difficulties and with very poor business prospects (failure of growth, chronic losses, abysmal debt, etc.).
Sometimes close to bankruptcy or judicial liquidation (risk of seeing the value of the shares declared zero), they will also have lost the confidence of investors and managers because of their low stock market weight.
Metals and commodities sometimes unveil rare opportunities
Traders can adopt a strategic approach by diversifying their portfolios and investing CFDs in non-traditional securities. The main benefit is that they have no or low correlation with stocks.
In particular, agricultural commodities are subject to many disruptions in their demand and supply that can significantly impact their prices. Weather patterns, tariffs or trade agreements strongly influence the pricing of agricultural products. But this market is mostly driven by supply and demand, and it leaves no room for manipulation, making it a very transparent trading instrument. The largest commodity markets are LIFFE, ICE Futures US and the Chicago Board of Trade.
Here are a few commodities for trading on Axiance:
The price of palladium had a historic year in which it set new XPDUSD records and even exceeded the price of gold.
In 2021, the global palladium market will experience a deficit of 0.9 million troy ounces, up from 0.3 million ounces in 2020.
If in 2020 the deficit was carried by the rebound in demand from the automotive industry in China coupled with the shutdowns of treatment plants in South Africa, this year the trend will continue. A strong recovery in demand for automobiles and other industrial applications, almost to pre-Covid-19 levels, has been observed since early 2021.
Gold and Silver
What you need to know before trading XAGEUR and XAUUSD :
Confirmation of the worst negative real interest rate on record for U.S. savers sent gold and silver prices surging in November, surpassing what analysts had called key resistance in the price of the yellow metal in Dollars. New US data has shown that inflation in the world’s largest economy has reached its fastest annual rate in more than 30 years, which could bolster gold and silver.
Oil on the rise
What you need to know before trading CFDs on USOILCash or BRENTCash:
There have been many articles and speculation on whether the price can reach $100 per barrel. The price will be based on the continued supply and demand over the coming months. Looking at the current data, it could soon reach $ 100 a barrel.
The spectacular 2021 surge in oil prices is essentially motivated by 3 reasons:
- The tightening of energy and trade policies practised by the various energy bodies and agencies (EIA, API, WTO);
- Government policy led by the major oil-producing countries (Saudi Arabia, Russia, and the United States);
- And finally, the overall economic and monetary policies of the G7 countries.
Common sense above all
In times of crisis, investors always make the same mistakes: they panic and react irrationally. Loss aversion, for example, leads to potential losses being considered more important than gains of the same amount. This is how we often sell at an inappropriate time. And with the alienation of securities, the losses become real.
So even if it is not easy: keep a cool head and avoid any premature intervention. Because when it comes to investments, emotions are not good advice.
Finally, a well-diversified portfolio spreads risk across different investment categories such as forex, stocks and commodities as well as sectors and regions. It provides a feeling of security, especially in times of severe turbulence, and helps mitigate risk.
Start your trading journey on Axiance with a demo account and free educational resources and webinars!
Disclaimer: This article is not investment advice or an investment recommendation and should not be considered as such. The information above is not an invitation to trade and it does not guarantee or predict future performance. The investor is solely responsible for the risk of their decisions. The analysis and commentary presented do not include any consideration of your personal investment objectives, financial circumstances or needs.