What are stocks, shares and equities?

The terms are often used interchangeably in finance, but there are some technical differences between them that can cause confusion.

• ‘Stocks’ is generally used to refer to portions of ownership of multiple companies – for example, you could say that you own stock in Amazon and Microsoft.
• ‘Shares’ usually refers to units of ownership in a specific company – for example, you could say that you own ten Amazon shares.
• ‘Equity’ is the term for a total ownership stake in the company after the repayment of any debt – for example, if a company had 10,000 shares, and you owned 1000 of them, you could say that you held a 10% equity stake in that company.

Investing in shares

When you buy or invest in shares, you’ll be taking direct ownership. Investing is favoured by people that are looking to take a long-term position with the expectation that the company’s shares could appreciate in value. That’s because if a company grows and becomes more valuable, it’s likely that the value of its shares could also rise.

Being a shareholder in this case means that you can stand to profit if you sell your shares for a higher price than the price at which you bought them. But, because investments can rise or fall in value, you can also receive back less than you 

Trading shares

Trading shares means that you’re trading on share price movements without taking direct ownership. Trading is usually favoured by people who are looking to take a short-term position on a company’s share price – perhaps during periods of increased volatility or market activity.

When you trade, you’ll be able to ‘buy’ (go long) when you expect prices to rise; as well as ‘sell’ (go short) when you expect prices to fall. You can trade with derivatives like CFDs – which are leveraged.

This means that you only need to commit a deposit – known as margin – to receive full market exposure. But, remember that leverage can increase both your profits and your losses. 

Why do companies list on the stock market?

The primary reason that companies list their stock is in order to raise capital by tapping into the public equity market by selling their shares to individual investors and institutions. This is an alternate method to gaining capital privately via venture capitalists.

Most companies will list on a domestic exchange. For example, in Singapore, most shares are listed on the Singapore Exchange (SGX). However, it is becoming increasingly common for companies to have multiple listings to take advantage of foreign investment.

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Why trade shares?

Trading shares via derivative products (such as CFDs) is becoming increasingly popular because it enables individuals to go short as well as long – giving you the potential to profit from markets that fall in price, not just those that rise. This is because when you are trading CFDs, you are speculating on share price movement only, and you will not be taking ownership of any underlying asset.

When you trade stocks via leveraged products such as CFDs, you’ll only need to put down a fraction of the required capital, known as margin. This is a huge draw to trading shares, as it means less capital is required upfront to gain a full market exposure. While leverage has significant benefits, it also comes with risks.

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What are the risks of trading or investing in shares?

Risks of buying shares outright

The main risk involved in buying stocks is that the company gets into difficulty and goes bankrupt, or that the share price falls to zero. If this happened, you would lose your initial outlay – however with investing, this is always the most you stand to lose. For example, if you’d invested S$1000, the most you could ever lose if the share price fell to S$0 is S$1000.

For some investors, the risk of a short-term decline in share prices can be offset by the popular strategy known as hedging. Alternatively, other investors might choose to diversify their holdings by investing in or speculating on the price of exchange traded funds (ETFs) – these are baskets of stocks that track the underlying market price movements.

Risks of trading stocks CFDs

The risks posed by trading stocks CFDs are significantly different due to leverage. One such risk, is the risk of trading on leverage (or margin). When you trade on margin, both your profits and losses are calculated on the full value of your position, rather than this initial outlay. This means that although you have the possibility of magnifying your profits, you also could magnify your losses and your losses can exceed your deposits.

However, there are tools that traders can use to manage this risk. For example, stop-losses enable traders to define their exit point for trades that move against them, while limit orders will close a trade after the market moves by a certain amount in a traders’ favour.

Also, if you decide to short a stock – either traditionally via a broker or with derivative products – you would be open to an unlimited downside potential. As, in theory, there is no limited to how much the share price could rise by.

It is important to remember that trading CFDs may not be suitable for everyone, and your should ensure you fully understand all the costs and risks involved by reading the Risk Disclosure Statment and Risk Fact Sheet.

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