A Contract for Difference (CFD) is a financial instrument that lets you trade based on the price movements of stocks, whether prices are going up or down. The main benefit of a CFD is the ability to speculate on an asset's price changes without owning the asset itself. CFD trading has been a popular financial activity since the Dutch East India Company introduced stocks in the 17th century. It is an efficient and effective investment option for both individuals and families.
Stocks, also known as equities or shares, are issued by public corporations and made available for purchase. Companies initially use stocks to raise additional capital and support business growth. When a company first offers these stocks for sale, it is called an Initial Public Offering (IPO). After this stage, shares are traded on the stock market, where all stock trading occurs. Some people mistakenly believe that buying shares gives them ownership rights over the company's physical assets, such as office equipment. In reality, corporations are treated as separate legal entities that own their own assets. This separation of ownership and control benefits both shareholders and corporations by limiting liability. For instance, if a major shareholder goes bankrupt, they cannot sell the corporation's assets to pay their debts, and vice versa. The value of a stock lies in its entitlement to a portion of the company's profits.
The stock market is where stocks are bought and sold, with buyers and sellers agreeing on prices. Historically, stock exchanges were physical locations where transactions occurred on trading floors. One of the most well-known stock markets is the London Stock Exchange (LSE). However, with advancements in technology, stock trading has shifted to virtual exchanges, where transactions are conducted electronically through large computer networks.
A company's shares can only be traded on the stock market after its IPO, making this a secondary market. Large corporations listed on global stock exchanges do not frequently trade their own stocks. Instead, stocks are bought from or sold to other investors, not directly from or to the company. Traders invest in stocks because a company's perceived value can fluctuate significantly over time. Profits or losses depend on whether a trader's perception of a stock's value aligns with the market. While predicting short-term stock price movements is nearly impossible, stocks generally appreciate in value over the long term. Many investors maintain a diverse portfolio of stocks for long-term growth. Additionally, larger companies often pay dividends to shareholders, which are portions of the company's profits, independent of the stock's market value.
Stock trading requires both a buyer and a seller, as traders have different motivations. Some sell stocks to realize profits, others to minimize losses, and some because they anticipate changes in the stock's value. These varying agendas drive the dynamic nature of the stock market.
