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What is Share Trading? (Beginners Guide)
By
Will Ellis
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Last Updated on March 23, 2024
Everyone trading on the stock market started somewhere. Nobody showed up knowing everything. It does not always feel like this is the case, however.
When so many people walk around casually exchanging dense jargon, it can feel as though they have an unattainable amount of knowledge.
The reality of the situation is that those people are simply experienced. So, how do you get from an absolute noob to the skill level of a professional broker? Well, you start with the fundamentals.
eToro is the worlds largest social investing platform giving you the option to invest in crypto assets, ETFs and stocks all in one place. eToro offers access to 3031 stocks and 264 ETFs.
And there is no fundamental more essential to the stock market than share trading. Share trading, also known as stock trading, is the basis of the stock market.
But what is share trading? What are shares to begin with? How are they bought, sold, and profited from? These questions are how you get started.
Table of Contents:
- What are Shares
- What do you do with Shares
- How can Share Trading Make You Money
- How do you Buy Shares
What are Shares? ➡️
A “share” in a company is a portion of that company’s total dollar value, represented as a percentage. Imagine that a company is worth $100. $1 of that company’s money is a 1% share in that company.
This is hard for some people to grasp, as the language around “trading shares” makes shares sound so physical. They oftentimes find themselves imagining shares as being individual, real-world objects. In that scenario, a company worth $100 might have 100 $1 shares.
While it is true that shares will oftentimes (but in this day and age, not always) have a physical component, they are not dollar bills.
One of the most important things to know about shares is that it is not only possible, but in fact commonplace for many people to own shares in a company that make up far, far less than 1% of that company’s total wealth. This makes the most sense when you buy shares in billion-dollar companies.
To give you an idea of how this works, Amazon stocks sit at around $3200 at the time of writing. One of the first things you may notice is that $3200 multiplied by 100 is $320,000. Since we know that Amazon is worth more than $320,000, we can immediately identify that a single share is worth less than 1%.
Amazon has around 500 million shares in circulation around the world. That means that it has divided its value 500 million times, with each of those shares of their company being worth $3200. 3200 multiplied by 500 million is 1.6 trillion, which is much more in line with what most people know about Amazon.
In this case, the value of Amazon is so great that in order for the company’s shares to be easily tradeable they need to be divided into far smaller amounts than 1% of the company’s value. So, a single share can be less than 1% of a company. But can you own less than a whole share?
As a matter of fact, you can. If that $3200 price tag is too steep for you, then you can actually buy partial shares of a company. That means that while a single share is still worth around $3200, you can own $320 of a single share. But that begins to raise the question: What is the benefit of owning a share at all?
What do you get out of owning $3200 of a share rather than $320 of a share? Well, that is a whole other can of worms. Because the thing about shares is that they are meant to be sold.
What do you do with Shares? 🤔️
So, let us continue with the hypothetical $320 portion of Amazon’s $3200 share. $320 is 10% of $3200, meaning you own 10% of a share. Now, here is something you should know that is both everyone’s favorite and least favorite part of buying and selling shares: The value of that share is going to change.
And when the value of that share changes, the value of the 10% of that share you own will change too. The reason why this is everyone’s favorite and least favorite thing at the same time is because that share can become more valuable, or it can become less valuable.
If the value of an Amazon share becomes $3300, then the value of your 10% share will likewise become $330. And if an Amazon share becomes $3000, then your share will lower down to $300 in value.
The reason why shares in companies are bought and sold professionally (and how a person can make a living from just buying and selling shares) is because you can generate a passive income just from making investments in the right shares at the right time.
Imagine that rather than buying an Amazon share for $3200 you waited until it was $3000. Then, once it reached something unusually high like $3500, you sold it. You would make a profit of $500. Alternatively, you could also sell only a portion of it. If you sold 1/7th of it, for instance, you would get the $500 excess while still maintaining control over the share that you bought.
Of course, that would not mean you made a $500 profit. If you buy a share for $3000 and make $500 off of it, then so far you have actually only spent $2500. You mitigated your loss, but you are still “in the red” as they say. This is why most people sell the whole share once it gets above the original price, as that means they immediately make a profit.
Once you have a share of a company that has increased in value, you have a choice: Do you sell part of the share in order to make a profit, but still hold onto a portion of the share that you can make money off of later? Or do you sell the whole share and make your money back right then and there?
The difficulty in this is that the first option—selling part of the share—not only makes back only a fraction of the money you spent to get the share, but it assumes that the share will continue to yield you profits. After all, the only way for that share to get you your money back is by rising in price again.
Now, there are mitigating factors at play here. You can buy a share for $3000, sell $500 of it once it gets to $3500, and then sell the rest once it goes back down to $3300.
You might be wondering, “How much will I make if I sell it in this manner?” The answer is that the first sale will get you $500 while the second will only get you around $2800. You lose around $200 from waiting, but it could be worse. If you did not sell at all and the price kept dropping, then all you could do is watch helplessly while your $3000 investment dried up.
This little game of risk and reward is the reason why there is an old adage in share trading: “Buy low, sell high.” A $3000 stock is quite the investment, at least for an individual retail share trader. A retail share trader is someone that does not make their living off of buying and selling shares. That means most people who search for articles defining share trading, as they have little to no experience in it.
If you want to make money off of share trading, then it is critical that you avoid betting big looking for a “jackpot”. This is true at almost all levels of wealth and income, but it is especially true for retail traders.
How can Share Trading Make You Money? 💰️
We talked at length about a hypothetical scenario in which you spend $3200 on a share of Amazon. But let’s scale back our price range. What if instead of spending more than $3000, we had a budget of around $100? What would our money-making prospects be in that situation?
Well, they would definitely be lesser. But because our money-making prospects our lesser, our money-losing prospects are also lesser. Lesser risk, lesser reward. But when it comes to your finances, that is generally a good thing. Because the risk in question is not a joke. It is your livelihood.
Luckily, you can still make money off of investing just $100 in shares. In fact, as mentioned before, you can use that $100 on just about any share you want, even if the whole share is worth far more than $100. Remember how you can buy a share for $3000, wait for it to cost $3500, and then sell $500 of it? Well, because of that system, you can frequently find people who are selling portions of their shares.
The means you can buy a $100 portion in a company like Amazon. And just like when you own a whole share, that $100 will increase and decrease along with the value of the company. That means it is far easier to make your money back, as it does not take as many increases or decreases in the price to make back a $100 investment compared to an expensive of (oftentimes) risky $3000 investment.
But let’s slow down here. You might have noticed that something very confusing will happen with your $100 investment. The share costs $3200. You paid $100 for a share. If the stock increases in value from $3200 to $3500, how much does your $100 increase in value?
Well, $3200 to $3500 is an increase of $300, which means it is an increase of slightly less than 10% in value. For the sake of simplicity, let’s say it is an increase of 9%. That means that your $100 share will be about $109 after the increase. This is an important little equation to learn. Many people buy a portion of a share and are confused about how or why the price changes when it does.
What they are most often missing is the fact that the increase in your portion’s price is determined by the increase and decrease of the total share’s price. That means it has nothing to do with the size of the portion you buy, and everything to do with the size of what you are buying a portion of.
In short, the essence of making money off of buying shares is selling shares. Sometimes that means selling whole shares or portions of shares, but there are other times when the best way to make money off of shares is hidden in the way that you buy the shares. How your money goes into the share is as important as the amount of money you spend. So, let’s talk about the different ways to buy shares.
How do you Buy Shares? ➡️
To begin with, when you are buying shares, you will need one of three things: A broker, a platform, or a mutual fund. All three work wildly differently, so we will talk about each one differently.
Trading Shares with a Broker 👨💼️
A “broker” is a stock market professional. That means that they make their money doing two things: The first is by trading their own shares, while the second is by trading shares on the behalf of others.
They are able to do this because they have knowledge and connections that allow them to do it effectively enough to make a profit. A broker, by definition, has to have the ability to buy and sell shares on a marketplace.
That marketplace can be the New York Stock Exchange, the London Stock Exchange, or even the Australian Stock Exchange. Most people in one country cannot trade with another.
That is one thing a broker has going for them: The ability to trade in these markets at all. Another thing they have going for them is their knowledge of how trading shares works. This not only means the simple math behind how shares work, but also the tendency of the market to expand and contract.
That knowledge cannot be undervalued. A broker that can predict the market in even the shortest terms can make a lot of money for you. But of course, the flip side to that coin is that a broker whose knowledge is imperfect, whether through arrogance, lack of education, or bad luck, is doomed to lose not only their money, but yours as well. This is why you should use a broker carefully.
Using a broker to trade shares works by first establishing a contract with the broker. You will agree on a down payment (money they get no matter what happens to the money you give them) as well as the amount of money you are giving them with which they are to trade shares.
This contract will also stipulate how much of the profits they are going to share in. They are trading your money, but since they are doing the legwork, they will expect to be rewarded for those trades. In most cases they will also set aside a flat fee for a situation where they do not make any money.
It should be noted that it is improbable that a broker makes you no money at all. It is physically possible, but the situations where that happen are more dependent on the market than the broker. If a broker has a business being a broker, it is usually because they are good at what they do.
That might sound like a broad statement, but it all comes down to transparency. Imagine you go into a broker’s office and ask them how much money they made for their last three clients. They might tell you that they made each of them millions of dollars. So, you ask for proof of this claim.
A broker that does not provide proof is not trustworthy. If they say that they are not allowed to divulge that information, then they are trying to cover their dishonesty. It is totally possible for a broker to share proof that they make their clients money without violating those clients’ privacy.
Only trust brokers that can give you solid evidence that they are good at what they do.
Trading Shares with a Platform
The first question you probably have about trading shares with a platform is, “What the heck is a platform in this context?” A platform is a website or app that allows retail investors, who usually lack direct contacts or access to stock markets, to trade in those markets using the website or app.
The examples that most people are familiar with are eToro and Robin Hood. eToro is a website and Robin Hood is an app, and while they both have their flaws the reason why they are so well known is because they are, if nothing else, easy to use and effective.
On these platforms, you will use your own money to buy shares of companies on your own wisdom. That means that, unlike a broker, growing your money by investing in the right stock is a matter of your own personal knowledge, experience, and luck. You cannot rely on someone else’s skills, like in the case of a broker, but of course that also means that you are free to use your money however you want.
eToro and Robin Hood are good, well-known example platforms that cover a variety of different markets, currencies, and trading options. But neither of them covers everything. While you can get a lot done on them, do not be afraid to explore your trading options on other platforms. What you are able to do elsewhere may surprise you, as there are actually a lot of different ways to trade shares.
Trading Shares with a Mutual Fund
One of the most reliable and low-risk methods of trading shares is by using a mutual fund. This is because a mutual fund is very similar to trading shares using a broker, except that rather than just using your money the fund uses multiple people’s money, all of whom have oversight of its use.
How a mutual fund works goes thusly: First, a group of people (called a “cohort”) pool their money together. This money is called the fund, and it is then managed by a person called the fund manager, usually someone that does not have any money in the fund. This fund manager is paid for their work.
The fund is a larger amount than any one person among the cohort would be willing to put into the stock market at any given time. The money made off that fund is then divided amongst the cohort. In some cases, this money is divided evenly among them, but more often it is divided in accordance to how much money each individual put into the fund.
In short, there will be people who contribute $100 and others who will contribute $1000. While the person contributing $100 will make more money than they would usually make, the person contributing $1000 will make proportionally more money than the person who contributed $100.
The reasons for this setup are obvious: It is a reward for the person who contributes a higher amount. Now, you have to be careful when joining a mutual fund for this reason. While most times a high-yield mutual fund will be beneficial for everyone involved, there are mutual funds that are essentially scams. In these cases, the people who contributed the most to them will be rewarded disproportionally.
That means that they will get paid far more for their contribution than they should. And when that happens, then it is basically money coming straight out of your pocket. You do not want to pay $100 into a mutual fund and only make that $100 back after more than a year.
Conclusion 💡️
So, to recap:Share trading is the buying and selling of a portion of a company’s total money. Generally, shares are not physical objects, but documents that entitle you to the money that the company uses. By buying and selling shares you can make money, but you have to be careful in doing so as the whole process can be incredibly complicated. Rely on a broker or mutual fund, or trade for yourself.
Whatever you do, remember to be careful. Being careful does not mean avoiding trading shares altogether. Financial independence is possible through trading shares, but do not go looking to win the lottery. Instead, be patient and keep your head on straight. For the sake of your livelihood.
You Might Also Like:
- How to Sell Shares in Australia (2024)
- How to Buy International Shares
- How to Buy Shares Online
- How to Buy Amazon Shares on a Trading App
- Stock Market Basics for Beginners
