As a stock certificate, a stock is a negotiable security issued to raise funds by a listed company to its shareholders. A shareholder is an investor that legally owns one or more shares of stock in a company and has the right to enjoy the assets and interests of the company. The company issues shares to raise funds from the public for business development, while the investor purchases shares to earn returns and diversify his/her portfolios.
Mitrade is an award-winning broker focused on Contract for Difference (CFD) trading services. Unlike conventional stocks, share CFDs allow the investor to speculate on the price movement of stock rather than to own the stock. Thus, the investor neither owns shares nor carries voting rights.
Traders who trade share CFDs do not need to own the actual underlying assets to profit from the price changes of the stock. A CFD is a contract between the two parties (that is, the provider and you), and your profit or loss is the difference between your entry and exit from the transaction prices.
1. Share CFDs allow traders to use leverage to trade, that is, use less capital to obtain greater potential returns. Of course, the use of leveraged trading also represents higher risks and losses.
2. The share CFD traders do not own the stock. Therefore, CFD traders do not have stock ownership or voting rights. But investors who buy traditional stocks usually have other rights such as voting rights and dividend sharing.
3. Even in a period of positive economic development, the global stock market is full of uncertainty. However, when the market is facing downside risks, if the investor's investment portfolio is equipped with CFD products, the short selling function can be used to make profit possible. Therefore, share CFD trading can provide investors with more investment options.
4. Trading share CFDs on the Mitrade platform can do a better risk management with our advance tools and place orders easier. Traders can place various orders with preconditions for free to manage risks more effectively.
5. Please note that when trading with CFDs, if your position is not closed overnight, you may be charged an overnight fee. Therefore, CFDs may be more suitable for short-term transactions rather than holding it for a relative long period.
Most stocks are generally divided into either growth stocks or value stocks.
(1) Growth stock
A growth stock is any share in a listed company that is anticipated to grow at a rate significantly above the average growth for the market, whereby the investor earns profit from the growth of the company. A growth company is preferred because some investors speculate that it has a better chance to expand its businesses, gain more market shares and become more competitive in the coming years.
(2) Value stock
A value stock is often issued by a mature and stable company. It is characterized by steady profitability, undervalued price, high safety and regular dividends in most cases, but it is subject to low price-earnings ratio and low price-book ratio. Meanwhile, a value stock boasts lower risk and volatility than a growth stock.
Generally, stock prices have been fluctuating directly with supply-demand relationship, the company's performance and profitability, and mainly with macroeconomic and political factors as well as market sentiment.
Supply and demand
Stock prices are driven by such a variety of factors, but ultimately the price at any given moment is due to the supply and demand at that point in time in the market. Supply is the total amount of a specific stock that is available in a market, while demand is the total amount demanded in the market for that stock. Low supply and high demand will push up stock prices, whereas high supply and low demand produce a contrary result.
(1) Financial report: the disclosure of a company’s annual report, semi-annual report and quarterly report often brings fluctuations to its stock prices because the reports contain the performance, profitability and prospects of the company within a specific period. If the reports indicate that the company is performing well or that its sector is expected to grow, investors are more likely to purchase its stock shares, demand for its stock shares increases, and the stock prices rise accordingly.
(2) Company announcement: It includes management changes; acquisition, merger and reorganization resolutions; stock repurchase; dividend payment; and other corporate actions.
In good times, share prices tend to rise, while in a recession, they may fall.
Interest rates are another important factor in stock prices. When interest rates fall, stock prices rise, as individuals spend more, which in turn leads to higher corporate profitability, and companies are able to finance operations, acquisitions and expansions at lower borrowing costs, thus boosting their profit potential. When interest rates increase, individual consumers may not consider buying goods with variable interest rates, such as houses and car, and it will indirectly result in a decrease in corporate income. In the meantime, corporations refuse an access to funds from banks at high borrowing costs, and are subject to a decrease in spending and the slowdown of growth, hence a negative effect on their performance in the stock market.
International political and trade relations, natural disasters and commodity prices have had a significant impact on stock prices.
Corporate actions are the actions initiated at the corporate level having material impact on the issued securities, which mainly include dividend payout, stock splits, and partnerships.
Dividend payout is to distribute a portion of a company's profits to its shareholders. Generally speaking, dividends can be taken in cash or reinvested back into the stock. A stock dividend is paid to shareholders in the form of additional shares in the company, while a cash dividend is paid in cash. Dividends demonstrate good performance of a listed company and help maintain investors' trust in the company. Typically, dividend-paying public companies tend to be more mature and have better reputations.
A stock split is a corporate action in which a listed company divides its existing stocks into multiple shares to boost the liquidity of the shares. For example, Apple did a 4-for-1 stock split, whereby one high-value Apple share was split into four low-value shares. As a result, total stock issue increases, but stockholders' equity and the total market value of the company remain unchanged. When a company’s stock prices are extremely high or above that of a counterpart in the same industry, a split makes its stock affordable to more small investors and stimulates stock liquidity.
A Stock consolidation is an action by which a corporate reduces the number of shares held by each shareholder but increases the value of each share proportionally. Instead of directly affecting a company's market value, it may signal that the company is in trouble.
With share CFDs, an investor does not actually own shares and thus does not have the right to vote or any right to subscribe, issue or split shares. Mitrade will take measures, including adjustments to account balance, to minimize the impact of corporate actions on trading position. Thus, the investor can check the adjusted amount (if applicable).
Stock analysis is a method by which investors buy in or sell out stock shares after analyzing, evaluating and forecasting the company's past data. Its basic strategies are fundamental analysis and technical analysis.
It is the analysis of economic and financial conditions and other factors, trying to find the intrinsic value of the stock. Its ultimate goal is to attain the actual intrinsic value of the stock and compare it with the current stock price, so as to judge whether the stock is overvalued or undervalued. Investors tend to buy stocks that are undervalued and sell those that are overvalued.
Fundamental analysis includes qualitative analysis and quantitative analysis.
(1) Qualitative analysis is on the target company's business model, market competitive advantages, management efficiency, corporate governance and market sentiment.
(2) Quantitative analysis is on the quarterly or annual financial statements of a listed company.
Often, fundamental analysts combine qualitative analysis with quantitative analysis to make a final investment decision. By stock analysis, a company's financial status and the performance of its stock are the most important forces that move the actual intrinsic value of its stock. Common indicators used in fundamental analysis:
Income generated from normal business activities of an enterprise
Revenue is at the top of the income statement, and investors tend to focus on year-over-year/quarter-on-quarter revenue growth.
EBIT= Revenue - Cost of sales - Operating costs
EBIT is the profit a company earns from its core operations. It is a very important measure of a company's potential profitability, which excludes earnings or losses from investments, taxes, or asset depreciation and amortization.
Net income = Revenue - All expenses
Net income is in the last line of the income statement and represents the amount of money earned by the company at a given time. As the company can distribute the net income to its shareholders in the form of dividend or use it for expanding production and operation according to its development plan, the net income is a pivotal financial index.
(net income Margin)
net income margin = net income/total revenue
net income margin is an indicator that helps investors assess whether a company makes enough profit from its core business, and whether operating costs and overhead expenses are under control.
EPS= Net income/outstanding shares
EPS is the profit earned per share of a company's stock. The higher the earnings per share, the higher the stock value, and investors are willing to pay higher prices for more profitable companies.
P/E ratio = Stock price/earnings per share
It is one of the most commonly used measures to assess whether a share price is reasonable. Investors often compare P/E ratio among similar companies in the industry to determine the relative value of a company's shares. A high P/E ratio means overvalued stock, and that investors forecast high growth rates.
ROE= Net income/average shareholders’ equity
Investors usually compare the ROE of the target company with the average figure of the industry. If its ROE is higher than the average level, as a result of its high net income, then this may be a good signal. But in a few cases, higher ROE may be the result of fewer shareholders' equity, which investors need to be wary of.
In addition to the above indicators, the company's balance sheet, cash flow and operating indicators are the focus of fundamental analysis. But the operating indicators vary from industry to industry. For example, inventory turnover, sales per square foot, and customer retention are key indicators to measure business operations in the retail industry, while for companies that specialize in ordering businesses, the indicators include user average revenue, customer lifetime value, and user purchase cost. Most business information will be included in the annual and quarterly reports of public companies, so it is important for fundamental analysis investors to carefully read these reports and corporate announcements.
It tends to study the historical data of stocks, such as stock price trend and trading volume, in a bid to analyze and predict future prices. Technical analysis is mainly done by technical graphics and technical indicators.
(1) Technical graphics
It is a major form of technical analysis in which traders attempt to determine support and resistance levels via specific charts. Technical graphics are mainly supported by psychological factors to predict whether a stock will rise above or fall below a certain price in a specific time. When a resistance level is breached, a significant increase in trading volume may ensue, thus pushing the stock higher.
(2) Technical indicators
It is a technical analysis method that applies mathematics and statistics to stock prices and trading volumes. The most common technical indicators include:
a. Moving average
This indicator helps traders clearly identify market trends. This is generally considered a bullish trend when the short term moving average crosses and is above the long term moving average.
It shows the relationship between two moving averages of asset prices and is calculated by the difference between a fast and a slow exponential moving average (EMA). "Fast" refers to the short term EMA (typically 12 periods), while "slow" means the long term EMA (typically 26 periods).
Typically, when the MACD is positive, it indicates that the 12-Day EMA is valued above the 26-Day EMA, and when they diverge further, the positive value increases, and it indicates that the stock is gaining upward momentum. In contrast, a negative MACD indicates that the 12-Day EMA is below the 26-Day EMA, and when they move further away, the negative value increases, and it indicates that the stock is gaining downward momentum.
When the MACD crosses the signal line (usually the 9-Day EMA) upwards, it signals a bear market and indicates a possible sell opportunity. When the MACD crosses the signal line downwards, it signals a bullish market and indicates that the stock may be heading for an uptrend.
It is a commonly used momentum indicator in technical analysis, which reflects the prosperity of the market in a certain period and evaluates the overbought or oversold state of a stock. Theoretically, no matter how the stock price changes, RSI always ranges between 0 and 100 and mostly fluctuates between 30 and 70. It usually considers a overbought position at 80 or even 90, at which point the stock price will fall back. When the stock price falls below 30, it is considered oversold, and the price will rebound.
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