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Four ways to trade shares

by , 26 February 2015

If you've decided that you want to give trading shares a go, you have a number of options open to you.

These options all vary slightly and the level of risk that you take on also varies. But they all offer you a way to gain leverage and potentially multiply your profits.

So what instruments can you use to trade shares?

Read on to find out…

In South Africa, there are four options to pick from when it comes to trading shares

#1: Trading shares with single stock futures

A single stock future is a contract to buy or sell the shares of a particular company at a predetermined date in the future.

One single stock futures contract is equal to 100 underlying shares.

You can use single stock futures to speculate on whether a share will rise in value or fall in value.

In addition to single stock futures, there are futures available on currencies and commodities too.

#2: Trading shares with contracts for difference (CFDs)

A CFD is an agreement between two parties to exchange, at the close of the contract, the difference between the opening price and the closing price of the shares.

You can also use CFDs to speculate on shares rising and falling in price.

One CFD is equal to one underlying share.

#3: Trading shares with spread trading

Spread trading is a way of trading that involves you risking so many rand per point on the movement of a company’s share price.

Some new traders find spread trading easier to understand and you’re in control of how much risk you take on.

You can also use spread trading to speculate on a share price rising and falling. And you can spread trade a number of assets including international currencies, indexes and commodities.

#4: Trading shares with options

Options give you the right, but not the obligation, to buy or sell shares at a fixed price. You pay a small premium for this right.

As options are based on single stock futures in South Africa, one options contract is equal to 100 underlying shares.

If you use options to speculate a share will rise in value, it’s called a call option. If you use options to speculate a share will fall in value, it’s called a put option.

What makes options different from the examples above is that your losses are strictly limited to the premium you pay.

So there you have it, four ways to trade shares.

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Four ways to trade shares
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