How to understand different ways to make money by buying and selling stocks

This guide will explain all the possible ways to make money from buying and selling stocks. Over the last few years, there have been developments of several types of instruments that allow people to trade stockmarket-listed securities other than just the traditional way of physically buying the stocks through a stockbroker.

Buying stocks through an online broker

Buying individual shares and building your portfolio is a fun way of becoming your own “fund manager”. Essentially, you live or die by your own decisions. To be a successful stock picker though, you have to do a great deal of research and build a system that will determine the type of stocks that you buy and what part it will play in the overall objective of your portfolio.

Buying and selling stocks through an online stockbroker is much more efficient than a dealing with a traditional stockbroker because of the ease in managing your portfolio by logging into your account.

• The commission rates are lot cheaper than traditional stockbrokers. If you open an online stock trading account, be sure to compare commission charges and look at all the facilities they provide. Some compromise useful research tools and account management facilities for to provide very low commissions, while others get the balance right.

Unit Trusts

These are funds run by money managers. They actively buy and sell stocks on behalf of their clients after grouping the funds generated from their clients. The characteristics of funds differ because some are focussed on investing in high dividend paying stocks, some focussed more on growth and therefore likely to invest in growth stocks, while others might focus entirely on small and mid-cap stocks.

If you invest in funds, make sure you research the performance of fund managers rigorously using independent research information.

Exchange Traded Funds

In the last few years, Exchange Traded Funds or ETF's have been introduced as another means of investing in the stockmarket, making it a good alternative to Unit Trusts managed by fund managers.

An ETF differs from Unit Trusts in important regards. Firstly, an ETF is not a physical stock of a company or any other instrument. Although the ETF's mirror actual prices of instrument they were devised to track, they are not physically owned when someone purchases them.

• There is the advantage of trading them in real-time prices, as opposed to closing prices offered for unit trusts.

• Another advantage of trading an ETF is that they are relatively cheap, usually between .025%-.04% of the value of the investment, compared to unit trusts, for which there are significant, if not substantial, annual charges made by a fund manager – usually 2-3% of the value of the fund.

• The commission charges levied by a stockbroker for purchasing and selling ETF's are the same as dealing when buying/selling a stock. Of course, commission charges are very low with many online brokers. Some brokers like Selftrade offer commission free purchases of major ETF's when bought within tax-efficient accounts like an Individual Savings Account (ISA).

• At the moment, the choice of ETF's is still pretty limited given that it has only been a few years since they were first introduced, but the choices are rapidly increasing and already there are products that cover the major indices as well as ETF's that provide emerging market exposure.

Another advantage of making regular investment in an EFT that tracks one of the major indexes over a unit trust is that often the returns from Unit Trusts are not enough to negate the charges levied by the fund manager running the Unit trust.

The following link has more on Exchange Traded Funds

Futures trading – Financial spread betting

Spread betting is an increasing popular form of trading because it of its tax-efficient system – all profits are tax-free. It's very popular with day traders because of the ability to make large sums of money very quickly. It is possible to make big profits in matter of hours by taking advantage of the fluctuations in stockmarket indices and stock prices. With the recent advent of margin trading, which allows account holders to trade by putting up small amounts of money up front (around 10%)

Advantage of financial spread betting:

• Some spread betting firms allow trading with as little as 1 penny per point movement in the instrument traded. This would allow people to learn the concept of spread betting by risking, initially, very small amounts of money and gradually increasing the amount per point as they became more experienced and confident in their ability.

• Stop Loss – The advent of guaranteed stop loss has been a wonderful boon for spread betters because of the ability to predetermine losses, if the trade went badly wrong.