When it comes to trading financial markets, one of the big benefits is the diverse range of assets and instruments available to traders.
Along with Forex, one of the most popular asset classes that traders choose to operate is stocks.
It’ important to note that we aren’t talking about stock markets here, such as stock indices (SPX500, DAX ETC).
We are referring to individual company share prices such as Amazon, Facebook, and Coca Cola for example.
The actual trading of these stocks on the MT4 platform is very much the same as other assets in terms of how to place an order using the platform.
As with other instruments, traders can either buy or sell a stock.
With a buy trade, profit is made when the stock increases in value. With a sell trade, profit is made when the stock decreases in value.
However, there are some unique elements that traders should be aware of.
Firstly, when trading individual stocks, the trader is not actually purchasing physical shares in the company but speculating on the direction of the company’s share price via contracts for difference (CFDs).
This contract type differs from spot trading (such as use in Forex).
Whereas a spot trade is concluded at the current market rate, a CFD trade is concluded at the termination of the trade.
There, the trader pays or incurs the difference between the entry and the exit price, multiplied by the number of contracts they purchased.
Margin & Leverage
Another key element of individual stock trading via CFDs is the function of margin and leverage.
The margin percentage for CFD stock trading is 20% with a leverage of 1:5.
This means that when placing a trade, the trader will only need to initially put up 20% of the total trade amount. This is because the leverage offered by the broker allows them to control a position 5 times larger than the deposit size.
For example, if Amazon shares are trading at $125 and a trader wishes to buy 100 CFDs (100 x 125 = $12500), they would only need to put up 20% as margin ($2,500), utilizing a leverage of 1:5.
It is important to note that CFD trades are priced differently to spot trades and futures trades.
The full list of contract details and specifications can be found here.
All stocks are either in EUR or USD depending on the stock and have a minimum contract value of 1 with a max contract value of 1000.
Unlike Forex trading, where markets are open 24 hours a day 5 days a week, individual stocks are only active during the relevant market hours.
This varies depending on whether the stock is a European listed stock or an American listed stock. (Once again, details can again be found here.)
Minimum Trade Value
All stocks are quoted with a minimum tick value of 0.01 and a tick value of 0.01.
This means that when placing a trade, traders should ensure that their stops and targets are properly calibrated to account for these parameters.
Traders should also beware of commissions when trading stocks. The commission value is 0.005 of the total trade size.
So, going back to the example used earlier, if a trader buys 100 Amazon shares at $125, the commission fee would be ($125 x 100 = $12500 x 0.005 = $62.5)
As with all asset classes and instruments, traders should take caution and make sure to manage their risk and trade responsibly.
This means only risking what they can afford to lose and ensuring to use stops when traders.
Finally, it is important to note that the use of leverage can cause a negative account balance.
Therefore, traders should always bear this in mind or ensure their broker offers negative balance protection.