What is share trading and how does it work?

A dummies guide to investing in the stock market.

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Everyone knows that share trading is used to build wealth, but few truly understand how it works. When you trade shares, you’re buying and selling a portion of a company on a share market (or a stock exchange).

Each share has a price. The price of a share is determined by the supply and demand of a company’s shares in the market and the company’s present or predicted future performance.

Usually, when a company is performing well, more investors will want to buy its shares and its share price goes up. Conversely, if a company is underperforming and failing to deliver good profits, shareholders may decide to sell their shares.

You can make money from share trading by selling shares for a higher price than you purchased them for or when a company pays dividends.

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What is the stock market?

Also called a stock exchange, a stock market is where investors trade shares in companies. New Zealand has one main stock exchange – the New Zealand Stock Exchange, or NZX.

Some of the major overseas exchanges include the Australian Securities Exchange, the London Stock Exchange, the NASDAQ, the New York Stock Exchange (NYSE), the Japan Exchange Group and the Shanghai Stock Exchange. These can be accessed from New Zealand by using an international stock broker.

How does online share trading work?

Although there are physical stock exchanges, shares are purchased and sold online. To trade shares, you need a stock broker to act as an intermediary to the stock exchange.

A broker can be a full-service broker or an online broker. As well as place trades on your behalf, a full-service broker can give you advice about which shares to trade. An online broker is an online software platform which lets you execute trades yourself.

Online brokers are a low-cost option compared to full-service brokers. If you don’t want to go down the path of using a full-service broker, you can use share trading software to help you learn about which shares to trade, in addition to an online share trading platform to make trades.

How can you make a profit from share trading?

There are three ways to make money from share trading: capital growth, dividends and tax concessions.

Capital growth

This is the most common way to make money from share trading. This is simply where you sell shares for more than you paid and get a profit.

Dividends

This is when the directors of a company chooses to pay company profits to shareholders. Dividend payments are based on the number of shares you own. These types of shares are called income shares. Not all companies pay dividends, and directors can reinvest profits to grow the company rather than pay a dividend. These types of shares are called growth shares.

What are the different types of shares?

You can trade these types of investments using online share trading platforms or through a broker.

New Zealand securities

This type of stock is publicly listed on the New Zealand Stock Exchange (NZX). Shares in the top 50 New Zealand companies are traded on the S&P NZX 50.

International securities

You can also trade on overseas markets. You can trade shares in some of the biggest companies in the world from Australia, Europe, Asia, the United States and Britain.

Managed funds

Managed funds and exchange traded funds (funds that are listed on a stock exchange) are investment tools you can use to access multiple assets, including shares, property, commodities and derivatives.

What are the benefits of share trading?

Share trading can make you money in the short term and the long term, plus they present tax benefits for investors.

    • Liquidity. Shares are a liquid investment. You get your money two days after you make a trade.
    • Capital growth. Shares have proven to be a solid investment for long-term capital growth.
    • Tax. You may be eligible to receive a discount on any capital gains tax if you’ve held the shares for more than 12 months.
    • Shareholder rights. When you become a shareholder, you can vote on company decisions and attend annual general meetings (AGMs).

What are the risks of share trading?

Share trading is a way to make money. Generally speaking, the greater the potential gains, the greater the risk – share prices can rise and fall quickly.

  • Volatility risk. Shares can be a volatile asset. The price can rise and fall quickly depending on a number of things such as good or bad company performance, company announcements and performance of the market.
  • Timing risk. The share market moves in cycles. Buying shares in a bull market is no guarantee of future performance.
  • Government risk. Laws can change and this can impact your share price and investment strategy.
  • Overseas risk. Investing in international shares exposes you to risk from currency fluctuations and foreign governments.

Share trading jargon lookup

  • Blue chip. Companies that have a proven record of growth – for example, Fletcher Building, Ryman Healthcare and Contact Energy are New Zealand blue-chip shares.
  • IPO. An initial public offering is when a company floats on the stock exchange and sells shares to the public for the first time.
  • Income shares. Companies that pay a dividend to shareholders.
  • Growth shares. Companies that reinvest profits for long-term growth.
  • Capital growth. When an asset increases in value over time.
  • Rights issues. When a company makes shares available to existing shareholders at a discounted rate. Existing shareholders are not obligated to purchase shares under a rights issue and can sell the right to purchase discounted shares.
  • Settlement date. The date when the person who has made a trade purchasing shares must make a payment.
  • Sectors. A sector is a group of similar companies. For example, the resources sector is made up of mining and commodities shares.
  • Bull market. When the entire stock market is growing.
  • Bear market. When the value of the stock market is falling.
  • Day trading. A share-trading strategy where shares are purchased and sold in the same day for short-term capital gains.
  • Market capitalisation. The number of shares a company has issued multiplied by the price. This is a way of calculating the size of a publicly-listed company.
Disclaimer: This information should not be interpreted as an endorsement of futures, stocks, ETFs, options or any specific provider, service or offering. It should not be relied upon as investment advice or construed as providing recommendations of any kind. Futures, stocks, ETFs and options trading involves substantial risk of loss and therefore are not appropriate for all investors. Past performance is not an indication of future results. Consider your own circumstances, and obtain your own advice, before making any trades.

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