The global financial markets have never been so vibrant and alive, and they have never been so accessible to you as an individual investor. You are in a unique position. Never before have individual investors, like you, had access to everything they needed to be successful on their own in the global financial markets. Now you do.

Both the stock and contract for difference (CFD) markets are exciting markets that give individual investors, like you, access to the world's stock markets with an exciting level of leverage and flexibility.

Let's take a look at the basics of how each of these markets work. We'll start with the stock market and then take a look at the CFD market.

Investors trade stocks - shares of ownership in a company - through stock exchanges. Before the rise of the Internet, stock exchanges were physical trading floors where investors, or their brokers, could get together and negotiate prices for the stocks they were looking to buy and sell. While many of these physical exchanges, like the New York Stock Exchange (NYSE) and the London Stock Exchange (LSE) still exist, new Internet-based stock exchanges, like the NASDAQ, have developed. Regardless of whether the stock transactions take place on a live trading floor or in cyberspace, the important thing for you as an investor is that there is a place where you can buy and sell your stocks.

Why would you want to buy and sell stocks instead of simply buying and holding stocks? Investors buy and sell stocks based on their belief of what the price of the stock is going to do in the future. If they believe the price of the stock is going to go higher, they buy the stock. If they believe the price of the stock is going to go lower, they sell the stock.

● Why Stock Prices Go Up and Down

Companies are in business to make a profit. You don't have to get any more complicated than that. Companies want to make a profit. When companies do make a profit, managers either reinvest the money back into the business for future growth or they distribute the money to the owners of the business. As you just learned, you are buying ownership in a company when you buy stock, which means managers would be distributing money to you. These cash distributions to stock holders are called dividends.

Companies that are growing and generating more and more profits tend to have stock prices that move higher and higher. Companies that are not growing and are not generating more and more profits tend to have stock prices that move lower and lower. As a stock investor, however, you cannot simply look at how well a company is performing today when you are choosing which stocks to buy and which stocks to sell. Investors are most interested in what they believe the company will do tomorrow, next month and next year. If they believe the company will continue to grow and generate profits, they will buy the stock. If, on the other hand, they believe the company will not continue to grow and generate profits as it has done in the past, they will sell the stock.

Now that you have a basic understanding of the stock market, let's take a look at the CFD market.

A CFD, or contract for difference, is a contract that rises or declines in value as the stock on which the contract is based rises or declines in value.

● Why the Value of CFDs Goes Up and Down

A CFD gains or loses value as the difference between the price of the stock when you bought the CFD and the current price of the stock fluctuates. For example, if you buy a CFD that is based on a share of Microsoft (MSFT) stock, and the share of stock rises in value, the value of your CFD will also rise. Conversely, if you buy a CFD that is based on a share of MSFT stock, and the share of stock declines in value, the value of your CFD will also decline. The value of the CFD is directly tied to the price of the stock, which is why you must understand why stocks move before you invest in CFDs.

●  Leverage in the CFD Market

If the value of a CFD is directly tied to the value of the underlying stock, why not just trade the stock? Why would you want to trade CFDs instead? The answer: leverage. When you trade CFDs, you can use leverage to enhance your investing returns.

When you buy a stock, you have to pay the full price of the stock. If the stock is trading at $25, you must pay $25 for the stock. If the stock is trading at $100, you must pay $100 for the stock. When you buy a CFD, on the other hand, you only have to pay a portion of the total price of the stock - sometimes as little as 5 percent.

Leverage enhances your profits, but it can also enhance your losses. Imagine you buy a CFD on a stock that trades for $50, but you only have to set aside $5 for the CFD because you are taking advantage of leverage and can pay as little as 10 percent on this particular stock. Now imagine that the value of the stock increases 10 percent, from $50 to $55. How does this affect your CFD trade? Remember, a CFD is a contract for difference so you make the difference between $50 and $55 - which is $5. If you had bought the stock, you would have made a 10 percent profit ($5 / $50 = 10%). However, since you bought the CFD instead and only had to set aside $5 to enter the trade, you made a 100 percent profit ($5 / $5 = 100%).

While this is a tremendous return, you have to remember that leverage can also work against you. If you had entered this same CFD trade and the stock had declined $5, from $50 to $45, instead of rising, you would have lost a larger portion of your investment as well. If you had bought the stock, you would have suffered a 10 percent loss (-$5 / $50 = -10%). Whereas, since you bought the CFD and only had to set aside $5 to enter the trade, you would have lost 100 percent of your investment (-$5 / $5 = -100%).

Leverage is an incredible tool. Use it wisely. .

Individuals around the world are trading shares and contracts for difference, or CFDs - a share-based product that adds versatility to a dealer's trading arsenal - every day. Whether they are trading shares and CFDs from companies they recognize, like Nokia or Coca Cola, or entire indices, like the FTSE 100 Index, they are putting their money to work for them.

You have come to the right place to learn about shares and CFDs and the tools and information you will need to start trading them. Let's get started!

In this first section we will explain the following to get you on your way to placing your first trade:

    What you need to know about shares
    What you need to know about CFDs

•  Shares - Pieces of a Company

Shares are pieces of a company. In other words, every share represents ownership in a company. For instance if you own 1 share in a company that has issued 1,000 shares then you own 0.1 percent of that company. Likewise if you own 1 share in a company that has issued 1,000,000 shares, you own 0.0001 percent of that company.

Each company is free to determine how many shares it will issue, and it is only the company that can make this decision. Traders or other market participants cannot create their own shares. They can only trade those shares that the company has issued.

When you own a share you are entitled to share in the successes and failures of a company, the profits and the losses. When a company makes money the value of that company's shares generally goes up. When a company loses money, the value of that company's shares generally goes down. Of course traders speculating on the share price can cause the price to move up and down on a short-term basis, but company performance is typically the long-term driver of price movement.

Traders buy and sell shares to take advantage of the price movement of the share. If you buy a share and the price of that share goes up then you make money. For example, if you buy a share of Google (GOOG:xnas) for $400 and sell it after the price has risen to $500, you make $100 ($500 - $400 = $100).

If you sell a share short (which means you borrow the share from your dealer and sell it on the open market), and the price of that share goes down, you make money. For example, if you borrow a share of Google from your dealer and sell it on the open market for $600, buy it back for $500 and then return it to your dealer, you make $100 ($600 - $500 = $100).

The following table illustrates what will happen to the value of your share based on whether you bought or sold the share to enter your trade:

 

	Share Price Goes DOWN	Share Price Goes UP
Buy the Share	Lose Money	Make Money
Sell the Share	Make Money	Lose Money

Share prices fluctuate from day to day. Your job as a share trader is to determine which direction you believe the share price is going to move and place your trades accordingly. You will learn more about how to analyse a share and project where the price is going to move in the future in later sections.

Share Traders

Share traders who want to buy or sell a share submit their orders to Financial Pacific, and Financial Pacific takes care of the rest. The following outlines the complete process:

1. You submit an order to Financial Pacific.
2. Financial Pacific submits the order to the appropriate share exchange.
3. The exchange fills the order by matching it with another order (or orders).
4. The exchange sends confirmation to Financial Pacific that the order has been filled.
5. Financial Pacific updates the order in your account.

The amazing thing is that all of this takes place in a matter of seconds, sometimes less. Trading platforms by dealers like Financial Pacific have brought lightning-fast order execution to individual investors like you.

Reuse of Collateral

Financial Pacific allows up to 60 percent of the collateral invested in certain shares and ETFs (Exchange Traded Funds) to be used for margin trading activities (Forex and CFD trading). For example if you are holding a position in an eligible share with a value of $10,000 you can re-use up to $6,000 of this as collateral for trading Forex and CFDs.

•  Contracts for Difference (CFDs)

Contracts for difference (CFDs) are similar to shares and share indices - with the added benefit of leverage. CFDs are based on shares and share indices. Whereas shares are actual certificates that show ownership in a company, CFDs are simply contracts between two parties (you and your dealer, in most cases) that designate how much money you will make, or owe, depending on where the price of the underlying share or share index moves.

Whereas there are a limited number of shares available for each company, there are no such limits on CFDs. Companies don't issue CFDs or determine how many are available - traders do. As long as there are traders willing to buy or sell CFDs and dealers or others willing to take the opposite side of the trade, there is virtually no limit to the number of CFDs you can trade on each share or share index CFDs and shares are like people and hot-air balloons. A person alone cannot fly. A hot-air balloon, on the other hand, can fly by itself. However, when you put a person inside a hot-air balloon, she can fly with the hot-air balloon. As the balloon floats higher, the person inside the balloon also floats higher. As the balloon floats lower, the person inside the balloon also floats lower.

CFDs and shares work in much the same way. A CFD by itself cannot move up or down in price. A share, on the other hand, can move up or down in price all by itself. However, when you attach a CFD to a share it can move up or down with the price of the share. As the share price moves higher, the value of the CFD also moves. As the share price moves lower, the value of the CFD also moves.

Every CFD has a specific underlying share or share index on which it is based. For instance if you trade a CFD for the Nikkei 225 Index (an index of Japanese shares that trade on the Tokyo Stock Exchange) the performance of your CFD is going to be based on the price performance of the Nikkei 225. If you buy the Nikkei 225 CFD and the price of the Nikkei 225 moves higher then the value of your CFD will also move higher. Conversely if you sell the Nikkei 225 CFD and the price of the Nikkei 225 moves lower then the value of your CFD will also move higher.

The following table illustrates what will happen to the value of your CFDs based on whether you bought or sold the CFD to enter your trade and the price movement of the underlying asset:

	Underlying Asset Price Goes DOWN	Underlying Asset Price Goes UP
Buy a CFD	Lose Money	Make Money
Sell a CFD	Make Money	Lose Money

CFD values fluctuate from day to day as the price of the underlying asset moves up and down. Your job as a share trader is to determine which direction you believe the underlying asset is going to move so you can place your CFD trades accordingly. You will learn more about how to analyse these underlying assets and project where the price is going to move in the future in later sections.

Along with being quite easy to trade, CFDs also enjoy another tremendous advantage over shares: leverage.

Leverage

CFDs have the added benefit of leverage. Leverage is probably the one characteristic of CFDs that intrigues individual investors the most. Leverage is the ability to convert a small amount of power into a larger amount through the use of a tool. Imagine you are asked to move a large boulder from the spot where it is currently resting. You could certainly try to push and move the boulder with your bare hands, but your job will be much easier if you can use a tool - such as a large pole - that you can place under the boulder to give you some leverage.

The same principle holds true when you are trading CFDs. You can make money by investing just your own money, but you can make much more money if you can use the tool of financial leverage by borrowing money from your dealer.

You can lever, or increase the investing power of, your CFD accounts by using some of your own money to enter a trade and then borrowing the rest from your dealer. For example, you can buy or sell a CFD on some heavily-traded shares and indices using as little as 10 percent of your own money. You can borrow the remaining 90 percent of the purchase price from your dealer.

The leverage you enjoy when trading CFDs is determined by the margin you are required to post for each trade.

Margin

The CFD market is an exciting market because your dealer is willing to lend you money so you increase your profit-generating potential in all of your trades. Before your dealer lets you borrow money, however, you have to show that you have some money to cover any losses you may incur. Margin is the money you set aside with your dealer for safe keeping to prove that you are able to cover your losses.

For example if you buy the Exxon Mobil CFD you will be required to set aside 10 percent of the share price as margin. That means if the share price is $90, you will be required to set aside the equivalent of $9 to prove to your dealer that you can cover losses of at least $9 (a 10% loss) should your trade move against you.

Different CFDs have different margin requirements. CFDs covering shares and indices that are actively traded have lower margin requirements because their high levels of liquidity make it easier to enter and exit your trades quickly - which gives your dealer added confidence he will be able to close out your positions without incurring unexpected losses. CFDs covering shares and indices that are not actively traded have higher margin requirements because their low levels of liquidity make it harder to enter and exit trades quickly.

Many novice CFD traders are often confused into thinking that the money they set aside as margin actually goes toward purchasing shares or indices. It does not. You borrow 100% of the purchase price from your dealer. Your margin only shows your dealer you have money to cover any losses that you may incur.

CFD Financing credit/debit rates

As CFDs are a margined product, you finance the traded value through an overnight credit/debit charge. Consider this as the price you pay for access to the generous flexibility in lending that your dealer provides you when you trade on margin. When you hold a CFD overnight (i.e. you have an open CFD position at close of market, which is 17.00 New York time), your CFD position will be subject to the following credit or debit:

• When you hold a long CFD position overnight you pay interest, meaning that you are subject to a debit calculated on the basis of the relevant Inter-Bank Offer Rate for the currency in which the underlying share is traded (e.g. LIBOR) plus a mark-up (times Actual Days/360 or Actual Days/365).

• When you hold a short CFD position you receive interest, meaning that you receive a credit calculated on the basis of the relevant Inter-Bank Bid Rate for the currency in which the underlying share is traded (e.g. LIBID) minus a mark-down (times Actual Days/360 or Actual Days/365).*

The credit/debit is calculated on the total nominal value of the underlying share(s) at the time the CFD contract is established (whether long or short).

If you open and close a CFD position within one trading day you are not subject to these credits/debits.
___________
* Please note that, depending on the jurisdiction of your account, you may not receive interest on short CFD

CFD Traders

CFD traders who want to buy or sell a CFD also submit their orders to Financial Pacific, and Financial Pacific takes care of the rest. With CFDs, however, Financial Pacific can fulfil your orders in one of two ways - by sending the order to a centralized CFD exchange, or by acting as the counterparty to the trade.

When you submit an order for a CFD that trades on a centralized exchange, Financial Pacific will handle your order the same way it handles a share order. The following outlines the complete process:

1. You submit an order to Financial Pacific.
2. Financial Pacific submits the order to the appropriate stock exchange.
3. The exchange fills the order by matching it with another order.
4. The exchange sends a confirmation to Financial Pacific that the order has been filled.
5. Financial Pacific updates the order in your account.

When you submit an order for a CFD that does not trade on a centralized exchange but will be fulfilled by Financial Pacific instead, the order process is slightly different. The following outlines the complete process:

1. You submit an order to Financial Pacific.
2. Financial Pacific fills the order.
3. Financial Pacific updates the order in your account.

Regardless of which type of CFD you are buying or selling, the entire process - just as with share trading - happens within a matter of seconds.

Short Selling CFDs

When short selling a CFD directly on an exchange (that Financial Pacific does not market-make), you will be affected by the rules for the share market in that country. For example when trading Australian CFDs you may experience limitations on the volume of CFDs you can short trade in a single day due to limited borrowing availability in the underlying market.

You can also experience forced closure of a position if your CFDs get recalled. The risk is particularly high if the share becomes hard to borrow due to takeovers, dividends, rights offerings (and other merger and acquisition activities), or due to increased hedge fund selling of the share.
 
Charting Basics

Charts are a stock and CFD trader's best friend. You will most likely spend more time using your price charts as a stock and CFD trader than you will any other trading tool. Since your charts are going to play such a large part in your trading, it is imperative you become familiar with them. The more comfortable you are with your charts, the easier it will be to become a successful stock and CFD trader.

To help you become familiar with your charts and how you can affectively use them, we will cover the following concepts:

     • Chart setup
     • Chart time-frames
     • Chart types

We will discuss the incredible technical indicators you can add to your charts to improve your trading results in a later section. Take the time now to learn the so you will be ready for more advanced material later.

• Chart Setup

Let's start from the very beginning and take a look at how a stock price chart is set up. Once you understand the basics, you will be much more successful applying more advanced concepts to your technical analysis.

Stock price charts (see Figure 1) are built on two axes - the X axis (the horizontal axis) and the Y axis (the vertical axis).

Figure 1 - Basic Chart Setup

The X axis runs horizontally along the bottom of the chart providing a timeline for everything that has happened on the chart. The most recent price movements are shown on the right of the chart and the most historic price action is shown on the left side of the chart.

The Y axis runs vertically along the right side of the chart providing a scale on which to measure price movement on the chart. Lower prices are shown towards the bottom of the chart and higher prices are shown towards the top of the chart.

When you put the two axes together, you can see at what price a stock was trading at a particular time in the past. For example, you can see that the S&P 500 was trading at 13,675 on 14 March 2007 (see Figure 2).

Figure 2 - Identifying the Date and Price

• Chart Time - frames

Financial Pacific Forex charts give you the ability to analyze the price movement of astock or CFD anywhere from a minute-by-minute basis to a month-by-month basis. You have the flexibility to choose which time-frame is best for you.

If you are a short-term trader, you will want to use shorter time-frames for your charts. If you are a long-term trader, you will want to use longer time-frames for your charts. For example, a trader who is looking to quickly jump in and out of investments for 10- to 20-cent profits would most likely want to be watching a 1-minute or a 5-minute chart. A trader who is looking to hold onto investments for a longer period of time to take advantage of larger price moves would most likely want to be watching an hourly or a daily chart.

Some traders even choose to use multiple time-frames so that they can see how the movement of a stock or CFD looks from various points of view. We will discuss this concept in detail in a later section.

To change the time-frame on your chart to best match your trading style, click on the button at the top of the chart. A drop-down menu will appear, and you can select your preferred time-frame (see Figure 3).

Figure 3 - Chart Time-frames

• Chart types

Financial Pacific Forex charts give you the ability to analyze the price movement of any stock or CFD in various formats, from line charts to candlestick charts. You have the flexibility to choose which format is best for you.

Technical analysis is a visual, almost artistic, skill that traders develop, and different traders like to practice their art on different types of charts. Some traders feel they can see and analyze support and resistance levels better on a line chart, while other traders feel they get more information on price movement on a bar chart or a candlestick chart.

Technical analysts tend to gravitate toward the following three chart types:

Line Charts

Line charts are the most basic type of chart. Technical analysts often use line charts to easily identify support and resistance levels. Line charts only have basic information plotted on the chart, which means there is not a lot of other clutter to get in the way of analysis.

You create a line chart by plotting the closing price of each trading period on a chart and then connecting each closing price with a line. You can see an example of a line chart below (see Figure 4).

Figure 4 - Line Chart

Bar Charts

Bar charts provide more information than line charts. Technical analysts often use bar charts to access more information about how a stock's price moved up and down during trading periods. Whereas line charts only plot the closing price from each trading period, bar charts plot the opening, high, low and closing prices from each period.

You create a bar chart by plotting a series of bars across the chart. Each bar represents one trading period. To create a bar you plot the high and low price of a trading period and connect them with a vertical line. Next you plot the opening price to the left of the vertical line you have just drawn and connect that point to the vertical line with a horizontal line. Lastly you plot the closing price to the right of the vertical line you have just drawn, and then connect that point to the vertical line with a horizontal line (see Figure 5).

Figure 5 - Price Bar

Seeing where a stock or CFD started the trading period compared to where it ended the trading period can help you better identify trends. If the price closes higher than it opened you know investors were bullish on the stock or CFD during the trading period. If the price closes lower than it opened you know investors were bearish on the stock or CFD during the trading period.

You can see an example of a bar chart below (see Figure 6).

Figure 6 - Bar Chart

Candlestick Charts

Candlestick charts provide the same information as bar charts but in a slightly different format. Technical analysts often use candlestick charts instead of bar charts because it is easier to see and identify various trading patterns using candlestick charts. In fact, a complete line of technical analysis, known as Japanese candlestick-chart analysis, was developed around these easy-to-use charts.

Candlestick analysis was developed in the 1700s in Japan. Traders in the Japanese rice markets would use candlestick analysis to help them make more profitable rice trades.

You create a candlestick chart by plotting a series of candlesticks across the chart. Each candlestick represents one trading period. To create a candlestick you plot the high and low prices for a trading period and connect them with a vertical line. This line is called the wick of the candle. Next you plot the opening price by drawing a horizontal line through the vertical line or wick. After you have plotted the opening price you plot the closing price by drawing another horizontal line through the vertical line. Lastly you fill in the area between the opening price and the closing price. This area is called the body of the candlestick (see Figure 7).

Figure 7 - Price Candlestick

Seeing where a stock or CFD started the trading period compared to where it ended the trading period can help you better identify trends. If the price closes higher than it opened you know investors were bullish on the stock or CFD during the trading period. If the price closes lower than it opened then you know investors were bearish on the stock or CFD during the trading period.

You can see an example of a candlestick chart below (see Figure 8).

Figure 8 - Candlestick Chart