Trading stocks refers to the act of buying and selling shares of companies listed on a stock exchange. The ownership of companies can be on an individual basis or in the case of publicly quoted companies, in the hands of numerous individual and corporate entities. Publicly quoted companies are companies whose stocks are listed on a stock exchange and whose shares can be bought or sold. The demand and supply of a company’s stock determines the price of that stock. In the parent stock exchanges, stocks can actually be owned and will remain in the custody of the owners until they decide to sell it off to other entities that want to take ownership of the stock in question.
Trading Stocks on MetaTrader 5 (MT5)
Stocks can also be traded on the trading platforms of forex brokers. These are Contracts for Difference (CFD) assets, meaning that traders who buy the CFDs on stock assets do not actually own the stocks and there is no physical transference of the stocks from seller to buyer. So when trading stocks on the MetaTrader 5 platform, the trader is basically buying contracts based on the price of each stock, and the aim is to benefit from the difference in price from the point of trade entry to the point of trade exit.
Differences Between Trading Stocks on an Exchange and Trading Stocks on MT5
There are some differences between trading stocks on a traditional stock exchange using a stock broker, and trading stocks on MT5.
- No stocks are exchanged when trading on MT5. All that is traded are CFDs on stocks, allowing traders to speculate against price movements without actual ownership of the underlying stock.
- Stock CFDs can be traded in two directions: long or short.
- Stock CFDs are always traded on margin, unlike traditional stock accounts where trading on margin is optional.
What Does MT5 Stock Trading Entail?
Almost every instance of the MT5 platform features CFDs on stock assets pooled from the US stock markets primarily, and augmented with a few stocks from other stock exchanges across Europe and Asia. The same principles of trading currencies apply when trading stocks on the MT5 platform. The technical basis of trade entries and exits are the same. However, the fundamental influences on stocks differ from the fundamental factors that affect currencies. Even among stocks, what influences stock price movements in one stock is not necessarily what affects the price of another stock. So it is important to understand what stock CFDs are listed on the MT5 platform, the fundamental influences on each stock CFD as well as how to trade each of these stock CFDs on the MT5 platform.
Some Examples of Stocks CFDs
What are the stock CFDs listed on the MT5 platform?
The stocks offered for trading in the binary options market will differ from broker to broker. Generally speaking, the stocks listed on MT5 are classified according to the country where the parent companies are domiciled.
Procedures for Trading Stocks on the MT5
The logical first step that should be taken by a trader who wants to trade stock CFDs on the MT5 platform is to open a trading account with a broker that offers the MT5 platform and lists stocks on the platform. You can click on Ctrl + U on your keyboard, or View -> Symbols to see that stock symbols are offered. Click on your preferred selection to have them available for trading on the MT5, and then click on “Show” in order to have them displayed for trading.
This will involve selecting a regulated broker, filling the online account opening form and getting the account verified by submitting a proof of identity and address (international passport/national ID card + utility bill or bank statement).
The next step is to deposit funds to start trading. Please be aware of the contract specifications required for trading stock CFDs. Many regulators across the world are pushing brokers to fix leverage at a maximum of 1:50 for trading of stocks CFDs. However, there are still brokers who offer leverage of 1:100. The leverage and margin requirements will determine your account capital, as you need to ensure that your account is properly and adequately funded to handle the price movements on stock CFDs.
The third step is to familiarize yourself with the factors that affect the price movement of the stock CFDs that you intend to trade. Generally speaking, stock prices are affected by events such as mergers/acquisitions, earnings reports, appointments of key persons into sensitive management positions, launch of a revolutionary product/service likely to impact the revenues of a company, or other news that have the tendency to impact the sector of the market where the stock CFD is listed. It takes some time to familiarize yourself with these factors. Never trade a stock CFD without understanding the fundamental influences that affect the stock price of the CFD asset.
Take time to understand how to place orders on stocks CFDs on the MT5 platform. Practice your strategy and trade entries on a demo account before you proceed to trade with a live account.
Demonstration of a Stock Trade
In this example, we will use Facebook stock (FB) to demonstrate how to trade a typical stock CFD on the MT5 platform. Facebook had released stellar results which showed that it had increased its user base, increased revenues from advertising, and was doing this at a rate of almost 50% quarter on quarter. Such stellar results are almost unheard of. This news release was expected to boost FB shares. So how does a trader trade this on the MT5?
The first step is to analyze the news numbers. Obviously, the numbers were good for FB stock and the price was expected to head upwards. So the trigger for a possible trade on FB stock was to trade this in an upward direction using a Long trade.
The next step is to look for a technical basis for a Long trade entry. One the chart of the FB stock as shown on the MT5 platform, we see a bullish pennant formation. The trade entry to make here, is to trade the price breakout at the upper border of the pennant.
The next step is to setup the trade order. You can trade using a Buy order or a Buy Limit order. In this instance, a Buy Limit order was used to take advantage of the breakout, in case price dropped a little after the breakout. The conditions met on the chart should determine the kind of order that is used by the trader.
As we can see from the eventual price action, the price of the FB stock went higher, and would have put the trader in profit.
Trading stocks on MT5 is possible and can be very profitable if undertaken properly. Traders also have the advantage of using a demo account on MT5 as well as all the tools available on the MT5 marketplace to execute their trading. These should all be used to make stock trading on MT5 worthwhile.