A Comprehensive Guide to Tokenized Stocks
As technology advanced, many investment options expanded. Many people are now familiar with cryptocurrency and blockchain concepts, but new forms of crypto emerge every day, and keeping track is challenging. A less familiar digital asset on the market nowadays is tokenized stocks.
These tokenized versions are a great option when you don’t want to buy an entire stock. With them, you can get only a piece of it. If you are wondering what are tokenized stocks, keep reading. In this article, you’ll learn how to trade them and a few things to consider before you invest.
What are tokenized stocks
Tokenized stocks are tokenization of digital total return swap contracts. They represent traditional securities, like shares in publicly traded companies such as Apple, Tesla, and Facebook. With them, you have fractional ownership of the traditional securities, greater liquidity, and 24/7 access to markets.
Tokenized stocks are backed 1:1 to traditional stocks. This means they entitle holders to the same benefits of owning underlying stocks. Its value is collateralized with the traditional security and underlying assets. The value of traditional security defines the significance of digital assets. It allows tokenized stocks to mirror the performance of traditional securities.
They might include leverage and long or short exposure and may represent the innovative baskets of indexes of traditional securities. It is a digital asset that is traded on exchanges with blockchain technology. Some organizations use them to help raise capital, as tokenized stocks allow companies to adjust to the market.
The main benefit is that you can trade them 24/7. Tokenized stocks are an amazing solution for any investor or trader who wants to trade tokens that mirrors actual stock trading.
How to trade them
You can trade tokenized stocks the same as you would in other markets. To start trading, sign up for one of the exchanges. Each has a slightly different process and a section where you can buy tokenized stocks like any other digital asset.
People can purchase these shares with cryptocurrencies or fiat currencies. It allows them to grow investments by lowering an entry barrier for traditional securities like blue chip stocks and others. Remember that you’re buying a derivative with an underlying stock. If an underlying stock pays dividends, you receive them too.
The goal here is that the value of underlying stock increases. This is how the value of your tokenized stock also improves. Companies such as CM-Equity and Digital Assets AG tokenize stocks. Regardless of what exchange you choose, it’s’ likely to be a partner of these two.
Pros and cons of tokenized stocks
Tokenized stocks provide benefits like:
- Greater liquidity
- Fractional shares
- 24/7 trading
- Increased access for foreign investors
- Faster transactions
Compared to traditional shares, a wider segment of the population can access tokenized stocks, so they may be more liquid. People who cannot buy an entire share of stock can still buy a fractional tokenized stock. Fractional shares are easier to obtain, and available wherever they are traded.
You can trade them any time of the day, as the markets are never closed. However, trading some of these is restricted to the regular hours of traditional stock exchanges. It can be challenging for foreign investors to access some popular stocks (Apple, Amazon, Tesla), so the ability to purchase them makes them more affordable and accessible.
Depending on the network, transactions may resolve in a few minutes, compared to traditional stock transactions that can take a few business days.
There also are a few drawbacks that may come with tokenized stocks:
- You aren’t a shareholder
- Unclear regulations
- A lack of understanding
- Additional risks
When you buy a tokenized stock, you’re purchasing a derivative that tracks the stock performance, not the ownership in a particular company. That means you don’t have rights as a shareholder. Their regulations are not precise, so it still isn’t entirely clear how the exchanges are regulated.
That’s why there’s a lack of understanding. New investors may not fully understand what they are getting themselves into, so this could lead to losing money.
Tokenized stocks come with additional risks because they’re a relatively new concept with unclear regulations and little track record.
Tokenized stocks are a relatively new phenomenon in the crypto world and a new investment opportunity. They present a new intriguing trade for investors, but there’s a lot to consider before deciding to invest in them, especially the lack of regulations and the fact that it doesn’t grant you a share of ownership in the company.
Research the pros and cons and never invest more than you can afford to lose. For those looking for a chance to invest using the latest technologies, tokenized stocks may be the right solution.