Valued at an incredible $80 trillion, the stock market is an important part of the global economy. Not only is it an important source of capital for businesses, but it also provides investors with the opportunity to share in the profits of publicly-traded companies.
YOUR CAPITAL IS AT RISK
When done right, investing in the stock market has the potential to grow your money as, historically, it offers a steady return on investment that outperforms money left sitting in a savings account. In this beginners guide to trading stocks, you'll learn everything you need to know about starting a stock portfolio including:
- What to look for when buying a stock
- Advantages & disadvantages
- How to get started
- Tips for success
- Strategies to use
What is a Stock?
A stock is a type of investment/security that represents a portion of ownership in a company, with each unit of stock called a ‘share/shares’. It means that you, as the stockholder, own a portion of the company’s assets and are entitled to a part of the company’s profits, “dividends,” equal to the amount of stock that you own.
When you are buying stocks, there is always a seller (or counterparty) to that purchase. Who that counterparty is would depend on the period that the purchase is made. These two market access types are classified into ‘primary', and ‘secondary' markets.
This is when you are purchasing newly issued stocks directly from the company issuing them. Usually this would be during the IPO (or ‘initial purchase offering'), but could also be during private fundraising rounds pre-IPO.
When a company lists its shares on a stock exchange, those shares can then be bought and sold frequently via the exchange – a process known as ‘stock trading’. It is this secondary market, where shares are re-sold and exchanged that the vast majority of stock purchases will take place.
The goal of stock trading is to, of course, make money by timing the market and capitalising on short term moves in the value of the shares you are trading. In its purest form, as a stock trader, you want to buy stocks when they are cheap, and sell them for a profit.
How Many Times Can You Trade Stocks in a Day?
The number of trades you can make in a day depends on the amount of money you have in your account or the amount of margin you have access to. If you are using a non-margin account, there is no limit to the number of times you can trade stocks in a day.
However, if you trade with margin and have less than $25,000, you must comply with the ‘pattern day trading’ rule’. According to FINRA, if you trade four or more times in five business days, you are defined as a ‘pattern trader’.
As a pattern trader, you must maintain a $25,000 balance in your trading account at all times. If it falls below this amount, your broker will not allow you to execute any further trades until your account reaches this level again.
What to Look For When Buying a Stock?
Different traders will see value in different areas of the stock market. So, let’s go through what you should look for when buying a stock:
Are common shares of small companies usually priced at under $1 per share but can be as large as $5 per share. You will find most penny stocks are traded over the counter (OTC), but some are on large exchanges. They can also be referred to as micro-cap or nano-cap stocks.
When analysing penny stocks, it is essential that you first consider the underlying fundamentals of the company. Consider whether it is in good financial health, if it is profitable or has the potential to be, and lastly, that it doesn’t have a high amount of debt. Some other things to consider are volatility and liquidity or volume.
These are stocks that grow at an accelerated pace, above the average rate for that market. The aim when buying growth stocks is to realise a significant gain when they are eventually sold, rather than collecting dividends, which most of the time are not paid with growth stocks. It is because the money that the company makes is typically reinvested back into the business to help it grow further.
A value stock is a stock that is undervalued when compared to the underlying conditions of the company such as earnings, dividends, sales etc.
With value stocks, the investor or trader is looking to capitalise on what they feel is the data not matching the current share price. It will generally have a lower share price compared to its peers in the same industry.
As the market has a more negative attitude towards value stocks during periods of strong economic growth, they are considered riskier than growth stocks during these times. However, the idea when holding value stocks is to keep them for an extended period, collect dividends, and wait for the current narrative surrounding the company to fade.
What Moves Stock Markets?
So, earlier, it was mentioned that the goal of stock trading is to buy stocks when they are cheap and sell them for a profit, ideally when they are deemed expensive by the broader market. But what moves the price of stocks and causes them to fluctuate, i.e. go up and down?
These play a significant part in the movement of stock prices. Earnings reports provide traders and investors with information about the company’s financial health, with market participants basing investment decisions on earnings expectations.
If earnings results beat market expectations, then the company’s stock price will rise. If they are below market expectations, then its stock price tends to fall.
This is another vital part of determining how stock markets move as generally speaking if the economy is doing well, then company’s will also be able to perform better, therefore helping to increase profitability and its stock price.
The opposite will happen if the economy is not doing well; profitability will tend to decrease, and so will stock markets. Economic news that will impact stock markets can be interest rates, inflation, economic outlook, quantitative easing, monetary stimulus, and so on.
Our final important factor in what moves stock markets is politics. Political factors that can impact stock markets include war, taxes, product subsidies, presidential elections.
There is a great recent example of how politics has impacted the stock markets. Take the US-China trade war. When negotiations weren’t going so well, stock prices would fall, but when positive comments and remarks were made regarding negotiations, then stocks would rally higher.
Stock Trading Advantages
Here are some of the advantages of investing in the stock market:
Return on investment
Trading the stock market has the potential to provide a high return on investment, as long as you do it correctly. Trading or investing in index’s such as the S&P 500 or Nasdaq has shown to provide high returns, but remember trading without the right knowledge and know-how is risky, so don’t dive in headfirst.
Owning a (small) portion of a company
If you are investing in the stock market its a great way of having an ownership stake in a company and, depending on the company you invest int, you may be paid back consistently via the company’s dividends.
Now, let’s move on to the disadvantages.
Stock Trading Disadvantages
As mentioned earlier, investing in the stock market can be risky, and the higher the potential reward typically means there is a higher risk. If issues are surrounding a company, then its stock price may decline rapidly, so it is essential to be aware of the risks and protect yourself against them.
Trading the stock market can be extremely time-consuming. You will need to do your analysis, which itself can be extremely complex, find the right stock, enter a position and then manage the trade until you decide to exit. Because of this, it may be recommended that you first start by holding your positions for a more extended period.
How to Get Started Trading Stocks
Ready to start trading stocks? Here’s how to get started:
1. Find a broker
The first thing you will need to do is find a reputable broker. With so many brokers out there competing for your business, the choice can be overwhelming. How secure are they? What transaction costs can you expect? These are important questions that take time to research. We’ve compared some of the best stock brokers to make this process easier for you.
2. Practice on a demo account
The next step is to open up a demo account with your broker of choice and start practising. As the saying goes, if you don’t know yourself, the stock market is an expensive place to find out. Practice with virtual money before you use any of your own.
Perfect your stock trading strategies. Many new traders will make the mistake of jumping in headfirst without an idea of what skills and tools they will need. Don’t make that mistake; learn how to trade stocks so that you give yourself a solid foundation to work upon.
3. Do research
Research companies and their earnings, read research articles to make sure that you are making well-informed decisions when deciding to buy or sell a specific stock. you will need to search for the stock you want to buy or sell.
Depending on the broker you choose, you can usually do this by searching for the company’s name or stock symbol. Our very own analysis page is a great place to keep up-to-date with the latest breaking market news.
4. Place and order
Once you’ve identified the perfect stock, it’s time to buy. You need to either click the buy or sell button (that will bring up a trade ticket) or fill out the trade ticket for the stock. Don’t click buy before you have completed the trade ticket.
This will include the trade size and whether you want to add a stop-loss (you should) or take profit level. Once you’ve done all of that, you will need to review the order and place the trade.
Best Brokers to Buy Stocks:
eToro: 68% of retail CFD accounts lose moneyTake a look
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IG: Over 16k stocks to tradeTake a look
If you are ready to start investing in stocks and building your portfolio you'll need a broker that is regulated, has low fees and a user-friendly platform. Finding one can be a daunting task, which is why we've selected some of our favourites that tick all of these boxes to help you get started.
Stock Trading Tips
1. Always manage risk
Managing risk is one of the most important aspects of trading. It's what stops you from blowing your account and also helps you to survive, remember survival in trading is critical. Don’t risk too much on one trade; it is advisable only to risk 1-3% of your account per trade.
2. Master one area
Don’t try to trade every stock in every sector as it can get confusing. Instead, become as knowledgeable as you can in one sector or industry and make yourself aware of the stocks in that sector. Don’t be the jack of all trades.
3. Spend time learning
Stock trading can be enticing, especially if you hear stories of how successful others are. But, a lot of the time, those stories are fabricated. To be a successful stock trader takes time and knowledge, don’t skip the learning part before diving straight into the market, make sure you give yourself the best possible chance of success.
4. Beware of Scammers
Unfortunately, the trading world is littered with scams and poor advice. You’ll come across self-styled gurus on social media and internet forums that claim to have the lowdown on the next ‘big thing’. Unfortunately, these are often fraudsters involved in a ‘pump-and-dump’ scheme. Don’t listen to them – they are trying to artificially boost the price of a stock through their recommendations and will sell their shares as soon as they hit a higher price.
Stock Trading Strategies
Volume trading strategies are technical trading strategies that involve assessing the activity in that market. They are a great way of being able to determine areas of support and resistance in a stock.
Volatility trading strategies is another technical strategy that can be used to identify big moves. If a stock has high volatility, it means its price moves a lot, this is good for traders as it provides plenty of opportunities to enter a trade.
Beta is a measurement of the volatility of a stock in comparison to the overall market. Higher beta stocks usually have a higher risk associated with them. Using beta is an excellent way of assessing the risk associated with buying a company’s shares.
Short-selling is an advanced strategy that shouldn’t be attempted by beginner traders. It involves speculating (or betting) on the decline of a stock and profiting from falling stock prices. If you get it wrong, your losses can be catastrophic. Equally, however, if your prediction holds true then the rewards can be substantial.
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