What is the stock market? A beginners guide to stock market trading
This guide provides a detailed overview of what the stock market is, understand stocks and what drives the value of a stock. By the end of this guide, you will have a solid basis to start trading and investing in stocks.
When making any investment it is important to gain some understanding in what you’re getting into. This will allow you to achieve the best results possible and limits the amount of mistakes made. If you want to actually learn how to trade stocks you’ll need a basic understanding to begin with, on how stock trading works which will be explained in this article. After reading this stock market guide you will have an a basic understanding to get started trading stocks, if you want to take your trading tot he next level a trading mentor is very beneficial, especially if you are looking to make money from stocks in the long run.
What is a stock?
A stock is a type of investment which allows you to have a share in a company. When you buy a stock from a business you’re essentially purchasing a small piece of that company which is called a share. Shareholders contribute to the company’s’ profits as they are investing into the company’s future as long as they own their shares. Investors typically buy stocks from companies that they predict will increase in value over time. If this happens then the stock brought can be sold for a profit. For many businesses distributing stock creates an opportunity to raise money to invest and expand in their company. Whilst for investors or potential investors like yourself, stocks enable a growth in your money and outpace inflation in due course.
The main goal when investing into the stock market is to make a profit by selling the stock for more than you paid for.
What is stock trading?
The stock market provides a secure and regulated environment for traders to participate in regular activities of buying, selling of shares in publicly held companies with a zero to low operational risk. The supply and demand of each company’s stock is tracked through stock exchanges which directly affects stock prices. Public companies sell their stock through a stock market exchange like the New York Stock Exchange (NYSE) or Nasdaq for example although there are many other stock markets exchanges all over the globe. Investors are then able to buy and sell these shares among themselves through stockbrokers. Stockbrokers are individuals or firms who are licensed to trade stocks through the exchange-this allows them to buy and sell at your request. In exchange for dealing with individuals trades, the broker collects a commission or a fee. You can sign up to a stock broker here >
Long–term vs. short-term stock trading
With fluctuations in the market happening on a daily basis there are two main strategies used by investors: short-term trading or long term trading also known as buying and holding. Investors who do best over the long term have a diversified portfolio of many stocks which they hold onto through good and bad times. This approach requires you to wait until the stock’s value has increased over an extended period of time – also known as passive trading. Having patience and the ability to overlook short term fluctuations is needed with long term trading as it is the ongoing performance of the stock which is important not the recent ups and downs happening on a daily basis.
On the other hand, short term trading is about using the constant volatility and fluctuating prices in the market to your advantage. Investors who use this method of trading watch the markets for opportunities to buy low and sell high making numerous of trades in a short time period- also known as active trading. This type of trading comes with a potential for easy profit but is also associated with risks such as there may not be rise in value of a low stock price over a short period of time or it may actually lose value. Investors also end up paying more capital tax the more frequently they sell their shares. This was pretty much done to encourage traders to trade over a long term scale. There are many styles of short term trading such as day trading, intraday trading and scalping.
How to invest in stocks
Before you start trading or investing in stocks it is essential that the money you are investing is NOT more than you can afford to lose. This is due to the fact that you will need to be willing to lose some or all of that money as a beginner. The stock market is forever fluctuating and you can never be in control of business setbacks. You also have to consider that the riskier the investment, the higher the potential rewards and losses. With active trading timing, the market is a tricky thing to do as you have to choose the right opportunities twice – once when you buy the stock than another when you sell it.
Traders using this approach will benefit from short term changes in the market by frequently buying and selling based on trends. At starttrading.com, we offer copy trading services, which thousands of beginners people are using on a daily basis, who don’t have the time watch to the market but are looking for short-term rewards. Copy-trading allows you to copy the trades of experienced professionals who have high success rates for every trade they make.
As an investor, your choice in a broker is important because it has huge implications for how much you’ll pay in fees, the types of investments you have access to and what your eventual returns will amount to. You can sign up to a stock broker here >
Some brokers are known as discount brokers who execute trades inexpensively but typically don’t provide any personalised guidance. Full-service brokers offer a comprehensive variation of services including investment advice however the higher quality of service will require a higher fee which some find worth every penny. Both services have pros and cons but it depends on what approach in investing works best for you and what your goals are.
Many first time investors believe that to make money in the market you have to pick individual stocks but this is not the case. It takes time and patience to build a diversified portfolio of individual stocks as you need to do your research in each area of investment. Alternatively many investors especially those with experience have made their successes through using mutual funds and exchange-traded funds which is also a good place for beginners to get started in trading. This provides automatic diversification that helps to protect your portfolio from inevitable market setbacks even if you have little money to invest. Mutual funds and exchange-traded funds provide a basket of investments in different areas of the markets in one single package.
What determines the stock price?
As I have mentioned a few times the prices in the stock market constantly fluctuate on a day to day basis, you might be asking yourself, what makes stock prices fall and rise?
The very straightforward answer is supply and demand. The price changes in the market reflect the supply and demand in that present moment so when a stock is seen as desirable then the stock price will increase. Factors could include a company’s recent success, a strong industry sector or just plain and simple popularity.
On the other hand, investors may be unwilling to purchase a stock due to a weak industry sector, company failings or the fact that the price is too high. This is called a lack of demand which will inevitably cause the stock price to drop. When this happens at some point the price will reach a point low enough for investors to start buying again where the cycle will repeat itself, this is known as market cycles. These are the trends which active traders will be looking out for. Passive traders who take on a long term approach to trading would invest in stocks which have strong earnings and a bright future and wait for the price to rise over a long period of time.
Advantages of trading the stock market?
- The most prominent advantage of buying or selling stocks is investment gains. Over time the stock market tends to increase in value despite the prices of individual stocks fluctuating daily. Investments in steady companies that are able to grow to give investors returns on investment through profits. With the potential to grow wealth through value appreciation of assets the stock market attracts those with efforts to secure their financial future.
There are two trading methods to make money
- The stock market gives you the option to make money on both a long term and short term basis. Some stocks also offer the opportunity to earn dividends which provides additional investment income. Dividends can be defined as a payment made by a business to its shareholders. The payouts are usually made in cash although they can also be distributed in stock dividends where stock shares are allocated to shareholders. In essence, a dividend is basically a reward given to shareholders for owning stock in the corporation.
Easy to buy
- Buying stocks isn’t as formal as it used to be, with electronic and technological advancements buying stocks online literally takes minutes. You can purchase your shares through a broker, financial planner or online.
The Best way to outpace inflation
- Historically stocks have averaged an annualised return of 10% although it does mean you must have a longer time scope. Nevertheless, stock investments still outrun the average annualised inflation rate of 3.2%.
Disadvantages of trading the stock market?
You could lose all your investment
- When a company does poorly, the investors will sell allowing the stock prices to plummet. As you sell during the company’s hardship you are exposed to losing your initial investment. If losing your initial investment is something you can’t afford to do then you should consider buying bonds. This provides an income tax break if you lose money on your stock loss.
Can be very time consuming
- Before buying a stock you have to research every company to determine how profitable it will be for you in the long run. You have to learn how to read financial statements, annual reports and keeping up to date with your company’s developments in the news. It is also required to monitor the stock itself as even the best company’s price will fall in the market.
Stock trading can be an emotional rollercoaster
- Stock prices increase and decrease second by second and many individuals buy high out of greed and sell low out of fear. Focusing on the price fluctuations of stocks can be damaging to your investment especially without patience. It is best to check on a regular basis rather than constantly watch the prices.
You are competing with professionals
- Along with knowledge and time professional traders and institutional investors have refined trading tools, computer systems and financial models at their disposal which some find intimidating.
To conclude although there are risks to investing in stocks, these can all be minimised with the right guidance and approach to what method of trading is best suited to your goals. Start trading provides services which can both teach and guide you into the right direction of a bright financial future in the stock market. With our mentoring services available you’ll be able to gain the confidence necessary in making sound trades and investments in the Stock, Forex and even Cryptocurrency markets. Book a FREE consultation with one of our trading mentors today for more information or to discuss any of the topics mentioned in this article in further detail.