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 you make.
If you want to actually learn how to trade stocks, you’ll need a basic understanding on how stock trading works to begin with. After reading this stock market guide you will know exactly to get started trading stocks.
Let’s get into it.
How to trade stocks
If you’re looking to start trading stocks for the first time, you likely have a ton of questions. “What stocks should I buy?”, “Is X company a good investment?”, “Is $XX too much for this stock?”, sound familiar?
Slow down, before you place any trade in any sort of stock, you’re going to want to stop and make sure you understand how to go about making a decision of what stocks to trade — which brings us to how to trade stocks in just 7 steps:
- Get to know the stock market
- Learn the basics of trading
- Create a trading plan
- Open a trading account with a stock broker
- Practice before investing real money
- Mesure your returns
- Learn from your mistakes
1. Get to know the stock market
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, called a share. Owning shares of a company makes you a shareholder.
Investors typically buy stocks from companies they predict will increase in value over time. If this happens the stock can be sold for a profit. Many businesses distribute stocks to create an opportunity to raise money and invest to expand their company. Whilst for investors or potential investors like yourself, stocks enable a growth opportunity for your money and outpace inflation.
What is stock trading?
The stock market provides a secure and regulated environment for traders to buy and sell shares in publicly listed companies with low operational risk. The supply and demand of each company’s stock is tracked through stock exchanges, which directly affects stock prices.
A stock trader typically refers to someone who regularly buys and sells stocks to benefit from their daily price fluctuations.
The main goal when investing or trading the stock market is to make a profit by selling the stock for more than you paid for. Buy low, sell high. However, depending on your trading strategy you can also make money by speculating on the price to decrease in value.
2. Learn the basics of trading
You’re here because you want to learn how to trade. Maybe you’ve seen the success of a professional trader? Or maybe you just want more income. Whatever your reasons, learning to trade can change your life.
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3. Create a trading plan
A trading plan gives you guidance on when and how you should trade. Without a plan, you might be constantly worrying about which market to trade, whether to take your profits early, let your losses run, or if you’re missing out on other opportunities in different markets.
It is vital for your trading plan to be personal to you. It’s no good copying someone else’s plan, because that person will very likely have different goals, attitudes and ideas to you. They will also almost certainly have a different amount of time and money to dedicate to trading.
By following a trading plan, and maintaining a trading diary, you can keep a record of what works for you and what doesn’t. This is useful for analysing your own performance and improving as a trader. A full record of every trade makes it much easier to learn from your mistakes, and to evaluate which trades you won (or lost) by luck or by judgment.
4. Open a trading account with a stock broker
What is a stock broker?
Publicly listed companies sell their stock through a stock market exchange, such as the New York Stock Exchange (NYSE) or Nasdaq, 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.
How to find a stock broker?
Picking your broker is not much different from picking a stock. It starts with knowing your investing style. And today you have more options than earlier generations could dream of.
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.
Your choice of broker should be influenced by your investment style. Are you a trader or a buy-and-hold investor?
Traders don’t hold onto stocks for a long time. They’re interested in quick gains greater than the market average based on short-term price volatility, and they may make many trade executions over a short time span. If you envision yourself as a day trader, you’ll want to look for a broker with very low execution fees, or trading fees could take a big bite out of your returns.
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5. Practice before investing real money
- See if you like trading
- Practice good money management techniques
- Learn to manage your emotions when trading
- Test a new trading strategy without risking real funds
6. Measure your returns
This is essential advice for all types of investors — not just beginners. Tracking how much you make on your demo account will give you a clear indication of how much you could be making when you start trading on a live (real) account. It is also important to measure your progress when you trade live funds. This will allow you to see how your trading strategy is performing under the current market conditions.
Measure your returns against an appropriate benchmark. The bottom-line goal for picking stocks is to be ahead of a benchmark index, such as the SNP500. Measuring results is key, and if a serious investor is unable to outperform the benchmark (something even pro investors struggle to do), then it makes financial sense to invest in a low-cost index mutual fund or ETF — essentially a basket of stocks whose performance closely aligns with that of one of the benchmark indexes.
7. Learn from your mistakes
Stock trading vs. investing: What’s the Difference?
You need to decide which type of trader you are and ask yourself exactly what you want to achieve by trading the stock market. With fluctuations in the market happening on a daily basis there are two main strategies used by investors: short-term trading (day trading) or long-term trading (investing) also known as buying and holding.
Day trading stocks:
Short term trading is about using the constant volatility and fluctuating prices in the market to your advantage. Traders using this method watch the markets for opportunities to buy low and sell high stocks, making numerous trades over a short time period.
This type of trading comes with the potential to make a fast profit, but is also associated with risks. It is incredibly difficult to predict how the price of a stock will change over the short term and the stock price could easily go against you.
Stock day traders also end up paying more capital tax the more frequently they sell their shares. This was likely 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.
Investing in stocks:
As mentioned earlier, investing in the stock market is a way to put your money to work for you. 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.
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.
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. Correctly timing the stock 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.
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 individual investment.
Alternatively, you may want to consider using mutual and exchange-traded funds to benefit from a vast amount of top-performing companies.
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.
Advantages of trading the stock market?
- Investment gains: 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.
The hardest part of cryptocurrency trading is that all-important first step to getting started. At starttrading.com we make this step that little bit easier, you don’t have to start trading alone. Take your trading to the right level, simply sign up to our FREE online trading course so that we can give you the help you need today!