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What is Stock Trading? Understand the Basics

Disclaimer: The products or services discussed in this article may not be offered by Taurex and may only be listed here for educational purposes.

Are you aware that robots make 90% of all stock trades? With advanced technology and powerful computers, robotic quantitative algorithms and AI have taken centre stage, shaping the way stocks are bought and sold.

A machine-dominated market landscape can make new or potential traders wonder if pursuing or starting stock trading is even worth it.

Is it worth understanding how stock trading works, including the terminology, concepts, and strategies that underpin successful trading? Is it worth figuring out how to correctly choose and seek out a reliable online broker to manage your trades effectively? 

No matter where you stand on your trading voyage, the answer to all these questions is a resounding yes. It’s crucial to understand the ongoing significance of human traders in maintaining liquidity and efficiency in the stock market. 

This article provides a beginner-friendly guide to stock trading if you’re ready to become part of that elite 10%. It discusses stock trading, including strategies, costs, terminology and concepts involved, and the steps to start your trading journey.

What Is Stock Trading?

Stock trading is all about the exciting world of buying ownership in businesses and tapping into their growth potential by selling your share. Think of stock trading as choosing which companies you want to invest your money in. When you own stock, a part of the company belongs to you.

By choosing the right stocks that match your goals and approach, you can set yourself up for potential monetary gains in two ways: by seeing your investment’s value rise (capital appreciation) or by receiving a share of the company’s profits (known as dividends).

Types of Stock Trading

There are numerous types of stock trading strategies- enough to overwhelm beginners and sometimes even veteran traders. Each variation caters to different objectives and approaches, from scalping and momentum trading to contrarian trading.

For now, let’s focus on the two common stock trading strategies:

  • Active Trading: By closely monitoring market events, company-specific news and a company’s past performance, active trading can help you generate short-term profits. 

With this style of stock trading, you must make swift decisions to buy or sell stocks based on market data.

For instance, you can buy shares of a healthcare company’s stocks a few days before they release their earnings report, where you anticipate an uptick in the stock price. You can then sell your shares when the stock price meets your desired percentage gain.

  • Day Trading: If you know how to spot price swings and make rapid decisions, day trading may be suitable for you. It involves buying and selling stocks when short-term price fluctuations occur. Using this strategy can make profits within a single trading day.

For example, you spot a stock rapidly declining during the morning and fluctuating throughout the day. As a day trader, you aim to buy during the price dip and sell when it begins to recover, securing your profits.

Stock Trading vs Buy and Hold

Stock trading and buy-and-hold investing are two different approaches to investing. Stock trading involves actively buying and selling stocks to profit from short-term price swings.

On the other hand, buy-and-hold focuses on stock investments for extended periods. This strategy relies on the premise that markets tend to rise in the long term, helping you profit from the passive potential growth.

Key Takeaways

  • Investing means putting your money to work with the goal of growing them in the long run.
  • Investing doesn’t guarantee monetary gains as there are risks of potential losses.
  • The stock market is where traders go to invest for the long haul, regardless of their experience.
  • Beginner investors can get help and advice from stockbrokers but can choose the DIY route.

“How Do I Start Trading Trading?”

Before you start trading, there are some critical things to remember as a beginner:

  • Do your homework: Smart trading begins with solid research. Explore different investment options and pick ones that align with your objectives and preferences. 

Using trading apps and trading tools can help streamline this process. Imagine the convenience of trading in real-time through a mobile app anytime, anywhere.

  • Create a game plan: Success in trading calls for a well-thought-out plan. Map out your entry and exit strategies, set up risk management techniques, and decide how you’ll divvy up your funds.
  • Start small and grow: As a beginner in the trading world, it’s wise to dip your toes in first rather than jumping right in. Begin with smaller investments and build up your experience before taking on bigger, riskier ones.

How to Trade Stocks

Embarking on your stock trading journey may seem daunting, but a few crucial steps can help you kick-start your trading experience on the right track:

  1. Open a Brokerage Account

Choose a reputable platform that offers the brokerage services and features you need, such as access to a wide range of stocks, ETFs (exchange-traded funds), and other investment products. Most importantly, pick a regulated broker.

  1. Set a Stock Trading Budget

Decide the amount of money you’re comfortable investing and can afford to lose. Setting a budget aligning with your financial situation and risk tolerance is critical when navigating the volatility of trading stocks.

  1. Learn to Use Market Orders and Limit Orders

Once you’ve set your brokerage account and budget, it’s time to place your stock trades. Here are two methods to do this:

  • Market order: This lets you buy and sell stock quickly at the best price possible.
  • Limit order: This buys and sells stocks for you at a specific price. Limit orders only occur if the stock’s price fits your set limit or is lower.
  1. Practice With a Paper Trading Account

Consider using a paper trading account to practice and sharpen your trading strategies without risking real money. A simulated trading account lets you gain experience and confidence in stock trading with virtual money. 

  1. Measure Your Returns Against an Appropriate Benchmark

Measuring your results is vital if you want to take stock trading seriously. Compare your returns against a relevant benchmark, such as the market index (S&P 500), NASDAQ index, or indices from the London Stock Exchange (LSE) like the FTSE 100.

Comparing your returns to a benchmark helps you gauge your current investment strategy’s effectiveness. It also allows you to optimise your trading strategy further to match your goals, risk tolerance, and preferences.

  1. Keep Your Perspective

Success in stock trading doesn’t mean investing only in the best stocks. Market volatility is a common occurrence, which is why keeping a long-term perspective is essential, especially if your goal is investment growth. 

Keep short-term gain from driving your decision-making if that differs from what you’re after.

How to Manage Stock Trading Risks

Managing risks is crucial in stock trading. Consider the following strategies:

  1. Lower Risk by Building Positions Gradually

Don’t go all-in unless you already know what you’re doing. Even then, trading pros won’t recommend it. 

Consider building your positions gradually first. This approach helps mitigate the impact of short-term market volatility.

  1. Ignore ‘Hot Tips’

Avoid making trading decisions solely based on rumours or speculative information. Conduct thorough research and rely only on reputable sources to help you make informed trading choices.

  1. Keep Good Records for Tax Purposes

Maintain detailed records of your trades, including purchases, sales, and dates. Documentation is essential for tax purposes and can help you accurately report your gains or losses to the HMRC (HM Revenue and Customs).

What’s the Difference Between Stock Trading and Investing?

While stock trading involves actively buying and selling stocks in the short term, investing focuses on long-term holdings with the aim of wealth accumulation.

Investing typically involves a more patient approach and can include strategies such as dividend investing, real estate investment trusts (REITs), and mutual funds.

How to Invest in Stocks: A Beginner’s Guide

Although getting into stock investments can be complex, it’s still a time-test method of utilising your money to generate more wealth over time. The good news is that you don’t need a fortune to start.

Each trader will have goals, risk tolerance, patience, and strategies. Remember, growing your money by investing takes time; it’s a marathon, not a sprint. Still, whether you invest $5,000 or $50, every dollar counts. 

Steps to Get Started

  1. Define Your Tolerance for Risk

Figure out how much risk you’re comfortable with and willing to take. Different stocks come with varying levels of risk, so choose ones that match your comfort zone.

  1. Decide on Your Investment Goals

What do you expect to gain by investing? Are you playing the long game or looking for short-term wins? Are you after a steady stream of income or aiming for growth? 

Clear goals will guide your investment decisions.

  1. Determine Your Investing Style

Are you the type to dig into individual stocks, or do you prefer a more passive approach? Your risk tolerance and goals will help you determine the best fit for your investing style.

Let’s say you prefer a long-term investment and are willing to hold shares rather than sell them. In that case, investing in IPOs (initial public offerings) may be better suited for you.

  1. Choose Your Investment Account

You’ll need a brokerage account to make stock trades. This can be a retirement plan many employers offer or a taxable account from a broker or an online trading platform.

  1. Learn to Diversify and Reduce Risk

Diversification reduces your risk by spreading your investments across several assets. 

With limited funds, investing in individual stocks can be risky. That’s where mutual funds and ETFs come in. They offer diversified portfolios by owning multiple stocks and investments.

Minimums to Open an Account

To start online stock trading, you need a brokerage account. The minimum to open one can vary. Your account application will only be accepted if you make the minimum deposit.

Some trading firms won’t even ask for minimum deposits. Others may entice you to open an account by offering commission-free trades. Still, other trading firms offer reduced costs in account management fees and trading fees if your account balance is more than a certain threshold. 

The Costs to Invest in Stocks

Nothing is free or gained without effort. Brokers have to make money through commissions and other fees paid by their customers. 

These fees can add up, depending on how often you trade and how much money you invest. The costs can impact your portfolio’s return and bankroll.

Consider the following costs associated with investing in stocks:

Commissions and Fees

Brokerages may charge commissions or fees for executing trades and managing your account. Commission fees range from $2 to $10 per trade. At the same time, some brokers offer zero-commission trading accounts.

Mutual Fund Loads

Mutual funds may have sales loads and fees charged when buying or selling shares. These fees are generally based on the fund’s assets or management expense ratio (MER), which can be between 0.05% and 2% annually.

Online Brokers

Choose an online brokerage platform that suits your trading or investing needs. Consider trading fees, account features, research tools, and customer support.

Full-service Brokers

Full-service online stockbrokers offer various traditional services, such as personalised investment guidance and opportunities like estate planning. That said, full-service brokerage tends to come with higher fees, which can be a percentage of the transactions, and annual membership fees.

Discount Brokers

Discount brokers provide trading services at a lower cost than full-service brokers because they don’t offer custom-tailored investment advice. That said, discount brokers are great options for traders who can and want to research and make their own investment decisions.

Stock Market Simulators

Stock market simulators or virtual trading platforms allow you to practice trading stocks without using real money. They provide a risk-free environment to hone your skills and test different strategies.

FAQs

  1. Is trading stock a good idea?

Stock trading is a viable strategy for individuals who manage their investments and potentially generate returns actively. However, it’s essential to understand the risks and have a well-thought-out trading strategy.

  1. What is the difference between a full-service and a discount broker?

A full-service broker offers personalised investment advice and various services at a higher cost. On the other hand, a discount broker provides self-directed trading platforms at reduced commission rates, giving you more control at a low cost.

  1. What are the risks of investing?

Investing involves various risks, including market volatility, economic downturns, and individual company performance. Diversifying your portfolio, conducting thorough research, and regularly monitoring your investments are critical for success in stock trading.

  1. How do commissions and fees work?

Commissions and fees are charges levied by brokerage firms for executing trades and managing your account. These vary depending on the broker and the services you need. It’s essential to consider these costs when assessing the overall profitability of your trades.

  1. What’s a good stock trading strategy for beginners?

If you’re a beginner, a good stock trading strategy often involves thorough research, understanding the fundamentals of the investments you want to put money in and having a disciplined approach to risk management.

  1. Can you trade stocks with $100?

Yes, as long as the share price is under $100. Many brokerage platforms now allow trading with smaller amounts of money, including fractional shares. This enables you to invest in high-priced stocks with limited funds.

  1. What time can I start day trading?

Day trading typically starts when the stock market opens. The trading hours for NYSE’s wall street and U.S. stocks are 9:30 AM to 4 PM. The London Stock Exchange trading hours are between 8:00 AM and 4:30 PM.

  1. How can I learn stock trading at home?

Resources on stock trading are aplenty. Learn stock trading at home with online courses, books, and educational websites. You can also use trading apps and tools, virtual trading platforms, and stock market simulators to practice trading without risking real money.

  1. Can you make a living day trading?

Yes, it’s possible to make a living day trading. However, it involves high risks, requiring significant skill, experience, and dedication to avoid significant financial losses.

  1. How do day traders make money?

Day traders profit from short-term price fluctuations in the financial markets. They often utilise technical analysis, leverage, and short-selling strategies to exploit movements in the global markets.

References

  1. 102 Incredible Unique Stock Market Facts & Statistics 2023
    https://www.liberatedstocktrader.com/stock-market-statistics/
  2. Just 10% of trading is regular stock picking, JPMorgan estimates
    https://www.cnbc.com/2017/06/13/death-of-the-human-investor
  3. Who’s Better at Stock Picking: Human Traders or Computers?
    https://www.kiplinger.com/investing/whos-better-at-stock-picking
  4. Capital Appreciation: Meaning, Types and Examples
    https://www.investopedia.com/terms/c/capitalappreciation.asp
  5. What Is a Dividend?
    https://www.investopedia.com/terms/d/dividend.asp
  6. How Stock Trading Works
    https://www.nerdwallet.com/article/investing/stock-trading
  7. Buy and Hold vs. Active Trading
    https://investorjunkie.com/investing/buy-hold-vs-active-trading/
  8. How to Invest in Stocks: A Beginner’s Guide
    https://www.investopedia.com/articles/basics/06/invest1000.asp
  9. Pros and Cons of Paper Trading
    https://www.investopedia.com/articles/active-trading/
  10. Stock Trading vs. Investing: What’s the Difference?
    https://www.nerdwallet.com/article/investing/stock-trading-vs-investin
  11. London Stock Exchange FAQs
    https://www.londonstockexchange.com/personal-investing/faqs
  12. Is Day Trading Profitable? How to Get Started
    https://www.investopedia.com/articles/active-trading/

Day Trading: The Basics and How to Get Started
https://www.investopedia.com/articles/trading/05/011705.asp

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