If you’ve heard good things about stock trading but don't know where to get started being a trader this guide is for you. Perhaps you’ve got some money that you don’t want to put in a bank, but instead, you want it to multiply. Stock trading has become a common practice of people around the globe who want to do the same.
But, as with all investments, stock trading does come with its share of risk. You could make no profit at all, and even lose some of your initial investment. The more you know about stocks before you begin, the more potential pitfalls you can avoid once you begin trading. This guide will give you an introduction to stock trading and shares, and how you can start making them work for you.
What is Stock Trading?
At its most basic, stock trading is an investment. Stock trading is one of the most common forms of investing and is a great way for beginners to gain experience in this area. In essence, you’re putting money away, to get more money later. The key is finding the right places to put your money so that it will multiply, and you can make a profit.
When you buy a stock at a set price, you then own those assets, also known as shares. Depending on what kind of stocks you’re trading, you can sell your shares whenever you like, at their new price. To begin buying shares, you just need to decide how much you’re willing to invest, and how much risk you’re willing to take.
Any investment will come with risk. In this case, a risky stock is a stock that has a high chance of decreasing in value, thus losing you money. However, oftentimes these same stocks could also make you a lot of money, so it’s about doing your research and finding the right stocks to invest in.
Another factor that plays into the amount of money you end up with, is the length of time that you own your stocks. Many people play the long game when it comes to stock trading, and do not sell their shares for years, or even decades after they’ve bought them. This is a great way to ensure you make a significant profit on your original investment. If you want to make money quickly, however, you might have to take bigger risks.
How Does Stock Trading Work?
Stocks and Shares
When a company is planning on going public, it will be listed on the stock market with a set number of shares. Investors can then purchase these shares, in the hopes that as the company grows and finds success, their shares will grow in value. Buying into a company on the ground floor like this is known as buying IPOs or an Initial Public Offering. There is some symbiosis to this trade, as the company will then use the money from the shares they’ve sold to invest in their growth.
Markets and Exchanges
Shares in a company are bought and sold on a market known as an exchange. These are regulated markets, meaning the countries that these exchanges are based in will have checks and balances in place to protect investors. Some of the most famous exchanges are those on Wall Street in New York, and the LSE or London Stock Exchange. Whatever country’s exchange a company is listed on, will determine the currency of prices.
Risk and Reward
Stock exchanges are subject to a myriad of external factors, that affect the prices of certain shares. If a certain industry is seeing a significant amount of revenue, then it’s likely that businesses in that industry will see an increase in share prices. This is because confidence in the companies’ success is going up, and more people are buying shares in them. For the best profits, you ideally want to predict these things happening, and purchase shares before prices start to rise.
Brokers and Traders
Stockbrokers are individuals or services that will invest your money for you, for a pre-determined fee. They usually have a great deal of experience with different markets and can accurately predict what shares are going to increase in value. You tell them how much you’re willing to invest, roughly how long you’d like to own your shares, and what your profit goals are. They then do the buying and selling for you, and you collect the profit minus the broker’s fee.
Where Can You Trade Stocks?
To begin trading, you don’t need a full-service broker, but you do need access to a trading platform. These are also known as brokerages. A brokerage is often an online site that can execute trades for stocks. By using a brokerage online, you can purchase, manage, and sell your stocks all in the same place.
But be warned, when using an online brokerage as an independent trader you oversee what stocks you choose to trade. They will simply execute the trade orders for you. You won’t receive any advice from a full-service broker, but you’ll likely also save money, as their fees will be lower.
If you do choose to use an online or discount broker, once you’ve decided on a company stock to buy, over time, your shares will increase or decrease in value. You can sell these stocks when they reach a price that suits you. Of course, if your stock is rapidly decreasing in value, you might like to sell your shares and cut your losses. Or you can take a chance and wait it out until the market bounces back. Selling your shares is not the only way to make a profit, however. You’ll be paid a regular dividend on the number of shares you own after a certain period if the company is doing well enough.
An Example Stock Trade
Sometimes the easiest way to get to grips with stock trading is to see it in action. That’s why we’ve included this handy example of a simple stock trade, to demonstrate the basic steps you’ll need to take. Remember, countless variables make every stock trade unique, so always get to grips with the full terms of any trades you choose to make.
You want to purchase some shares, and you notice that the food delivery industry in New York has taken off over COVID and shows no signs of decreasing profits. However, as delivery services raise their prices, people are looking toward budget options instead.
You find shares in an affordable food delivery company that is based in New York and listed on the New York Exchange. The company is called we love food, and its stocks are known as WLF.
The current price of WLF is $5.59 a share. You decide to buy 50 shares.
Number of Shares x Current Price = Total Purchase Price
50 shares x 5.59 = 279.5
Total Purchase Price = $279.50
Just as you predicted, over the next year, customers begin to choose budget food delivery services, instead of the main competitors.
After 12 months, the WLF share price has risen to $11.89. You decide to sell your shares.
Number of Shares x New Share Price = Net Profit
50 shares x 11.89 = 594.5
Net Profit = $594.50
Net Profit - Initial Investment = Gross Profit
$594.50 - $279.50 = $315
Gross Profit = $315
How to Start Stock Trading
Here are some steps to get you started in stock trading online, and help you make your first purchase of shares.
- Decide what kind of stocks you want to trade, and how much you’re budgeting.
- Find the trading platform or brokerage that matches your goals. Make sure to look into any sites you’re thinking of using and find one with fees and an interface that suits you.
- Set up an account with your chosen brokerage.
- Add money to your online wallet.
- Find the exact shares you want to buy. Shop around to find the ones in promising markets.
- Purchase the number of shares you want. You can often choose which currency the prices are shown in, but they’ll always convert back to the price in the currency of the country the stock is listed in.
Et voila, you have now invested your money in shares. You now own these assets and can keep them for as long as you like. To trade these stocks, you just need to sell them when, hopefully, they reach a price that’s in line with your goals.
Important Stock Trading Terms
To finish, here are some terms you may see often in the world of stock trading, along with their meanings. It’s useful to learn these terms so you can understand everything about the trading process, and not get caught out in new situations. You can also use these terms to research the different areas of stock trading and begin your journey to becoming an expert investor.
- Assets - A resource, such as a share, that has at least the future expectation of an increased financial value. Purchasers of assets are generally making investments.
- Averaging Down - A technique used by traders to capitalize on a stock that is decreasing in value. Traders buy more of the stock that they have lost money on when it is at a new low price. The average purchase price of the stock has therefore decreased, and when the market bounces back, profits are once again possible.
- Blue-Chip Stock - The stocks of a Blue-Chip company, or a company that is considered to be a “safe” investment. Blue Chip companies are often industry leaders, who have been public for a significant amount of time and have a relatively stable share price.
- Broker - An individual who trades stock on an exchange for their clients.
- Commodities - These are things such as wheat and oil. Shares in commodities are traded on a commodity market and work much the same as stocks.
- Contract - This is a financial instrument that determines the nature of purchase or sale on an exchange. Options contracts are the most popular.
- Day-Trading - A form of trading that involves buying and selling shares within 24 hours. Day traders usually buy large amounts of shares and are hoping for even the smallest price increases. There are a lot of regulations that day traders must abide by.
- Dividend - A portion of profits paid to shareholders by a company, quarterly, bi-annually, or annually. The amount depends on the number of shares you own.
- Exchange - The market where shares are traded.
- Index - A market index is a collection of companies, usually in the same industry or market cap, that make up a section of the financial market.
- Large-Cap / Mid-Cap / Small-Cap - These terms are a way to categorize companies depending on their market capitalization. Market capitalization is calculated by multiplying the total number of shares a company offers on an exchange, by their current price. Large-cap companies have market capitalizations of >$10 billion.
- Orders - Orders are instructions that can be written into a contract to determine different actions on trade. For example, limited orders ensure automatic sales if your stock reaches a certain price, be it low or high. This price is known as a strike price.
- Penny Stocks - Penny stocks are companies whose share price is lower than $1. These are risky but can provide some very high returns.
- Shares - A portion of a company’s value. When you buy a share in a company, you then own a certain portion of that company and are entitled to an equal profit dividend.
- Stock Trading - Refers to the buying and selling of shares on a market using a certain currency. Stocks are never traded directly for their value in other stocks.
- Traders - An individual who buys and sells shares with or without the help of a broker, to invest money for future profit.
Sources:
- https://www.investopedia.com/articles/basics/06/invest1000.asp#toc-what-is-the-difference-between-a-full-service-and-a-discount-broker
- https://www.raisin.co.uk/investments/how-stock-market-works/
- https://www.investopedia.com/do-i-need-broker-to-buy-stocks-5213282
- https://www.ig.com/uk/glossary-trading-terms
- https://www.fool.com/investing/stock-market/types-of-stocks/
- https://www.investopedia.com/investing/basics-trading-stock-know-your-orders/
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