Stock Trading Explained
The stock market is the bedrock of the global economy and the core of any savvy investment strategy. The global stock market is estimated to be worth $90 trillion, with hundreds of billions of dollars worth of stock being bought, sold, traded, and speculated upon on a daily basis.
First off, it’s worth providing a rundown of what stock trading actually is, as well as some of the key stock market terms you need to be aware of. In a nutshell, stock trading is the act of buying and selling the shares of a particular company or companies.
When you buy a piece of company stock, you own a little slice of that company. The stock of any company will rise and fall according to a vast multitude of factors. The goal of a stock trader is to buy company stocks at the right time and later sell them for a profit.
On the trading floors of Wall Street and the City of London, as well as on online stock trading platforms, there are a number of important, everyday terms you will come across, such as:
- Arbitrage: the act of buying a stock on one market and selling it on a different market at a higher price
- Bear Market: a term describing when a market is facing a general downward (negative) trend, with prices falling
- Bull Market: a term describing when a market is facing a generally upward (positive) trend, with prices rising
- Blue Chip Stocks: the stocks of massive, industry-leading companies
- Broker: A person who buys or sells company stock on your behalf, often in exchange for a fee, or commission
- Close: the time when a particular stock exchange finishes trading for the day
- Day trading: the practice of buying and selling stock all within the same day in an attempt to capitalise on small price fluctuations
- Dividend: a percentage of a company’s annual earnings that is paid out to shareholders
- Execution: a term describing when a trader has completed a transaction on the stock market
- Leverage: the act of borrowing shares from a broker in order to sell them at a higher price and pocket the difference
- Margin: this is capital that is borrowed from a broker in order to invest in stocks
- Portfolio: the complete collection of a person’s investments, including all assets such as stocks, bonds, CFDs, and cryptocurrencies
How Stock Trading Works
Buying stocks is not the same as buying something from the supermarket. You cannot buy and sell stocks directly as an individual. Rather, you must go through a licensed broker that can buy and sell stocks on your behalf.
Thanks to digital technology, this process can be done instantaneously via online stock broker platforms. You can simply click on stocks that you wish to buy and sell them at exactly the time that you wish to, with your broker acting as the middleman.
When people buy and sell different stocks, this too has an impact on the value of that stock. If a lot of people begin buying up stock in a certain company, that company’s stock will rise. Alternatively, if a lot of investors are selling or ‘dumping’ their stock in a certain company, that company’s stock value will fall.
Types of Stocks You Can Trade Online
There are many different types of stocks that you can trade online, covering virtually every industry on Earth and almost every country and territory in the world.
What Are the Most Popular Trading Strategies?
Both veteran and beginner traders alike adhere to trading strategies to help them stay on top and build their portfolio. There is no guaranteed winning strategy when it comes to trading stocks, but there are some that might work for you, depending on what kind of trader you are. Here are some of the most popular trading strategies that you’ll find on brokerage platforms in 2020:
In a nutshell, day trading is the practice of buying and selling an asset, such as a stock, all within a single trading day. The goal is to capitalise on short-term price fluctuations within a single asset.
Day trading can be done on any market in the world and has been popular for decades. The goal is to time the buying and selling of stocks according to market events and developments that occur throughout the day that might affect the price of that asset.
Successful day trading requires a lot of knowledge, experience, and resources.
This is a strategy that is often used by day traders, given that it also focuses on more incremental, short-term gains and losses.
It describes the process of attempting to make numerous profits in a single day from daily price changes, often focusing on buying and re-selling the same asset multiple times a day.
The idea is that short-term price changes can add up into a handsome profit. This is a strategy that requires flawless attention to detail to pull off correctly.
This is essentially the polar opposite of day trading. Position trading describes the process of buying an asset with the attention of holding onto it for a long time, in the hopes that it will appreciate in value over that time period.
People who describe themselves as position traders might hold on to an asset for several months or even years, often executing less than a dozen trades per year. While this is a strategy that requires a lot of patience, it can pay off with the right investment decisions.
This is best described as a trading strategy with a medium-term outlook. Swing traders will typically hold onto a stock for a couple of days up to a couple of weeks, hoping to capitalise on significant price shifts they expect or hope will occur during this specific period.
For swing traders, highly volatile stocks that exhibit a lot of movement are usually the preferred choice. Swing trading comes with a lot of risks attached to it, given the vulnerability of the investor’s position, but the payoffs can be massive when it is done correctly.
What is a Stock Broker?
Stockbrokers have existed since the very earliest stages of the stock market hundreds of years ago. They are professional financial services workers who have a direct connection to numerous stock exchanges.
It is this connection that is important for people looking to become traders. Trading stocks requires membership of a stock exchange, which brokers can offer to those looking to acquire their services.
When you hire a stockbroker, they will work on your behalf to directly buy and sell the stocks that you want to trade. A professional, licensed, and regulated stockbroker is absolutely essential for anyone who wishes to trade stocks on financial markets. You cannot trade without one.
Fortunately, thanks to the rise of the internet, hiring a stockbroker is now an easy, affordable, and almost instantaneous process.
Best Stock Trading Sites
If you’re looking for an online stockbroker, there are a number of websites that have a strong reputation for transparency, efficiency, customer service, and value for money. Here are some of the best stock trading sites for you to consider.
Simply the most reputable online stock trading platform in the business. Fidelity customers have the benefit of accessing some of the world’s greatest financial expertise, with countless on-site resources to help aspiring traders. With thousands of employees all over the globe, Fidelity offers world-class services at affordable prices.
Robin Hood is a millennial-friendly, tech-centric platform that offers commission-free trading. The user-friendly website allows you to view all of your investments in one place, while also executing instant trades across a staggering array of markets. Robin Hood is ideal for those looking for a sleek interface and no trading fees.
The boisterous new kid on the block. eToro is flashy and in-your-face, but it also delivers an outstanding brokerage service, allowing all customers to trade thousand of different types of stocks and assets all in one place. For those looking to invest in non-conventional stocks, eToro will definitely have something for you.
Best Stock Trading Apps available to Australian Traders
If you choose to trade stocks online, then having a stock trading app that allows you to buy and sell on-the-go is essential. Here are some of the most acclaimed stock trading mobile apps of 2020:
WeBull is a completely free trading app that does not charge any commission on trades. There is also no minimum deposit required for trading with WeBull. Although it only offers stocks and CFDs, it is very user-friendly and straight-to-the-point.
If you are completely new to the world of stock trading, then SoFi is the app for you. It features a huge array of easy-to-understand educational resources on trading stock, as well as its incredibly user-friendly application.
For traders that are more experienced, TradeStation is a solid choice. This app allows you to automate and customize your trading strategy, with a staggering array of settings and commands to choose from.
Top Stock Market Indices
- S&P 500
- Russell Indices (Russell 1000, Russell 2000)
- TSX Composite (Canada)
- FTSE Index (UK)
- Nikkei 225 (Japan)
- DAX Index (Germany)
- CAC 40 Index (France)
- CSI 300 Index (China)
- Sensex (India)
How to Get Started Trading Stocks
Made it all the way here and you’re itching to start trading stocks online? Here’s a short guide to help you get started!
1. Choose a Broker
When trading stocks, the first step is to choose the right broker for you. Make sure to do your research and read up on the latest and most detailed stockbroker reviews before making your decision.
2. Open an Account
Once you have decided on a broker, it’s time to create your own account. To do this, you will often need to provide your personal details. Your account will often need to be verified before you can start trading, so expect to provide a photo ID and a proof of residence document. Verification can take anything between several minutes and several days.
3. Set a Budget
Before buying a single share, make sure you have a strict trading budget in mind. It can be easy to get carried away, so know your limits beforehand. Decide how much of your money you are willing to commit to trading and investing and do not go over that amount.
4. Get to Know Your Platforms’ Broker
Just because you have created an account and begun trading means you should stop there. Take the time to explore all of the features and perks that a stockbroker platform has to offer. You might be pleasantly surprised at the freebies you can get.
5. Train with a Virtual Trading/Demo Account
In the world of investing, practice makes perfect. Before committing yourself with actual funds, use a demo account to get a good feel for a platform. This will help you decide whether a stockbroker is right for you before you begin trading.
6. Set Up Goals
It is important to established investment goals so you know what you are working towards. Try and decide on how much you wish to invest each week and how much you want to see your portfolio grow by over the course of a year.
7. Keep Your Focus
Finally, it is important to stay on the ball. Trading stocks can be an emotional business, but try to avoid making trades when tensions are high. Stay calm, collected, and focused whenever you are trading stocks.
Essential Stock Trading Tips
- Stay Cool
Whatever happens, check your emotions at the door. Getting overly excited or upset about a trade can cloud your judgement and lead to poor investment decisions. A clear head is your most powerful asset when trading stocks.
- Plan Ahead
Instead of instinctively responding to price shifts in the market, you should plan ahead with your investments before you even buy them. Decide under what circumstances you would decide to sell a stock or buy more of it. This will help you when times are panicky.
- Educate Yourself
Stockbrokers offer access to a massive array of educational resources for a reason. Do your reading if you want to truly understand how markets work and how you can use them to your advantage.
Stock trading is widely practised, but it does come with a number of risks that all traders need to be aware of before they begin trading. There are obvious risks associated with market volatility. Remember, if a stock you have invested in loses all of its value, you will not get that money back.
There are liquidity issues, which occur when you cannot sell a stock or asset due to issues in the market. This can easily wipe out an investment. There are risks concerning untrustworthy stockbrokers that could rip you off or give poor advice.
There are risks associated with not understanding how stock trading profits are taxed. It is important to be aware of these before you open your first brokerage account.