Stock market trading is a highway that leads you to opportunities for wealth creation. The share market has the potential to give you enormous profits. On the other hand, volatility is a critical part of the share market. As an investor or trader, you may see profits and losses, ups and downs. So, it is important to learn all about stock market trading, especially as a beginner.
Read more from Pepperstone Review
What Is Stock Market Trading
Stock Market trading typically means buying and selling shares in the secondary market on the same day. It can also mean buying and selling company shares to make a profit. So, it is necessary to get an understanding of the primary and secondary markets.
- Primary market: A primary market is where companies issue new securities and offer them to the public. So, the transaction happens between issuers and buyers.
- Secondary market: In the secondary market, you buy and sell shares issued in the primary market. The transaction takes place between seller and buyer. The stock exchange or broker acts as an intermediary in the secondary market.
Types of Stock Trading
This form of trade involves purchasing and selling stocks/shares in a single day. It’s also called intraday trading. If you are interested in such a trade, you need to close your transaction before the day’s market closes. This type of trade is popular for capitalizing on small-scale fluctuation in stocks/shares.
Day trading requires proficiency in market matters, a thorough understanding of market volatility, and a keen sense regarding the up and down in stock values. Therefore, it is performed mostly by experienced investors or traders.
It is also known as micro-trading. Scalping and day-trading are both subsets of intraday trading. Scalping involves reaping small profits repeatedly ranging from a dozen to a hundred profits in a single market day.
However, every transaction does not yield profits, and in some cases, a trader’s gross losses might exceed the gains. The holding period of securities, in this case, is shorter compared to day-trading, i.e., individuals hold stocks spanning a maximum of a few minutes.
This feature allows for the frequency of transactions. Similar to day-trading, scalping requires market experience, proficiency, awareness of market fluctuations, and prompt transactions.
This style of stock market trading is used to capitalize on short-term stock trends and patterns. Swing trading is used to earn gains from stock within a few days of purchasing it, ideally one to seven days. Traders technically analyze the stocks to gauge the movement patterns for the proper execution of their investment objectives.
In the case of momentum trading, a trader exploits a stock’s momentum, i.e., a substantial value movement of stock, either upwards or downwards. A trader tries to capitalize on such momentum by identifying the stocks that are either breaking out or will break out.
In case of upward momentum, the trader sells the stocks he/she is holding, thus yielding higher than average returns. In the downward movement, the trader purchases a considerable volume of stocks to sell when its price increases.
Position traders hold securities for months aiming to capitalize on the long-term potential of stocks rather than short-term price movements. This trading style is ideal for individuals who are not market professionals or regular participants of the market.
Best Trading Platform for Beginners
As a new investor, the best trading platform for beginners offers three essential benefits. First, the trading platform is easy to use. Second, the platform provides a variety of educational materials to encourage learning. Third, the best platform includes access to quality stock market research.
Here are the best online stock trading sites for beginners:
- TD Ameritrade– Best overall for beginners
- Fidelity– Excellent research and education
- Robinhood– Easy to use but no tools
- E*TRADE– A best web-based platform
- Merrill Edge– Great research tools
Process of Stock Trading For Beginners
The following tips will help you begin your journey in stock trading:
1) Open a Demat account:
To enter the stock/share market as a trader or investor, you must open a Demat account or brokerage account. Without a Demat account, you cannot trade in the stock market. The Demat account works like a bank account where you hold money to use for trading. The securities you buy are maintained electronically in the Demat account.
2) Understand stock quotes:
The price of a stock moves based on any news, fundamentals, technical analysis, and so on. By gaining knowledge about these aspects, you can enhance your knowledge of stocks and stock markets. This will help you to figure out the right price to enter or exit a trade.
3) Bids and asks:
A bid price indicates the maximum price you are willing to pay to buy a stock. The asking price is just the opposite. It represents the minimum price at which the seller is willing to sell the stock. To ensure a profitable trade, it is important to decide on the correct bid and ask price.
4) Fundamental and technical knowledge of stock:
Study the fundamental and technical analyses of the stock to plan your trading. Fundamental analysis evaluates security by measuring its intrinsic value. It considers various dynamics, including earnings, expenses, assets, and liabilities. Meanwhile, the technical analysis evaluates the stock based on the stock’s past price and volume chart to predict future potential.
5) Learn to stop the loss:
Volatility is an implicit characteristic of the share market. So, a beginner needs to understand the way of preventing heavy loss. While executing a trade, you need to set a stop-loss price to minimize the loss. Failure to put a stop loss may damage your capital heavily.
6) Ask an expert:
The share market is unpredictable. Nobody can predict a stock price accurately. But taking advice from an expert helps beginners make the right trading decision. It guides you to make the right choice.
7) Start with safer stocks:
A big capital loss, in the beginning, may bring your confidence down. A wise choice is to start with the less volatile stocks. That may give you a slow start. But those stocks are more likely to sustain a good performance even in adverse conditions.
How Does Stock Market Trading Work?
The workings of a system that can accommodate the trading of one billion shares in a single day are a mystery to most people. No doubt, our financial markets are marvels of technological efficiency.
You don’t need to know all of the technical details of buying and selling stocks, but having a basic understanding of how the markets work is important for an investor.
The concept behind how the stock market trading works is pretty simple. Operating like an auction house, the stock market enables buyers and sellers to negotiate prices and make trades.
The stock market works through a network of exchanges — you may have heard of the New York Stock Exchange or the Nasdaq. Companies list shares of their stock on an exchange through a process called an initial public offering or IPO. Investors purchase those shares, which allow the company to raise money to grow its business. Investors can then buy and sell these stocks among themselves, and the exchange tracks the supply and demand of each listed stock.
That supply and demand help determine the price for each security or the levels at which stock market participants — investors and traders — are willing to buy or sell.
Buyers offer a “bid,” or the highest amount they’re willing to pay, which is usually lower than the amount sellers “ask” for in exchange. This difference is called the bid-ask spread. For a trade to occur, a buyer needs to increase his price, or a seller needs to decrease hers.
This all may sound complicated, but computer algorithms generally do most price-setting calculations. When buying stock, you’ll see the bid, ask, and bid-ask spread on your broker’s website, but in many cases, the difference will be pennies and won’t be of much concern for beginner and long-term investors.
Historically, stock trades likely took place in a physical marketplace. These days, the stock market works electronically through the internet and online stockbrokers. The electronic markets use vast computer networks to match buyers and sellers rather than human brokers. While this system lacks the romantic and exciting images of the NYSE floor, it is efficient and fast. For the individual investor, you can frequently get almost instant confirmations on your trades if that is important. It also facilitates further control of online investing by putting you one step closer to the market.
That said, you still need a broker to handle your trades, as individuals don’t have access to the electronic markets. Your broker accesses the exchange network, and the system finds a buyer or seller, depending on your order.
Each trade happens on a stock-by-stock basis, but overall stock prices often move in tandem because of news, political events, economic reports, and other factors.
Regulating the Stock Market
A local financial regulator or competent monetary authority or institute is assigned to regulate the stock market of a country. The Securities and Exchange Commission (SEC) is the regulatory body charged with overseeing the U.S. stock markets. The SEC is a federal agency that works independently of the government and political pressure. The mission of the SEC is stated as: “to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.”1
Stock Market Participants
Along with long-term investors and short-term traders, many different types of players are associated with the stock market. Each has a unique role, but many of the roles are intertwined and depend on each other to run the market effectively.
- Stock Brokers, also known as registered representatives in the U.S., are licensed professionals who buy and sell securities on behalf of investors. The brokers act as intermediaries between the stock exchanges and the investors by buying and selling stocks on the investors’ behalf. An account with a retail broker is needed to gain access to the markets.
- Portfolio Managers are professionals who invest portfolios, or collections of securities, for clients. These managers get recommendations from analysts and make the buy or sell decisions for the portfolio. Mutual fund companies, hedge funds, and pension plans use portfolio managers to make decisions and set the investment strategies for the money they hold.
- Investment Bankers represent companies in various capacities, such as private companies that want to go public via an IPO or companies involved in pending mergers and acquisitions. They take care of the listing process in compliance with the regulatory requirements of the stock market.
- Custodian and depot service providers, which are institutions holding customers’ securities for safekeeping to minimize the risk of their theft or loss, also operate in sync with the exchange to transfer shares to/from the respective accounts of transacting parties based on trading on the stock market.
- Market maker: A market maker is a broker-dealer who facilitates trading shares by posting bids and asking prices, and maintaining an inventory of shares. He ensures sufficient liquidity in the market for a particular (set of) share(s) and profits from the difference between the bid and the asking price he quotes.