An In-Depth Guide To Stock Trading

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An In-Depth Guide To Stock Trading

A stock is a financial instrument which allows you to own a percentage of a company or entity. By purchasing a stock, you get a claim to part of the company’s assets and its profits. This instrument goes back centuries and has helped businesses grow exponentially through individual investors who each bought stock.

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The age of the Internet made stock trading much more accessible and simple, even for individuals with no experience of the market. Today, virtually anyone can buy or sell stocks with the click of a button and this has encouraged an unprecedented number of new stock traders.

Stock trading has been popularised by the successes of various personalities, amongst which Warren Buffet. Through the use of savvy investment strategies and an understanding of the market, many people have experienced successful results from their efforts. However, others, especially those who did not do their research or let emotions get the better of them, have lost part or all of their capital.

In order to understand whether stock trading is for you, you must first answer the following questions:

  1. Are you willing to continually learn and polish your trading skills?
  2. Are you willing and able to learn from your mistakes?
  3. Do you have the time to monitor your investment?

If you have answered yes to all of these questions, then there is a good chance that stock trading is for you. On the other hand, if you have answered no to any question, you should probably look at other investment opportunities. For those who answered yes to all questions, this guide will explain all you need to know about stock trading.

How to Open an Investing Account

The best way for you to start trading stocks quickly is to open an investment account. There are several types of accounts available, but this guide will focus primarily on opening a brokerage account.

By opening a brokerage investment account, you will be able to give out instructions to buy or sell a stock. Most online brokerage platforms, such as Plus500 and eToro, give you the opportunity to trade a variety of financial instruments apart from stocks, such as forex or CFDs.

Opening an account with Plus500 is simple and fast. You can take full advantage of the demo account in order to get used to the platform and carry out a few trial trades, risk-free. Similarly, by using eToro for stock trading you will be able to emulate trades of other traders, referred to as social trading, and also have access to vast educational support.

The Difference Between Stocks and Mutual Funds

The stock market offers two primary types of trades; individual stock trading and mutual funds.

Stocks

Buying individual stocks of a company are a great way to dip your toes in the market, and invest specifically in companies you believe will perform well. The price of each share depends on the company’s performance, with shares of better-performing companies normally costing more. 

Mutual Funds

Mutual funds are financial instruments which allow you to buy a small percentage of multiple stocks in just one transaction. This is a great way to diversify your portfolio with just one purchase and results in you owning a small piece of several companies. Investing in mutual funds often requires a minimum capital of $1,000. If you do not wish to invest this amount on just one fund, trading in individual stocks may be a better option for you.

Starting Your Investment

The best way to start stock trading is to keep things simple. Warren Buffet is known for recommending investment in a low-cost S&P 500 index (mutual) fund to the majority of traders who only trade part-time. At the same time, however, he also recommends investing in individual company stocks if you believe strongly in its long-term growth potential.

Deciding whether to focus on stocks or funds depends on many factors, including your investment capital. It is advisable that you do not spread yourself too thin, having multiple open positions and not be able to monitor them effectively. Initially, you should focus on opening a couple of positions, and see how they perform according to your strategy. As you gain more experience and, potentially, returns, you will be able to open more positions and further diversify your investment strategy.

Stock Trading Styles

There are several trading styles you can adopt as part of your investment strategy. It is best to choose a style and stick to it. By using a demo account you get the opportunity to try out all of these styles, and then choose the one you are most comfortable with.

Traditional Investing vs Trading

There is a difference between traditional investment and stock trading. Traditional investment is normally long-term and value-driven, whereas stock trading is normally short-term and profit-driven. Stock trading styles can be further categorized into Swing Trading, Day Trading, and Position Trading.

Swing Trading

Swing trading is a technique used to take advantage of market reversal points. This technique bases itself on the principle that after continued growth or slump, the stock price will eventually swing in the opposite direction. Successful swing traders are able to correctly predict upcoming swings and take full advantage of them. A significant skill of swing traders is their ability to pick the correct period charts with which to plot their strategy.

Day Trading

Day trading involves traders constantly involved in market movements, potentially opening and closing several positions on the same day. Such frequent trades are sometimes referred to as quantitative trading, and this allows traders to take advantage of smaller fluctuations in the stock’s price.

Position Trading

Opposites to day traders, position traders utilise a longer-term trading strategy which focuses on the main stock price trend. Position traders make use of various analysis tools, including the Relative Strength Index (RSI), to evaluate whether a trend is worth investing in or not.

Stock Market Fundamental Analysis

What is Fundamental Analysis?

A simple definition of fundamental analysis is understanding the asset’s environment. For example, fundamental analysis of coffee involves gathering data about the global demand and supply equilibrium, as well as medical studies pro or against coffee drinking. 

When trading stocks, fundamental analysis focuses primarily on studying company financial statements, especially revenues, sales and overall market outlook. The company’s financial position is also important and can help prospective traders to determine the true value of the stock. Useful fundamental analysis data for stocks include the Price to Earnings Ratio, the Price to Sales Ratio, Sales/EBITDA, as well as growth and profitability figures.

Application of Fundamental Analysis

Fundamental analysis is particularly useful when comparing a company’s current and historical performance. This process is called Trend Analysis and can help you identify the probability that a company will grow or scale down when compared to its own history and its current competitors.

Experienced and successful stock traders understand that anything and everything can affect the price of the asset. Geopolitical factors, media, market confidence are just some of the factors which contribute to a change in stock value.

Stock Market Technical Analysis

What is Technical Analysis?

Technical analysis is a common method used by online traders to determine the value of assets or securities by studying market activity data. Trading volume and the asset’s price as examples of such data.

Supply and Demand

When using technical analysis, supply and demand data is very important, more so, in fact, that the true value of an asset. Experienced traders look for this data to determine if the stock price will potentially rise or fall. As a result, the key figure to focus on is the potential difference in price, not the actual current price of the asset.

Candlestick Patterns and Indicators

Candlestick pattern graphs provide some of the clearest illustrations of a stock’s price history and future trend. In such graphs, the bear candle plots a closing price which is lower than the opening price, whereas a bull candle plots the opposite. If you would like to know more about understanding market graphs have a look at this guide.

Going Long vs. Going Short Explained

Going long refers to the most common form of trading, which involves buying low and selling high. Going short, however, is somewhat more complicated and refers to selling a stock before you even own it. Short selling is an advanced trading technique which uses margin trading to generate a return from a stock which the trader believes will fall.

While with a going long approach you can keep a stock until you decide to sell, going short could require additional investment if the stock’s price increases instead of decreasing.

Reading Stock Prices and Quotes

Understanding the true cost of a stock is slightly more complicated than just seeing its price. When using a stockbroker platform to buy stocks you will be presented with a price card for each company. On this card, you will find the Bid Price, the Ask Price, and the Last Price.

  • Bid – the price at which a seller would sell the stock
  • Ask – the price at which a buyer would buy the stock
  • Last – the price of one share

The price difference between the bid and ask is known as the price differential. This value helps to create price movements which come as a result of supply and demand. 

Bull and Bear Markets

What are their differences?

The overall movement of a financial market involves one of three patterns; the bull market, the bear market, and the flat market.

  • Bull – a market in which share prices are rising, encouraging going long traders to buy
  • Bear – a market in which share prices are falling, encouraging going short traders to sell
  • Flat – a less common market form which is also unpopular as it provides very little potential for successful trades

How do you distinguish Bull and Bear Markets?

By looking at a price chart for a particular stock over a long period of time you should be able to easily identify between bullish and bearish markets. Ignoring minor price fluctuations and focusing instead on the larger trend, you should be able to identify if the stock’s price is rising or falling, thus being able to determine whether you are viewing a bull or a bear market.

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