• January 27, 2022

The Fundamentals Of Stock Trading

There is something somewhat mysterious about misunderstood concepts. One of the most misunderstood concepts in trading. Many hear about trading stocks and simply dread it. Others approach it as a get-rich-quick scheme.

The reality of stock trading is that it comes with risks. This is why traders should understand how the trading world works for the best results. Traders can build up their net worth through stock trading and usually, this requires, implementing good strategies, time, and patience. Let’s look at what stock trading is.

What Is Stock Trading

Stocks are financial instruments that represent ownership in a company. Usually, stock owners, who are also referred to as stockholders, own a percentage of the company. They have a claim on the company’s assets and earnings equivalent to the percentage they own.

Stock trading, therefore, is the exchange of stocks in a stock market. Traders buy or sell stocks intending to make a profit.

Stock trading makes it possible for investors to make a profit through the buying and selling of securities. There are several things to consider if a stock trade is to be profitable

  1. Timing

This is dependent on predictions on when prices are likely to move. Traders buy or sell assets based on their anticipation of price fluctuations. Speculations can either be upward or downward but either way, the trader can expect a profit if the predictions were correct. However, traders can also miss their window or simply make wrong analyses which leads to losses.

  1. Mispricing

This usually occurs when there is a difference between the security’s current price and its fundamental value. Various events can trigger mispricing. This allows traders to obtain assets at a lower price than their value.

  1. Buy Positions

Another aspect that can increase profitability is a long buy position. Securities can be treated as collateral where a trader needs a loan. This can be profitable in the long run especially if the trader invests the loan into some income-generating venture.

  1. Liquidity

Stocks are highly liquid assets. This means that they can be converted into cash quite easily. This is caused by the number of available traders in the market. Traders can easily make money if they wish to sell.

Types Of Stock Trading

Most stock traders trade in the short term. Rather than looking for assets to hold onto for years, they seek to make some income by capitalizing on daily price fluctuations. Traders mostly trade for periods ranging from a few minutes, hours, days, or weeks. There are two main types of stock trading.

  1. Active Trading

This is a mode of trade used by traders who want to make the most of short-term events. They trade frequently which means they can trade more than 10 times a month. Active trading depends on the fluctuation of prices which means that traders need to be keen on timing.

  1. Day Trading

These a traders who exchange stocks daily. Their trades could last a few seconds, minutes, or hours depending on the trader and the price movements. This mode of trade is essential for traders who don’t want to get into the details of the workings of a company. Day traders need to monitor price movements closely, to get the best out of them.

How To Trade Stocks

Stock trading isn’t rocket science. It simply takes a clear understanding of how it works and implementing good strategies. Here are a few essential things that you need to do.

Find and select a good broker.

  • Set up a brokerage account with the broker you chose.
  • Set up a budget of how much you are willing to spend.
  • Research stocks and consider which ones you want to invest in
  • Learn to use and set market orders and limit orders.
  • Practice trading using a demo or virtual account
  • Measure your returns.
  • Keep records of trades for future analysis.

Wrapping It Up

Stock trading is a form of trading that allows traders to exchange stocks. There are a lot of factors that traders need to consider if they want to trade successfully. However, with proper analysis and strategizing, traders can gain a good profit. Stock trading comes with several benefits including the ability to build a trader’s net worth.