What Is Stock Trading and How Does It Work

Stock trading involves buying and selling company shares to make a profit, and it can be risky, especially if you lack basic stock market knowledge, research skills, and analytical thinking.

Don’t worry; we’re here to help you with a complete guide on how to open an account, stock trading strategies, and trading ethics.

Quick Insights

Stock trading means you buy and sell shares of companies to make money when their prices go up.

To start, you need to open an account with a brokerage and learn how to make trades.

Remember, stock trading can be risky, so it’s essential to be careful and not expect too much.

What is stock trading?

Stock trading is about buying and selling shares in companies to make money from price changes. Traders focus on short-term changes, aiming to buy at a low price and sell at a higher one, unlike long-term investors who hold onto stocks for a while.

You can earn from dividends or by selling shares later. The value of shares is influenced by factors like the company’s performance, prospects, market conditions, and investor confidence.

What is stock market trading? Stock trading mostly happens on platforms called stock exchanges where people trade stocks. Popular ones are the New York Stock Exchange (NYSE) and NASDAQ.

How does stock trading work?

Stock trading involves individuals buying and selling shares of companies to make a profit. When someone wants to buy stocks, they can do so through various channels such as financial advisors, online brokerages, or trading apps.

They can place different types of orders like market orders, limit orders, or stop-loss orders. Selling stocks involves selling them at a higher price than what they were bought for. Traders use different strategies like day trading or buy-and-hold.

Let’s understand based on the example:

On May 15, 2023, Mr X purchased ten shares of Tesla Inc. (TSLA) for $1,200 per share. On the next day, May 16, 2023, Tesla announced a 10-for-1 stock split and shared plans for a major expansion into renewable energy sectors, generating enthusiasm among investors.

As a result, the price of Tesla shares experienced a sharp increase, reaching $1,400 per share on May 17, 2023. Mr B, anticipating continued growth potential, decides to sell her ten shares at this heightened price, ultimately realizing a significant profit from the transaction.

The goal is typically to buy low and sell high, thus making a profit from the difference in stock prices.

Types of stock trading

Trading comes in different flavours, each with its strategy. Some well-known types include:

Day trading

Position trading

Swing trading

Scalping

How to get into stock trading?

How to open a stock trading account? To get into stock trading, the first step is to open an account with a reputable brokerage or online trading platform. And then trade stock using simple steps:

Open a brokerage account

You need to sign up with a trustworthy broker, which is like an online platform where you can buy and sell stocks.

Plan your stock budget

Decide how much money you’re comfortable investing. It’s essential to research companies and their financial health before making any decisions. It’s wise to only invest what you can afford to lose, and experts suggest not putting more than 10% of your money into a single stock.

Learn to use order types

When you’re ready to trade, you’ll use your broker’s website or app to place orders. There are different types of orders you can use, which are:

Market Order: Buy or sell a stock immediately at the current market price.
Limit Order: Set a specific price to buy (limit buy) or sell (limit sell) a stock.
Stop Order: Automatically sell a stock if its price falls to a certain level (stop-loss) or buy if it rises to a certain level (stop-buy).
Day Order: A day order is valid only for the trading day on which it's placed. If the order isn't filled by the end of the trading day, it expires and won't be executed.
Good-'til-Canceled (GTC) Order: Remains active until filled or cancelled by the trader.
Immediate or Cancel (IOC) Order: Execute immediately and completely, or cancel if not possible.
All-or-none (AON) Order: Specify that the entire order must be filled at once or not at all.
Fill-or-Kill (FOK) Order: Execute the entire order immediately or cancel it entirely.

Practice with a virtual trading account

Before investing real money, consider practicing with a virtual trading account or simply observing the market for a while to get a feel for how it works.

Check your progress

Compare your investment performance against a benchmark index, like the S&P 500, to see how well you’re doing. If you’re not outperforming the benchmark, you might consider investing in index funds instead.

Stay realistic

Successful investing isn’t about chasing the next big thing. By the time you hear about it, it’s often too late. Instead, focus on long-term investments that continue to grow over time. Treat investing as a hobby, not a quick fix for getting rich.

Learn more: Important steps to follow in your stock trading plan

Is stock trading worth it?

Whether stock trading is worth it depends on individual preferences, goals, and risk tolerance. Successful traders can potentially make more money than buy-and-hold investors by capitalizing on short-term opportunities.

Traders have more control over their positions, entering and exiting trades as market conditions change.

Conclusion

Stock trading involves buying and selling parts of companies to profit from their performance. Knowing the rules and strategies like day trading or position trading is important.

To begin, open an account with a trading company, invest, and choose companies wisely. Practice with virtual money first. Before diving in, research thoroughly, seek advice, and assess potential profits and risks.

Pro Tip

To further enhance your trading success, consider partnering with our trusted Forex brokers. Stay well-informed about opportunities in CFDs, forex, stocks, and cryptocurrencies, and leverage authentic broker reviews to make intelligent and strategic trading decisions. This approach will help you navigate the complexities of various markets and achieve your trading goals.

Frequently Asked Questions

1. Can I become rich by trading stocks?

It is possible, but it comes with risks. One way is to invest in stocks of strong, successful companies and hold onto them for a long time.

2. Is stock trading suitable for beginners?

Yes, stock trading can be suitable for beginners, but they need to start small, learn as much as possible, and understand that it takes time and patience to build wealth in the stock market.

3. Is it possible to start trading stocks with only $100?

Yes, you can trade stocks with $100, as long as the share price is below $100 and your brokerage account doesn’t have minimum requirements or fees that exceed $100.
Many beginner-friendly online brokers allow this, so you can invest $100 in any company with a share price of $100 or less.
Some brokers also offer fractional shares, allowing you to buy a portion of a share if you can't afford the full price.

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