This article is a basic introduction to trading on the stock market. Although it does not provide a specific trading strategy, this article does provide helpful fundamental information about trading, including information that is used by successful traders (e.g., steps to start online trading). The ultimate goal of any trader is to profit in the market, but such a goal does not come without practice, patience, knowledge of basic trading strategies, and the ability to decide when to buy and sell.
Knowing how to trade stocks also means getting educated on the various factors that impact stock prices, including economic and market indicators, company financials and stock market trends.
Getting educated on trading also includes, but is not limited to, developing successful trading strategies, and identifying an experienced mentor that can help navigate the many potential pitfalls associated with trading and related money management concerns.
It also means understating the risks involved in learning how to trade stocks, and recognizing what stock market categories work best for your unique needs.
What Are Stocks?
Stocks, also known as equities, are a security representing partial ownership of a publicly traded company. So, when you buy stocks in a company, it means you own a part of that company. A share is the unit of stock; the more shares you buy, the more stock you have in a company. Stocks are issued by companies to raise money to grow their business.
There are two main types of stocks, one is called a common stock and the other is a preferred stock. The main difference between the two is that common stocks give shareholders the right to vote on company matters and participate in the growing earnings of the company, while preferred stocks don’t. Preferred shares may come with a higher fixed dividend payout.\
The Stock Market
The stock market broadly refers to a series of exchanges in which shares of publicly held companies are bought and sold. Such financial activities are conducted generally through institutionalized formal exchanges (physical or electronic) and over the counter via marketplaces that operate under a defined set of regulations.
While both the terms “stock market” and “stock exchange” are often used interchangeably, the latter term is really a subset of the former. Traders in the stock market buy or sell shares on one or more of the stock exchanges that are part of the overall stock market.
The leading U.S. stock exchanges include the New York Stock Exchange (NYSE) and the Nasdaq. These leading national exchanges, along with several others operating in the country, form the stock market of the United States.
Introduction to Trading: How Does the Stock Market Work?
The stock market works through a network of exchanges — as discussed above, these include primarily the NYSE and 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 allows the company to raise money to grow its business. Investors can then buy and sell these stocks among themselves.
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 her price or a seller needs to decrease his.
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.
When it comes to trading shares on a stock exchange, there are two main types of investing strategies.
- Day trading: As the name implies, buying and selling the same shares within one day, sometimes making trades that last for just minutes or even seconds. The intent is to take advantage of small fluctuations in price.
- Long-term trading: Second, there are more long-term trades or investments where the buyer holds shares for longer periods of time and hopes to take advantage of the company’s long-term growth in earnings.
Introduction to Trading: The Stock Market Serves Two Important Purposes
- Raise Capital: First, it helps companies raise money often referred to as capital from the public by offering shares for sale, which can be used to fund and expand their business.
- Investor’s Ability to Share in Profits: Second, it gives an investor, who purchases those shares, an opportunity to have a share in the company’s profits. Investors can profit from owning stocks in one of two ways. Some stocks pay regular dividends (a given amount of money per share) at regular intervals, which provides a return on the amount of money invested in the shares. Alternatively, a return can also be earned through capital appreciation, which is when the stock price increases.
Key Steps to Take When becoming a Day Trader
The following are a few key steps to consider before embarking on actual stock trading in the markets:
- Establish financial goals: A good first step in learning how to trade in the stock market is to set goals. These financial goals depend on several factors, including age, income level, short-term financial needs (e.g., saving for a new home or business) and long-term financial needs (saving for retirement, paying off a home, etc.). Once goals are established and prioritized, along with a timeframe for reaching them, a trader can start the process of choosing the stock investments that best meet his or her unique goals and needs.
- Establish knowledge of risk tolerance: Every stock trader has a different level of risk when investing in the stock market. Focus on stocks that best balance the risk you are concerned about, be it inflation, taxation, liquidity, or all of the above. Mix your portfolio assets across different stock categories and try to cover the various types of risk associated with investing. By and large, if a trader loses ten percent or so in her stock portfolio, and that causes her to lose sleep at night, then that trader may be overextending themself. Simply put, stay cautious with stock trades.
- Learn, Understand, Execute, Repeat: It is critical to develop fundamental knowledge of the stock market, individual stocks, market conditions, investing options, different trading strategies (e.g., becoming a day trader in options trading), past performance of the market, and one or two effective trading strategies. Once all of these basic fundamental areas are learned, a trader can begin to implement an effective and profitable trading process, one that should be repeated and not be affected by emotions, or other outside conditions.
Find a Good Mentor: Introduction to Trading
As with any profession, trading in the stock market is loaded with many potential risks, including making risky trades, lacking basic knowledge about executing trades (when to buy and when to sell), seeking profit or gains based on emotion, buying or selling based on market swings or news reports and not based on solid trading principals, and many other pitfalls. There are really too many to list.
With that said, it is critical to identify a person or organization that can supplemental all the information learned from basic education on stock trading and take the trader to the next level. A good mentor will help a trader find better success with some essential tools, including, but not limited to:
- Identifying a Trading Strategy: More often than not, a professional that has been working the market for many years has already been through many ups and downs and has learned a process to succeed. This process is called a trading strategy (for example, day trader), and such strategies can take different forms, whether it be trading in securities, futures, options, or other techniques. This mentor can help narrow the field of potential trading strategies and bring the trader a better understanding of how to move forward into the future.
- Value: A mentor can bring value to a trader. This value includes having a baseline knowledge of many nuances associated with the stock market, nuances (e.g., price action of certain stocks or options) that are simply not able to be identified to a newcomer. This value of knowledge cannot be obtained by simply reviewing charts or online videos, talking with brokers, or utilizing free information offered by a financial services company.
- Training: A good mentor will actually provide training on how to succeed and consistently earn profits.
- Skills: A good mentor will teach a trader skills that the trader can then take, to become independent and not have to rely on others in order to succeed.
- Personal Interest in Success: A good mentor will be interested in the trader’s success, to the point that the mentor takes an interest in the future of the trader, and is not simply looking to make a quick buck off of that person. In fact, a good mentor will encourage the student to study often, including reviewing other courses on the topic, so that the student’s knowledge in the area is board and not limited.
Summary: Introduction to Trading
As stated above in this introduction to the trading article, trading is a profession. Trading in the stock market requires significant research, practice, and patience. And, as also stated, it is critical to identify a person or organization that can help develop effective and profitable trading strategies, trading strategies that manage and minimize risk, and utilize lots of data and experience to maneuver through what are many times topsy-turvy market conditions.
Maurice Kenny has helped over 600 people become financially free through one-on-one coaching, mentorship, and options trading strategy. Many of these new traders are now full-time traders, and they all started by watching his 1-hr webinar.
Feel free to check out other FREE educational resources to help guide you as you begin your new journey to financial freedom.
Also, download a (FREE E-BOOK) by Maurice Kenny, “DAY TRADE LIKE A MILLIONAIRE.”