How to Trade Stocks: Things You Should Know Before You Start
Trading stocks has become enormously popular over the past decade as the internet has made it easier and more accessible. You can create an account with one of many online brokerages, meaning you can buy and sell stocks, options, commodities, currency, and ETFs with ease, all with the click of a mouse.
Of course, there are risks. To mitigate these risks, anyone interested should learn to trade stocks and navigate a market that can be confusing and is always unforgiving. Fortunately, the internet has also made learning to trade stocks easier than ever before.
Here, I’ll cover the basics of learning to trade stocks, including the important topics to cover and how you can begin your education about the market.
A Quick Primer on the Market Itself
When people refer to “the market”, it’s as if they’re referring to a living, breathing creature (almost like it’s “The Market”). That isn’t very far from the truth. The market, as we know it, is a collection of buyers and sellers trying to agree on prices for shares of companies called stock.
Most trading is performed on stock exchanges, like the New York Stock Exchange, London Stock Exchange, NASDAQ, etc. This is an organized market for those who possess stock and are offering it for a certain price, called the ask, and those who want to buy the stock and are willing to pay a certain amount to get it, called the bid.
The best way to participate in the stock market is through a brokerage; there are traditional, brick-and-mortar brokerages and online discount brokerages that have made trading easier and more accessible than ever before.
While there are several strategies behind trading in a market, most revolve around buying a stock at a low price and selling for a higher one. That sounds simple in theory, but it’s difficult in practice because of how the market actually operates.
The Mechanics of the Market: Why Do Prices Change?
Prices fluctuate (called volatility) for many reasons, mostly due to the laws of supply and demand. Basically, as a company begins to outperform its competition, more people want to own a part of the company to share, directly or indirectly, in its performance. Since there are only so many shares that one can buy, it creates demand for the shares – and since demand is higher than supply, the price rises.
The opposite is true, too. If a company stumbles and investors grow pessimistic about its future, the number of shares out there outnumbers the demand for these shares, which causes stock prices to fall.
Price fluctuation, then, has just as much to do with market psychology – what people think will happen or expect to happen – as actual financial performance.
What can impact a stock’s price? The following factors all play roles in how the market determines the value for a company’s stock:
- Earnings reports (quarterly and annually)
- New product releases
- Lawsuits and litigations
- Government regulations that impact the industry
- Technological breakthroughs
- Price targets and ratings from analysts
- The economy (whether it is performing well or struggling, interest rates, etc.)
- Debt and other liabilities
- Company growth or company contraction
- Major changes in executive leadership
- Market momentum (which is hard to define, let alone recognize)
Predicting what a company can do based off these and other factors is pretty hard, which is why many traders who try their hand at trading lose money. That’s not to say it isn’t worth it; in fact, sound, solid analysis and a strong strategy can result in profitable investments year in and year out.
Another major area to cover for those who want to learn how to trade stocks is the actual trading aspect of the market.
When you are making a trade, you are offering to purchase a number of shares of a company at a particular price. If someone holding these shares agrees, the trade is made. If not, your order goes unfulfilled (an order being what you want to have happen and the conditions of the trade that you prefer).
There are a few basic types of orders that you submit to the system when you want to buy or sell stock:
Market orders – These orders seek to buy or sell shares at their current price.
Limit orders – These orders only go through once the stock reaches a certain price level of your choosing. If you set a limit buy order for $10 and the stock peaks at $9.99, it doesn’t go through.
Stop loss orders – These are used to limit your losses. You enter in a certain price below the current price; if the stock reaches this point, the order converts into a market order, which means the stock is sold at that point.
Trailing stop orders – These are like stop loss orders except they’re used to lock in profits. You place the order, once you’ve turned a profit, as a percentage of the current price; then, if the price goes down by that percentage, you sell the stock as a market order. If the stock goes up, the order continues to follow and protect the additional profit.
There are also orders that determine how long your request is valid. You can put in an order for just the day, or until you cancel it (called a good-till-cancelled order). You can also tell the market to fill all of the order or none of it (called a fill-or-kill order).
The specific type of order you prefer will become apparent as you begin trading, and you’ll probably find you’ll have a use for most, if not all, of the basic types.
Recommendations for Learning
By far, the best advice for those who want to learn the ins and outs of trading, in addition to reading everything you can possibly find, is to create a practice trading account with a brokerage and trade fake money using real stocks and real financial data.
The more you practice, the better at trading you’ll become – and the more money, ultimately, you will make.