How to Trade on the Stock Market
When we think about trading on the financial markets, the stock market is usually the first thing that comes to mind. It’s a commonly traded market, both by professionals and retail traders. Whether it’s familiar brand names like Nike, Apple, and Amazon, or the portrayal of buying and trading stocks in films, many people are attracted to it and seek to get involved.
There are various stock trading definitions out there, so, in this guide, we will look at how to trade on the stock market and discuss everything you need to know to get started in stock trading.
How Does Stock Trading Differ from Stock Investing?
There are two different approaches when it comes to participating in the stock market.
You can either invest or trade. So what are the differences, and which approach should you take?
Stock investing and trading are seemingly similar activities that involve buying and selling stocks. However, the differences are mainly in the time horizons and the mechanics of performing the actual purchase and sale.
Investing in stocks usually means buying and holding real company shares, thus making money when the company's share price appreciates or losing if the price depreciates. An investor who buys for the long run can buy shares directly from a company or via a stockbroker. This requires time, documentation, and usually a custodian who holds the shares for them, usually a stockbroker. Investors profit from stock appreciation — they sell stocks only to fix profits or to limit risks.
What is trading in the stock market? Unlike investing, where you buy or sell the actual shares, trading involves speculating on differences between open and close prices. A trader can execute trades quickly and capitalise even on small price changes. Besides the time horizon, when we consider how stock traders make money, we see that they also earn by shorting the stock price. This means that by shorting, they can make a profit when the price declines, which isn’t a possibility with investing.
When You Trade a Stock, What Happens?
Trading is done by derivative instruments such as options, futures, or CFDs. CFD is the instrument you can trade at FXOpen.
CFD stands for “contract for differences” and is what’s known as a derivative instrument. That means that it's a contract derived from the underlying asset, in this case, the stock, and tracking its price changes.
CFD stock trading is a meaningful method for traders for the following reasons. The first is that you can get started quickly by opening an account. The second is that CFD trading involves the use of leverage so that the capital requirements are much lower.
Note: leverage maximises your profit potential but also increases your exposure to risk.
How to Analyse Stocks in Trading
In order to be successful in trading stocks, you need to get on the right side of the trade and catch the trend in the direction of your position. This is where analysis comes into play. Performing a good analysis is the first step to choosing a stock to trade and deciding when to open a position.
There are two different types of analysis - fundamental and technical.
Fundamental analysis is the process of looking into the fundamental data behind a company’s performance. This can be done by looking at earnings and other financial reports from which you perform cash flow analysis, user/customer growth, price/earnings ratios and important news. Fundamental analysis is done by those who want a thorough understanding of the company and its position in the market in order to establish a clear picture of future potential.
Technical analysis is the process of analysing the price chart. It involves spotting the zones of buying or selling pressure by using technical indicators and chart patterns. Since stock traders usually don’t keep a long-term time horizon, they are more interested in the momentum and the volatility that is currently displayed.
This is why stock traders use oscillators like MACD, RSI, and volume indicators in combination with Bollinger Bands, Parabolic SAR, and chart patterns to spot the zones of interest. Technical analysis helps stock traders understand how trading stocks should be carried out before forming a trading plan.
What Factors Affect Stock Value?
Having said that, when it comes to stock investing and trading, the fundamentals are an essential catalyst for price movements. These can be regulations that impact the industry and sector a company operates in, and macroeconomic factors of the state the company is in on a broad scale.
The environment in which the company operates aside, the individual company’s performance is very important when it comes to factors that affect the stock value. Those can be primarily the earnings reports in which the company displays its profitability, and growth indicators - such as the number of employees, the number of users, office space or increased investing supply.
Earnings reports are usually published quarterly and on a set date, so following the economic calendar can help you anticipate price movements.
Teach Me How to Trade Stocks
There are different types of stock trading strategies that you can choose from. They help you understand how trading stocks work and how to trade stocks in accordance with your specific approach.
Scalping
Scalping is a stock trading strategy that is done in 1 minute to 5-minute timeframes and involves capitalising on the smallest of price changes. In order to make a profit on these small price changes, a high amount of funds is needed. Therefore, scalpers trade with leverage.
Note: leverage maximises your profit potential but also increases your exposure to risk.
Many scalpers choose the stock market because its high volatility provides numerous opportunities. Still, this strategy is only suitable for those who are skilful in trading and have all their time devoted to it.
Day Trading
Day trading is similar to scalping in the sense that you open and close positions within the same day but it differs from it mainly in the timeframe and the frequency. Day trading is done from a 15-minute to an hourly timeframe and usually involves catching a breakout or a trend continuation. It’s one of the most popular trading approaches and it suits any market. Therefore, it’s widely used in commodity, stock, and Forex trading.
Swing Trading
Swing trading can be done by holding a position for a number of weeks. It revolves around catching a newly formed trend from its reversal or a swing low to its top or a swing high. It can be done from an hourly to a weekly chart and its main advantage is that it involves a more passive approach, unlike the prior approaches where you have to be present throughout the day. As the stock market constantly changes its direction, swing trading is a common approach.
How to Manage Stock Trading Risks
One of the most important things when it comes to trading on the stock market is managing your risk. Investors don’t have many tools to manage risks except selling the stock which is also a lengthy process. Trading with CFDs can be advantageous for its risk management aspects.
Unlike the traditional method, by trading with CFDs, you can set a stop loss triggered automatically when the price goes in the opposite direction of what was expected. Having a stop loss is one of the safest ways to trade stocks and it can quickly save you from an unfavourable position.
In order to mitigate risks, traders can also hedge their positions. This is done by opening a position in the opposite direction to the primary one. Another hedging strategy is opening a position in another correlated stock or a trading pair that can mitigate the risk with those gains.
Where to Trade Stocks
FXOpen is a CFD broker that enables you to trade stocks in the way discussed in this article. You can open a demo account that helps you get accustomed to the trading terminal and practice trading beforehand. Besides stocks, you can get exposure to other markets like Forex, commodities, ETF, indices, and crypto*. Start your journey today!
*At FXOpen UK, Cryptocurrency CFDs are only available for trading by those clients categorised as Professional clients under FCA Rules. They are not available for trading by Retail clients.
Read more: https://fxopen.com/blog/en/how-to-trade-on-the-stock-market/
Text source: Forex Trading Blog
