What Is Stock Trading: A Complete Guide

Many people get lured by the chance to trade stocks and reap huge profits at once. However, it’s not as simple as it may seem. Before starting your stock trading journey it would be reasonable to gain some key knowledge about how the stock market works, types of stocks, peculiarities in trading them, etc. All this and other information you’ll find out in our complete guide.

What Are Stocks?

Stocks are types of securities that provide their holders (called shareholders or stockholders) with partial ownership in the issuing company. Stocks are often called shares or equities. The difference between these concepts is blurred. Stocks and shares are usually used like full synonyms. Both of them are measurements of the shareholder ownership proportion. Equities, in contrast, represent a stake in the company. For example, if the corporation issued 1000 shares and a trader owns 10 of them, he holds a 10% equity stake. Depending on the stock type, shareholders can get the right to take part in the shareholder meetings, receive dividends, and sell their stocks to other investors.

What Is Stock Trading?

Stock trading implies the process of buying and selling stock to gain potential profits in the short-term perspective. This means that if the company is expected to do well in the market a trader can buy its stock when the price is still low and sell it when it rises, taking the profit. It’s crucial to remember that in contrast to other long-term investments, stock trading comes not only with greater profit opportunities but also with an increased risk of loss.

When trading stocks speculators usually turn to active trading strategies that focus on short-term stock price movements. The most common of them include:

• Day trading implies that the act of buying and selling stock happens within one day. This method is one of the most popular.
• Position trading is often considered long-term trading. Yet, some active traders take advantage of it as well. Position trade usually lasts from several days to several weeks and even months, depending on the market trend.
• Swing trading is a way to profit from swings in the market, that usually last from one day to some weeks.
• Scalping allows traders to profit from minor changes in the share price. It’s the quickest active strategy that lasts a couple of seconds or minutes.

When it comes to passive traders, they focus on the long-term distance. It means that they don’t often buy and sell their stocks. Instead, they keep them for months or even years.

What Are Stock Exchanges?

A stock exchange is a concept that brings together people who want to buy or sell stocks. This term is often interchanged with a stock market, yet they are not the same. A market is a wider notion, it can include several exchanges.

What Are the Biggest U.S. Stock Exchanges?

The two leading stock exchanges are the New York Stock Exchange (NYSE) and the NASDAQ. Not only are they the biggest in the US but also worldwide with a market capitalization of over $28.2 trillion and $24 trillioncorrespondingly.

• New York Stock Exchange (NYSE) is the world’s largest stock exchange that dates back to 1792. It’s situated on Wall Street in New York and is open from Monday to Friday from 9.30 a.m. to 4 p.m. ET. The beginning and the end of the trading day are traditionally marked with the “bell”.
• NASDAQ (abbreviated from National Association of Securities Dealers Automated Quotations) is the second-largest stock exchange in the world founded in 1971. In contrast to NYSE, it doesn’t have a physical building. It is an electronic exchange that focuses on companies from the technology sector such as Apple, Microsoft, Meta, Intel, and others. NASDAQ trading hours run Monday through Friday from 9.30 a.m. to 4 p.m. ET.

Although both NYSE and NASDAQ reflect the performance of the US stock market they are not the same. One of their key differences lies in the way they operate. NYSE is more traditional and provides both floor and electronic trading while NASDAQ operates only online. What is more, listing on NASDAQ costs significantly less than on NYSE. Last but not least, being much older, New York Stock Exchange focuses on companies from more traditional industries, NASDAQ lists more innovative corporations.

Important International Stock Exchanges

NYSE and NASDAQ are followed by other popular international stock exchanges. Let’s have a look at some of them.

• Shanghai Stock Exchange is one of the three main exchanges operating in China. Moreover, according to Statista, it is the third-largest stock exchange in the world with a market cap of $7.7 trillion.
• Euronext is the most important stock exchange in Europe. It was formed in 2000 by a merger of exchanges of Paris, Brussels, and Amsterdam. Euronext has a market capitalization of $7.38 trillion and takes the fourth position in the list of the world’s largest stock exchanges.
• London Stock Exchange (LSE) is the main exchange of the UK located in London. It operates for more than 300 years and is considered one of the oldest in the world. Its market cap accounts for $3.8 trillion.
• Tokyo Stock Exchange (TSE) is the primary exchange of Japan. It is governed by the Japan Exchange Group and lists the major player of the Japanese market such as Toyota, Honda, etc. TSE uses the name of its parent company and has a market cap of over $6.6 trillion.

Types of Stocks

There are different classifications of stocks. One of the most popular divides them into common and preferred ones.

1. Common stock is the most widespread type. It allows its owners to vote on shareholder meetings and receive dividends paid out by the company. Despite providing its holders with almost unlimited rights, common stock implies a rather high level of volatility and risk. In case of company liquidation, the common shareholders are likely to end up with nothing.
2. Preferred stock doesn’t entitle its holders with voting rights but gives priority to dividends payments. In contrast to common stock, this type is less risky since the shareholders are guaranteed to receive a specific amount of their money if the company goes bankrupt.

Another classification comes with growth and value stocks.

1. Growth stocks represent company shares that are predicted to grow faster in comparison with the rest of the stock market. For example, in the recent decade, the technology stock has seen rapid growth due to the overall economical boost. It’s necessary to bear in mind that although growth stocks have high profit potential, they come with a greater risk. If their growth is slowed down they may experience a steep decline in value.
2. Value stocks are undervalued equities, whose price doesn’t coincide with the performance of the issuing company. When trading them, investors try to take advantage of the market disbalance. Value stocks are less volatile and less influenced by market sentiments, however, traders need more time to find them. Moreover, there is a risk that value stocks may never come out from the undervalued position.

How Does Stock Trading Work?

Stock trading has a long history. However, this sphere is not an exception when it comes to world digitalization. Nowadays, it’s possible to trade stocks not only in physical exchanges but also online.

Exchange Floor Trading

Floor trading relates to a physical area where speculators buy and sell stocks or other assets. Trading floors are situated in the building of exchanges such as NYSE, Bombay Stock Exchange, etc. These places are usually associated with crowds of people, monitors, shouting, and phone calls. The floor trading process looks like a chain. An investor tells his broker to buy a specific amount of company shares. The broker then informs the floor clerk on the exchange about this order. The clerk finds the company floor speculator and a seller of those shares to make a deal with. When the agreement is reached, the investor is informed about the set price.

Electronic Online Trading

Floor-based trading is time-consuming and lacks efficiency. Thus, there is a tendency towards electronic stock trading. This way is much easier, it doesn’t include such a long chain of actions. All the trader needs to do is to create his trading account, choose a particular stock he wants to trade, and get started. Thus, if floor trading is associated with noisy chaos, virtual trading is more about technologies and innovations.

How to Start Trading in Stock Market?

If you decided to add stocks to your investment portfolio, here is an easy step-by-step guide on how to start trading this type of asset.

Open a brokerage account.
Once you decided to start trading stocks it’s necessary to find a trustworthy online broker who will provide you with all the required tools and ensure the security of your operations. Opening the account doesn’t imply that you have to start trading immediately. Brokers usually offer traders an opportunity to get used to the platform and practice trading skills in a demo account.

Set your stock trading budget.
It’s risky and not reasonable to invest all your capital in an individual stock. The experts suggest allocating not more than 10%. What’s more, when planning your budget it’s crucial to be realistic and avoid investing more than you have and can afford.

Practice with a demo trading account.
A demo account is a seamless tool for both beginners and professionals in stock trading. Newbies can use it to improve their skills before risking their capital. Experts, in turn, can try out new strategies and trading methods without having to think about losses.

Learn to use stop-loss and take-profit orders.
Once you have an account, you can start entering trades. Choose the stock you want to invest in, define the lot size, and place the stop-loss and the take-profit orders. These are the tools, helping to mitigate risk. The stop-loss automatically closes the trade to limit the losses once the price reaches a particular level. The take-profit is an order that closes the trade when it reaches the established profit price.

Learn to analyze markets.
Trading is always about continuous learning, thus, never stop educating yourself. By applying technical and fundamental analysis you will be able to build a robust trading strategy. By following market and company news you can predict price fluctuations more accurately and avoid potential losses.

Practice trading.
The more you trade, the more experienced you become. Try out different trading approaches, follow and copy the behavior of the leading market traders, develop a risk management plan, learn to control your emotions, etc.