Stock trading can be overwhelming if you’re a beginner. Terms such as charts, prices, bull market, and bear market can be confusing. If you’re not well-versed in stock market principles and theories, all your efforts may end up in tragic financial losses.
Therefore, you must become technically capable and learn the ways and means of stock trading. Familiarizing yourself with the process of stock index trading or trading in individual shares will help you earn profits in the market.
Below are the six basic things you should know about stock trading.
What Is Stock Market And Stock Trading?
A stock is a security that grants you part ownership of a corporation. Simply put, a stock market is a place where stocks are bought and sold. Pepperstone’s trading platforms and other such platforms help you buy and sell stocks by providing access to the stock market.
Stock trading involves buying and selling stocks to make profits. There are different types of traders. Many stock traders are day traders, implying that they close their positions within the trading day. Some traders hold their positions for many days or weeks. Active traders trade several times in a month or a year.
The Basics Of Stock Trading
Successful stock trading isn’t based on luck. It requires the application of some basic principles developed based on experiences. Although intellect is an advantage in any task, a higher IQ is not a guarantee for trading success.
However, you must understand the following basics before you can start trading.
- Educate Yourself
Spend some time learning the basic principles about the stock market and also the stocks which make up the market before making you start trading. Take into consideration the factors driving your stock. Familiarize yourself with terms such as market capitalization, Earnings per share, Price-Earnings multiple, and so on. Understand technical and fundamental indicators that can help you to decide when to buy or sell the stock. You should also understand different types of market orders such as stop market orders, limit order, trailing stop-loss orders, stop-limit orders, etc. You should also have a basic understanding of the correlation between the individual stocks and economic activity, GDP, inflation, fiscal deficit, foreign exchange rates, prices of crude oil, etc. Different stocks have different factors that influence their price movements.
- Buy Low And Sell High
The very basic thing you should know as a stock trader is to buy stocks when prices are low and sell them when prices go high. Of course, the trick is in finding the perfect price to buy and the best price to sell. This can get easier if you know the basics and gain experience in trading.
- Stock Trading Involves Significant Risk
Stocks are often volatile and there’s no guarantee that they’ll keep rising or falling. If you’re thinking of short-term trading, you must do your homework and accept that your judgment may turn out to be wrong. So, you may lose money despite knowing the basics and analyzing the stock for hours.
- Avoid Taking Leverage
Leveraging means borrowing money to buy or sell stocks. Banking institutions and brokers allow you to trade with less money than what is required to buy or sell the stock. This sounds pretty good when the market moves in the anticipated direction. However, when things don’t go as planned, you lose a lot of money. In addition to your initial investment, you will have to pay interest and other costs to your lender. Leverage, consequently, is a double-edged sword. Leveraged trading must be done only after understanding its risks and gaining enough experience in trading.
- Diversify Your Investments
It may be enticing to go “all in” on a promising trading setup. However, putting too much money into a single trade is a risky move. You may end up losing all your capital if you make a wrong decision. Remember to trade in small quantities, especially if you’re a beginner.
- Brokerage and taxes
You must know the brokerage commission that’ll be charged by the broker for each trade. Agree on the brokerage rate before you start using a broker for trading. There are several brokers to choose from and you can negotiate brokerage, especially when you trade in large quantities. Government taxes also impact your trading profits. So, you must be aware of these factors.
As with all specialized skills, it takes some resources and time to understand stock trading. Yet, the bonus of learning is life-changing. Learn the above basics and expand your knowledge to learn the art and science of stock trading. Start trading only after you’ve learned the basics. Over time, you’ll improve and eventually develop a process that helps you earn consistent profits.
Chris Adams loves to read materials and write articles on investments. Chris fully understands how important investments are to a person’s financial health, which is why he aims to inspire others through his articles.