Stock trading involves buying and selling of stocks to capitalize on short-term market phenomena, like selling stocks at a profit or buying at their low. The stock market has its own rules, and it is not like an everyday market where you can just enter and buy things you like. To ace the share trading, a trader needs to go through a licensed brokerage that will make trades on his behalf; in fact, individual investors nowadays are represented by brokers who are in most of the cases, online brokers. Here is everything you need to know about the stock market.
First, in stocks marketing, you will often come across the word “market exchanges.” Stock exchanges are like markets where the buyers and sellers meet. The two most popular exchanges in the US are the Nasdaq, and the New York Stock Exchange (NYSE). Both these exchanges, the New York Stock Exchange and the Nasdaq are open from morning 9 A.M to 4.30 P.M. Stocks are listed on any of these specific exchanges. The price of each stock is driven by the demand and supply of the stocks created at the exchange.
When people refer to a certain stock going up and down, they refer to these major market indexes. A stock market index tracks the performance of various stocks collectively, either representing the entire securities market or a specific market sector, e.g., retail companies or a specific technology. In the stock market, investors often use indexes to benchmark the performance of their portfolios or to announce their own share trading decisions. Investments can also be made in an entire index through ETFs (exchange-traded funds) or index funds to track a specific sector or index of the stock market.
The S&P 500, Dow Jones Industrial Average, or the Nasdaq composite are the three most common terms that are used on an everyday basis for share market trading; these terms are often used as proxies for the performance of the overall stock market. S&P 500 is the most common term used amongst the 3.
What are the various financial instruments traded in a stock market?
Four key instruments are traded in the stock market, which is discussed in detail below:
Shares are the most commonly traded instruments in stock market. Companies issue shares to investors, and owning a share of the company gives the shareholders a right to a certain portion (based on their shareholdings) of the company. Thus, Shares are certificates of ownership of a company that gives the right to the shareholders to earn a portion of the profits that the company makes, and shares the portion of the losses that the company makes. The value of the shares increases as the company starts to do better business.
Bonds are a means of investing money by lending to others, and this is the reason why bonds are also called debt instruments. Just like shares, bonds are also effective ways for companies to raise money. When a company borrows money from banks or other financial institutions in exchange for regular interest payments, it is termed as loans. Whereas on the contrary, when a company raises money by borrowing from multiple investors in exchange for regular interest payments, it is termed as bonds. When a person invests in bonds, it shows the face value of the bond, which is the amount that is borrowed. The coupon rate or the yield rate which is the interest rate in which the borrower has to pay the loan’s interest. The maturity date, which is the date within which the money borrowed should be paid back to the lender along with all the interest accrued.
3) Mutual Funds
A mutual fund is another investment vehicle that allows people to invest in share markets or bonds, though indirectly. Mutual funds pool money from various investors and then invest the collective sum of money into various financial instruments. There are specific units in every mutual fund scheme, and whenever an investor invests in these schemes, he automatically becomes a unitholder of that specific scheme. The unitholders earn money when the Mutual Fund’s instruments invest in, make money either through the distribution of dividends or through the rise in the value of the units.
Derivatives are financial instruments that help people to trade in the future at a price fixed at present. To be more specific, derivatives are financial contracts agreed upon by two parties by deriving the present value of an underlying asset. There are four different types of derivatives contracts- options, futures, forwards, and swaps. The main purpose of derivative contracts is to mitigate the associated risks. When a derivative contract is entered into by two parties, one party frees itself from the typical risks arising from commercial activities or risks arising from a high-interest rate accrued over a certain period.
How to start trading stocks?
Trying your hands out in the stock market casino is not that easy as it seems to be. Every single loss makes you wiser and allows you to master the trading skills that will help you to tilt the odds in your favor. Here’s how to start trading in the securities market.
1) Open a brokerage account
All investments in a stock market are made through trading brokers, and nowadays, most of them are online brokers. So, find yourself an excellent online broker and open a brokerage account. Having a professional trading account for trading is always better than trading through a personal account. Not all the brokerage firms are the same; some may offer low fees while others have a strong customer service team backing them. Therefore, choose your broker according to your investment goals.
Get yourself accustomed to the free trading tools available to know the nooks and corners of online share trading. Take advantage of the online brokers’ virtual trading, even though it is not enough, but it will help you understand the basics. Many online brokers also offer important share trading information, including charting tools, analyst reports, and securities research reports- follow them religiously.
2) Follow the stock market by reading financial articles and books
Self-tutorial is the best way to come across the securities trading jargon that you will need in your everyday investing business. Follow the related financial articles from the newspapers or news bulletins or collect articles from the internet; there are lots of them available there. Read about the market trends that will give an overall insight into the stock market background. Never ignore any news by thinking that they are too irrelevant for now; you might need them just tomorrow.
3) Learn to analyze price charts
Your experience in analyzing price charts will help you immensely to predict the stock prices. Understanding the basics of technical analysis helps the investors to survive through the first few years of stock trading. The stock market is highly unpredictable but the correct analysis of the indexes and charts gives out some hints of the price movements of the stocks.
4) Practice trading
Before you start investing with your own money, it is better to try your hands out and experience the real-time market actions through virtual trading. It is like a theoretical performance of taking the ‘buying and selling’ decisions before the actual practical stock trading happens. Virtual trading involves using the stock market simulator that resembles an actual stock exchange performance. Try out various virtual trading strategies and find out the best one before taking the deep plunge into the actual world of stock trading.
Investors who trade stocks do extensive research for hours a day to follow the stock market. They rely on technical analysis, tools, and charts to gauge the stock price movements and also to find lucrative trading opportunities and market trends.
Some important stock trading tactics every investor should know
Investing in stocks would be much easier if you follow these simple long-term trading tactics on “how invest stocks.” Though these tricks are not everything that an average investor should know, and also these tricks cannot guarantee you 100% success, but definitely, these tactics will serve as good starting points to buy into stocks.
1. Pick the right stock
Even though picking the right stocks does not need one to know fancy algorithms but it needs plenty of long term research regarding which stock to buy. Try investing in those stocks that you understand better. Please go through the annual reports of the company or its price-earning ratio whose shares you want to buy.
2. Buy only when it is the perfect time
For investing in stocks, you must know the perfect time to buy and sell them. Never buy stocks in a hurry, rather keep it as the long term business and wait for the price to come down. Alternatively, always sell your stocks when the stock prices are high. Here lies the difference between investing and trading when it comes to stock investment and stock trading. Investing in stocks and shares means buying and holding stocks for an extended period, whereas on the contrary, stock trading refers to buying stocks and then quickly selling them for a profit. The longer the investors hold their stocks for stock trading, the more successful they would be in reaping the higher returns; short term tactics do not hold good for shares. But then holding your stocks at least for one year before they are sold out may impose tax from capital gains.
By the term “perfect time” it also implies whether your current financial status (that includes your current income or debt or other household expenditures, your dependents, if any, etc) will allow you to accommodate this new investment activity. No broker will ask you these personal questions before marketing stocks; you will have to find solutions yourself and answer to your conscience that whether you are ready to take up stock trading given its inherent risks and fluctuations.
3. Keep a cash reserve aside
Never invest all your earnings to stocks trading as it may lead you to lose all your fortunes owing to its unpredictable nature. Keep a cash reserve equal to at least 3-months living expenses if you are a first-time investor. The cash reserve will serve as an emergency fund if you face any income disruption or other financial adversaries.
4. Start investing in ETFs
Instead of plunging directly into stocks, it is better to start with ETFs and Mutual Funds. As these funds are professionally managed, investors are relieved from the complications of selecting the most profitable stock. There are many commission-free ETF trading apps available, and investors can open an account in any of their preferred applications. The main advantage of investing in ETFs and mutual funds is diversification. As each unit of the mutual fund scheme can hold numerous shares, the diversification feature is already built into the fund.
Index funds are the most common types of funds. Investing in index funds also involves complying with some simple parameters and is, therefore, the most preferred choice for the investors.
These are some of the simple tactics that you need to know before investing in shares and securities. According to the Wall Street Journal of New York, patience is the keyword for share trading. Wall Street investors wait for the correct price at which they decide to buy and sell their holdings, and that is why they earn more than most other average investors.