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The stock market can be a confusing place for the uninitiated. Financial news is often saturated with bemusing buzzwords; tales from the trading floor of treasury stock, stated value, and retained earnings often mean nothing to the average investor. But for those looking to trade stocks, understanding and applying such concepts is key to navigating this asset class.
While investing in stocks presents a risk to capital, it can also be an effective way of accumulating wealth, and a well-chosen, balanced stock portfolio has the potential to be a ticket to a stable passive income. Read on for our beginner’s guide to trading stocks, and we’ll help you turn the jargon into actionable knowledge.
Getting Started in Stock Trading: Main Talking Points:
What is the Stock Market?
The stock market is where shares are bought and sold by individual and institutional investors. In the modern era, the process is conducted electronically through major stock indices such as the Nasdaq 100, FTSE 100 and DAX, each of which represent the performance of a basket of constituent stocks.
These stocks are tracked by the market index to come up with a value for the index based on weighted market capitalization methodology. This means that a large movement in the price of a single large stock can influence the index on which it is listed.
What are Stocks?
Stocks are effectively the ownership certificates of a given company. They are issued by a business to raise capital for growth, and they fluctuate in price depending on the company’s performance. They can be listed on the stock market (public) or may only be available to private investors (OTC or over-the-counter stocks). Commonly traded stocks include Boeing, Xerox and Apple, the latter of which is traded on the Nasdaq 100, Dow Jones and the S&P 500.
Events such as product launches, a new CEO appointment, and earnings announcements are all instances that can move a stock’s price and influence a choice of stock. More of these factors are discussed in the ‘How do you pick the right stock’ section below.
Shares on the other hand refer to the proportional ownership of a stock in one particular company. For example, owning 50,000 shares of a company with 1 million outstanding shares would give an investor a 5% ownership stake.
Trading
A trader can potentially make (or lose) money by speculating on securities over a shorter timeframe. Often, traders will focus on technical patterns using methods such as scalping and day trading, often using short-term timeframes such as ten-minute charts.
With online trading platforms traders can monitor the stock's performance along with their entry and exit prices.
Investing
An investor can potentially make money trading stocks essentially through purchasing the asset, often via a brokerage account, and holding it over a longer timeframe. During this period, (s)he may look to receive dividends and interest, as well as benefit from long-term increases in value, culminating in the sale of the stock(s).
This ‘buy and hold’ strategy may involve holding a stock for at least five years. Focusing on a ‘total return’ means that interest, dividends, distributions and capital gains are all taken into account when calculating the total return from a given stock.
While investing in stocks presents a risk to capital, it can also be an effective way of accumulating wealth, and a well-chosen, balanced stock portfolio has the potential to be a ticket to a stable passive income. Read on for our beginner’s guide to trading stocks, and we’ll help you turn the jargon into actionable knowledge.
Getting Started in Stock Trading: Main Talking Points:
- What is the stock market and how does stock trading work?
- How can an investor potentially make money trading stocks?
- What does it take to start trading stocks?
- How do you pick the right stocks to trade?
- Things to consider before trading stocks
WHAT IS THE STOCK MARKET AND HOW DOES STOCK TRADING WORK?
Being a confident stock trader or investor involves getting to grips with the basics of the market and how stock trading works.What is the Stock Market?
The stock market is where shares are bought and sold by individual and institutional investors. In the modern era, the process is conducted electronically through major stock indices such as the Nasdaq 100, FTSE 100 and DAX, each of which represent the performance of a basket of constituent stocks.
These stocks are tracked by the market index to come up with a value for the index based on weighted market capitalization methodology. This means that a large movement in the price of a single large stock can influence the index on which it is listed.
What are Stocks?
Stocks are effectively the ownership certificates of a given company. They are issued by a business to raise capital for growth, and they fluctuate in price depending on the company’s performance. They can be listed on the stock market (public) or may only be available to private investors (OTC or over-the-counter stocks). Commonly traded stocks include Boeing, Xerox and Apple, the latter of which is traded on the Nasdaq 100, Dow Jones and the S&P 500.
Events such as product launches, a new CEO appointment, and earnings announcements are all instances that can move a stock’s price and influence a choice of stock. More of these factors are discussed in the ‘How do you pick the right stock’ section below.
Shares on the other hand refer to the proportional ownership of a stock in one particular company. For example, owning 50,000 shares of a company with 1 million outstanding shares would give an investor a 5% ownership stake.
HOW ARE STOCKS TRADED?
When it comes to approaching stocks, there is an important distinction to be made between trading and investing.Trading
A trader can potentially make (or lose) money by speculating on securities over a shorter timeframe. Often, traders will focus on technical patterns using methods such as scalping and day trading, often using short-term timeframes such as ten-minute charts.
With online trading platforms traders can monitor the stock's performance along with their entry and exit prices.
Investing
An investor can potentially make money trading stocks essentially through purchasing the asset, often via a brokerage account, and holding it over a longer timeframe. During this period, (s)he may look to receive dividends and interest, as well as benefit from long-term increases in value, culminating in the sale of the stock(s).
This ‘buy and hold’ strategy may involve holding a stock for at least five years. Focusing on a ‘total return’ means that interest, dividends, distributions and capital gains are all taken into account when calculating the total return from a given stock.
