If you’ve ever dreamed of owning a piece of a big company and riding the waves of financial markets, you’re in the right place. Trading stocks might sound like something only Wall Street big shots do, but guess what? With the right guidance, you can do it too, no fancy suit required.
First things first, you need a stock broker to help you buy and sell stocks. Picking the right broker is like picking the right partner for a three-legged race, critical to your success and sanity. We’ll walk you through how to choose the best one for your needs and how to pick the right stocks that won’t leave you feeling like you bet on a horse with three legs.
After that comes the comparison of two strategies, Trading and Investing. We’ll break down the differences so you can decide whether you’re a long-term lover or a thrill-seeking hopper.
And before wrapping things up, we’ll lay out the world of stock derivatives plain and simple. If stocks are the main course, derivatives are the spicy side dishes that add extra flavor (and risk of losing face in a party) to your trading meal. By the end of this article, you’ll have a clear roadmap to start your journey in the stock market.
Table of Contents
Trading Stock Market
When it comes to trading the stock market, there’s no one-size-fits-all approach. Different styles cater to various risk tolerances, time commitments, and personalities. The main styles include Position Trading, Swing Trading, Day Trading, and Scalp Trading.
Each trading style suits certain personalities and traits. Deciding which one is the best fit for you is like trying to find the right pair of shoes, just because they look good on someone else doesn’t mean they won’t give you blisters.
Position Trading
Position trading involves holding trades for several months to years. Traders look for long-term trends and rely heavily on fundamental analysis.
This style suits individuals who prefer a more hands-off approach, patience of a saint (they must brace themselves for some serious market turbulence and not flinch), and a knack for long-term forecasting.
In position trading, the traders usually don’t follow the news as much as their other counterparts, unless it’s some ground shattering financial catastrophe or a random star alignment in the stocks sky that affects the long term market.
Swing Trading
Swing trading aims to capture short- to medium-term gains over a period of days to weeks. Swing trading requires traders to analyze market trends and capitalize on potential market “swings.”
It’s a favorite among those who want a balance between the laid-back nature of position trading and the high-paced frenzy of day trading. If you are a fan of a balanced trading build, swings are your go to.
Day Trading
Day trading involves buying and selling Tradables within the same trading day. Day traders rely on technical analysis and short-term strategies to exploit small price movements. This style is ideal for those who thrive in fast-paced environments, have the attention span of a caffeinated squirrel, and enjoy making quick decisions.
Scalp Trading
Scalp trading takes day trading to the next level, with trades lasting from seconds to minutes. Scalpers seek to profit from tiny price changes and often make dozens or even hundreds of trades a day. This style suits adrenaline junkies who love the thrill of the hunt and have the nerves of a bomb squad technician.
Are you done thinking through your trading style? If not, then don’t worry you’ll get the chance to do so when your trading knowledge matures. Parallel to your trading style, your broker also plays a huge role.
Choosing a Stock Broker
Choosing the right stock broker is a crucial step for anyone looking into the world of stock trading. A well-chosen broker can greatly enhance your trading experience and help you achieve your financial goals with more proficiency, while a poor choice may lead to frustration and potential losses.
First and foremost, a broker must be well-regulated. Regulatory oversight ensures that the broker operates within the legal framework, protecting your investments and providing peace of mind. Look for brokers that are registered with reputable regulatory bodies like the Securities and Exchange Commission (SEC) or The Financial Industry Regulatory Authority (FINRA) in the United States.
An easy-to-use user interface is also essential. Trading can be complex, so a platform that is intuitive and user-friendly can make a significant difference, especially for beginners. You don’t want to be bogged down by a clunky, confusing interface when making important trading decisions.
Fast money deposit and withdrawal processes are another critical factor. Delays in funding your account or accessing your money can hinder your trading flow and create unnecessary stress. Look for brokers that offer seamless and speedy financial transactions.
24/7 customer support is a feature that cannot be overlooked. Markets move quickly, and issues can arise at any time. Having access to reliable customer support around the clock ensures that you can resolve problems and keep your trading activities running smoothly.
Additionally, some brokers provide educational materials and trading events, which can be highly beneficial. These resources can help you build your knowledge, refine your strategies, and stay informed about market trends.
While not a primary factor, these educational offerings are a valuable plus if the broker already meets the preferred characteristics mentioned before.
The last factor that you must keep in mind, is the stocks that the broker allows you to trade. Make sure the broker you pick supports your favorite stocks. In our last article, we covered all types of stocks. If you’re interested in understanding the groundwork of the stock market, we suggest you read.
Keep in mind that unlike the crypto market that is open to the public all day everyday, the Stock market is open Monday to Friday. Stock market open hours depends on your geographical location, for example for the US east coast 9:30 AM to 4 PM and US west coast 6:30 AM to 1:00 PM. For those in the United States, some of the major stock brokers to consider include:
And as for top brokers for citizens of Canada, they include:
After picking up the broker of your liking, comes choosing the stock. But how one must pick the stock that fits them best?
Choosing the Stock
Choosing a stock without doing the proper research is like throwing a dart at a restaurant menu in Paris and wondering why they’ve brought you a half cooked frog.
The stock or type of stock you choose matters because it dictates how you keep up with relevant news and trends. It’s much simpler to follow the news and developments around a specific industry rather than trying to keep track of every sector in the market on a daily basis. This focused approach allows you to make more informed decisions and react properly to relative market news.
Your stock choice should align with your personal preferences and knowledge as well. If you have a relatively good understanding of the tech sector, then tech stocks might be the best fit for you. Familiarity with the industry means you’ll have a better grasp of what drives stock prices and how to identify potential opportunities.
Your trading style also plays a crucial role in stock selection. Are you someone who prefers the calm seas of stable, blue-chip stocks, or do you relish the thrill of navigating the oceans of volatile penny stocks?
Some traders find comfort in the predictability and steadiness of established companies, while others thrive on the excitement and potential high rewards of riskier investments.
Away from all the winds and dangers of wild seas, stand the stock market investors, those who believe timing the market is wrong and you should join the market asap, be patient, and let your investment grow when the market decides. But how different is investing from trading?
Trading vs Investing
Investing in the stock market refers to the act of purchasing shares of companies with the expectation that their value will increase over time, leading to a profit. The main goal is to build wealth gradually through long-term holdings, not flipping shares for profit. There are two primary types of investing:
- Investing for Capital Gain: This strategy focuses on buying stocks with the expectation that their value will rise significantly over time, allowing investors to sell them at a higher price than the purchase price. The profit made from this sale is known as a capital gain.
- Investing for Steady Income (Dividends): In this approach, investors buy stocks in companies that regularly distribute a portion of their earnings to shareholders in the form of dividends. This method provides a steady stream of income and is often favored by those seeking reliable returns.
Investing and trading are comparable in several factors, though they might seem the same to the average Joe who’s joined the forex market after watching Warren Buffett youtube short. Let’s begin with the timing.
Time Horizon
Investing typically involves a long-term perspective, with the aim to hold assets for years or even decades.Trading on the other hand involves short-term strategies, with trades executed over days, weeks, or maybe minutes.
Goals
Investing focuses on building wealth over time through gradual appreciation and dividend income. On the flip side trading aims to profit from short-term price movements, often seeking quick returns.
Risk Tolerance
In most cases investing has lower risk and lower volatility, as investors ride out market fluctuations over the long term. Though trading is on the riskier side of the spectrum, higher risk and higher volatility, requiring constant attention to market trends and quick decision-making.
Capital Requirements
Stock investing can be done with smaller amounts of capital, especially with the advent of fractional shares, allowing investments as low as $1.
A trading business model often requires considerable initial capital to maximize potential gains and manage risk effectively. However, leverage trading minimizes the amount of initial capital, for the cost of higher risk.
But there’s still a piece of trading pie that we are yet to consume, the derivatives.
Stock Derivatives
How much is the value of all the gold on earth? What about the GDP of the entire world? Well, what if I tell you that the notion value of financial derivatives is way more than the combined value of the GDP of the entire globe?
In 2002 Warren Buffett referred to derivatives as “Weapons of mass destruction”, emphasizing the insane risk that they are associated with. But what are these priceless pieces of paper? Derivatives are among the most diverse asset classes in the world and simply drive their value off of their underlying asset. This underlying asset can be a company’s share, an ETF, a house, debt, commodities, and even another derivative.
Forward Contracts
Let’s begin the show with forward contracts; imagine you’re the CEO of an airline company, and your biggest concern is the volatile price of fuel. One day, fuel prices might be manageable, but the next, they could skyrocket, putting a dent in your profits.
Well, you have two options really, you either buy months worth of fuel in advance and store the Hiroshima 2.0 somewhere near your airport (do not try this at home) or you can sign a contract, locking in today’s fuel prices for a future date. Enter forward contracts, your financial time machine.
A forward contract is an agreement between two parties to buy or sell an asset at a predetermined price on a specific future date. In our example, your airline might enter a forward contract with a fuel supplier to purchase fuel at today’s prices six months from now.
This way, no matter how much fuel prices soar, you’ve secured a price that keeps your budget intact. A financial black hole would not spawn in your wallet and you also don’t risk blowing your airport to smithereens.
Futures Contracts
But wait, there’s more! Forward contracts have a sophisticated cousin known as futures contracts. Futures operate similarly to forwards but with a twist: they are standardized and traded on exchanges. Think of futures as the celebrity version of forward contracts, with all the bells and whistles.
Imagine our airline company again. Instead of negotiating directly with a fuel supplier, you go to a futures exchange where fuel contracts are bought and sold like tickets at a concert. The terms are set, the market is regulated, and you have the assurance of a standardized contract.
Comparing forward and futures contracts is like comparing a homemade pie to one from a gourmet bakery. Both serve the same purpose but come with different levels of polish and security.
Forwards are like baking a pie at home, customized to your taste but requiring your full attention. Futures, on the other hand, are like grabbing a pie from the bakery, convenient, regulated, and ready to go.
Now, while both forwards and futures commit you to the deal, there’s another derivative that adds a twist to the tale: options contracts.
Options Contracts
Options are the wild cards of the derivative world. They come in two flavors: call options and put options. A call option gives the buyer the right (but not the obligation) to buy an asset at a specified price within a certain period.
It’s like having a coupon for a discount on your favorite concert tickets, you don’t have to use it, but it’s nice to have the option. A put option, conversely, gives the buyer the right to sell an asset at a predetermined price, similar to a return policy on that gadget you bought but aren’t sure about.
In an options contract, there are two sides: the buyer and the seller. The buyer holds the power, they can choose to exercise the option or let it expire.
The seller, however, is obligated to fulfill the terms if the buyer decides to exercise. Think of it as a game of poker where the seller has to play their hand while the buyer can fold anytime.
It might seem like the options seller is perpetually stuck with a losing hand, but the game isn’t that simple. To even the playing field, the buyer pays the seller a “premium amount” for this privilege.
So, in our airline scenario, imagine you bought an option to purchase fuel at a lower price. Even if you never use it, you still pay the seller the premium for giving you that choice.
Options can be a savvy strategy for hedging risks or making speculative bets, but remember, in finance, there’s no such thing as a guaranteed win or lose. The premium ensures that sellers get compensated for their risk, while buyers gain the flexibility to navigate uncertain markets.
Stock Market Analysis
Analyzing the price to find proper market entry and exit points is absolutely crucial for any trader. To make informed decisions, traders typically rely on three types of financial analysis: fundamental analysis, technical analysis, and sentiment analysis.
Fundamental Analysis
Involves evaluating a company’s intrinsic value by examining related economic, financial, and other qualitative and quantitative factors. Concepts like earnings reports, revenue, profit margins, and economic indicators are used to measure a company’s health and predict future performance.
Sentiment Analysis
Finds the mood or tone of the market, often through the lens of news articles, social media, and other public communications. Sentiment analysis includes concepts like investor sentiment indexes and market psychology, aiming to understand how collective market emotions might influence stock prices at a certain point.
Once you’ve tested the waters with these analyses, it’s time to swim and make your first trade, not in a chaotic ocean of sharks, blood, and gore, but in a safe swimming pool with paper trading and a demo trading account.
Trading in a demo account is vital as it allows you to practice your skills, strategies, stress management, and finding proper entry and exit points without risking real money. It’s like practicing boxing with a dummy before entering the ring against Mike Tyson.
Equally important is keeping a trading journal. Documenting your wins and losses, along with your thoughts and strategies, helps you learn from your experiences. This practice is as crucial as using a demo account, providing invaluable insights and promoting continuous improvement on your trading journey.
Final Words
So there you have it, folks! We’ve taken a wild journey through the heart of the world of stocks trading. We’ve explored the art of picking the right trading style, learned what metrics to look for when picking a stock broker and the stock itself.
We’ve also asked the age-old question, to trade or to invest, which should it be? And for those brave enough to venture into the world of derivatives, we’ve tackled forwards, futures, and options contracts.
Then it comes, the sea monster you shall slay to get the hidden treasure deep inside the waves of price charts. Find the monster’s weaknesses and strengths by scanning the news and public data around it, analyze the sea of charts and measure other sailors’ sentiments toward the monster. This shall you do, then you’ll have a good chance of claiming the treasure.
Remember, trading and investing isn’t just about making money; it’s about understanding the dance of the markets. Sure, it can be complex, like trying to assemble IKEA furniture without the instructions, but once you get the hang of it, it’s pretty rewarding.
If you’re thirsting for even more knowledge and want to dive deeper into the intricacies of the market, we’ve got a little gift for you. Head over to our website and download our free Ebook. It’s packed with all the tips, tricks, and insider secrets you need to maximize your trading proficiency and maybe, just maybe, make that dream of financial freedom a reality.
FAQ
- What are stock trading strategies?
Stock trading strategies are systematic methods for buying and selling stocks to achieve specific financial goals, such as Scalp Trading, Day Trading, Swing Trading, and Position Trading. - How to choose a stock broker?
To choose a proper stock broker, consider fees (such as spreads and commissions), available analytic tools, supported stocks, customer service, trading platform usability, and the broker’s reputation. - When does the stock market open?
The U.S. stock market typically opens at 9:30 AM and closes at 4:00 PM Eastern Time and 6:30 AM to 1:00 PM Western Time, Monday through Friday. As for international time, it’s open 14:30 to 21:00 UTC. - What is better, stock trading or investing?
Investing is generally better for long-term wealth building, while trading aims for short-term profits but involves higher risk. The better choice depends on your personality trait and preferences. - How stock options work?
Stock options give the option buyer the right, but not the obligation, to buy or sell a stock at a predetermined price before a specified date. To compensate for the risk, options sellers receive an agreed upon sum known as Premium Amount.
