Stock trading has become popular in the past years. Most of us know that you can make a lot of money by trading stocks, but not everyone knows about stock trading and how to join the market. Thus, what’s stock trading?
Here, we will explain how the stock market works and how to start trading stocks as a beginner. Nothing's as easy as it seems. You must understand that trading stocks carry risks.
Because it is hard to understand the whole process, this article will give you a good basis to start trading. Furthermore, you can sharpen your trading skills and improve your trading strategies. Gaining experience brings greater winnings!
What’s Stock Trading?
Trading stocks equals buying and selling a specific company’s shares. The point is to buy stocks and sell them for a higher price. Stock prices often change, and you should determine when it is best to sell them.
The sum difference between the price you bought a stock and the one you sold the stock at is your profit. Nonetheless, the price won’t always go up. You should prepare for downs, like buying a stock that might lose its value and result in no profit.
However, various strategies might help you choose a secure stock that is more likely to bring you profit in the future. To profit from stock trading, you should learn how to manage the stock market correctly.
Numerous prominent companies offer their stocks on a stock exchange list. This makes the company’s stock liquid and attractive to investors. Investors buy stocks and further decide what to do with them.
The stockholder companies can even exchange their stocks in different countries, intending to attract international investors.
Types of stock trading
The two main types of stock trading are swing and day trading.
Active stock trading
Swing trading is buying and selling stocks for speedy profit when a short-term price movement happens. Swing traders hold their trades for a relatively short period and sell them immediately after a short price variation occurs.
Swing traders focus on highly liquid markets. They are generally focused on stocks, futures, trades with foreign currencies, and options. High liquidity allows swing traders to trade stocks with low transaction costs in a short time.
To become an active trader, you must focus on the market’s timing and keep an eye on the stock price “24/7.”
Day stock trading
Day trading can bring you a very lucrative career. You should only focus on keeping an eye on the stocks and prices and choosing the right strategy to trade. In other words, you should find a trade, buy it, and sell it on the same day.
Day trades do not focus on businesses' inner workings. They only focus on making instant money in a few hours.
This type of stock trading is like a technical analysis of price variations. To become a day trader, you should have sharp trading skills, self-discipline, and objectivity. To succeed in day trading, traders use different strategies:
- Scalping (making many small profits on short-term price changes throughout the day);
- News - based trading (trading opportunities from high volatility occurring by new events);
- Range trading (pre-determined support and resistance price levels for determining the trader’s decisions);
- High-frequency trading (a strategy with sophisticated algorithms).
What Are Stocks?
Stocks are ownership interests in a company that offers its shares to public investors. The company offers its stocks on a public exchange, available to numerous domestic and international individual investors.
Each stock should be government-regulated and protected for the investors to ensure they invested in an actual, existing company with no fraudulent practices. They are issued by a company that wants to increase its funds to operate the business.
Furthermore, stocks are sometimes called “equities.” However, “stock” is a general term that describes the ownership of a specific company/ies. The two main types of stocks are Preferred stock and Common stock.
Types of stocks
Preferred stock
Preferred stock is a degree of company ownership that usually comes with no voting rights. The voting right depends on the company, so we can not surely say whether these stocks come with or without voting rights. In general, these stocks come without it.
Owning preferred shares means having a guaranteed dividend forever. The guaranteed dividend is the main difference between preferred and common stocks.
Another incredible advantage of these stocks is that they have priority pay-offs over the common stocks in case of company liquidation.
Furthermore, the preferred stocks are callable, meaning the company that issues them can purchase them from the shareholders. This may happen anytime and for any reason. Preferred stocks are usually purchased for a premium.
Common stock
When people talk about stocks, they generally think about common stocks. This is because the majority of issued stocks are common stocks.
Common stock is company ownership with a claim on a portion of profits. Investors receive 1 vote per 1 share, with the right to elect the board members charged for the major management decisions.
Over a longer term, common stocks yield higher returns than most other investments. The drawback here is the fact that common shareholders would not receive any money until bondholders, creditors, and preferred shareholders are paid off.
How is stock price determined?
The stock price is determined the same as the price of everything else on the market - by supply and demand.
The Supply and Demand Law says prices increase when supply rises and demand declines; the opposite, price drops, and supply constricts while the demand increases. This law makes the stock market no different from other economic markets.
However, companies use different formulas in determining the stock price. The Dividend Discount Models are stock valuation methods, saying: “A fair stock price is the sum of the present value of all dividend payments in the future.”
Almost every time, there is a maximum price ( bid price ) a buyer wants to pay for a specific stock, and a maximum price ( ask price ) a seller wants to set for the shares of that stock. It is a kind of auction.
Buyers bid the price for the stocks investors are willing to sell. So, if the demand for a specific stock is high, investors will buy shares immediately before the sellers consider getting rid of them. This event increases the price higher.
Conversely, if investors are selling more than buying stocks, the stock price on the market will drop.
Anyway, numerous events and moments move the stock price up and down. You will see it once you get into the stock market.
How Stock Trading Works?
You may also wonder how it works and how all securities are sold. To keep everything in place, the market has market makers, which are usually individuals or companies charged for trading securities.
Market makers try to connect buyers with stocks since individual buyers will not always find matching sellers and stocks. Market makers are actually brokers that act like intermediaries, helping sellers and buyers come together because of mutual interest.
The broker or market maker offers up-to-date prices at which the buyers or sellers are willing to buy/sell a stock. In most cases, the market makers are brokerage companies or banks. These market makers enable greater and faster trading activity and service use.
Market makers constantly offer quotes on prices they will pay for buying more shares ( bid price ) and prices they will sell their shares for ( ask price ). The difference between the bid and ask price is known as the bid-ask spread.
Moreover, they maintain order in stock trading. Without them, the buyers will have to wait too long for a seller to find a matching order.
Market makers’ profit is the bid-ask spread. They make high-volume transactions, which is how they make money as intermediate parties.
Stock Market Participants
The stock market has a set of participants that enable smooth market functioning. The main participants in the stock trading market are the Regulator, Companies, Stock exchanges, Market intermediaries, and investors and traders.
Regulator
The stock trading market is a large sector that needs to be regulated and governed. As all big companies have a regulatory body, the trading market has it, too. The stock market's regulator oversees the market's fairness, function, and the entities involved in the financial activity there.
The stock market regulator investigates thoroughly to prevent fraud between the involved parties. Keeping an eye on the transactions, the regulator ensures everything is transparent and efficient on the market.
Because the stock market has multiple sectors, there are multiple regulators for each of them. For example, the financial market is controlled by RBI, SEBI, IRDA, PFRDA, Ministry of Finance, etc.
The regulatory body of each sector aims to protect investors’ interests in securities, develop the market, grant licenses, prevent malpractices, regulate all market activities, design guidelines, register intermediaries, and more.
Stock exchanges
Stock exchanges are registered investors and stockbrokers that transact electronic securities. The exchanges provide shares, stocks, and capital events like payment of dividends and incomes.
Securities traded on these platforms offer stocks issued by a listed company, unit trusts, and derivatives.
In other words, stock exchanges work as auctions where stock buyers and sellers do the transactions. These parties have multiple essential roles in the economy:
- They raise businesses’ capital;
- They mobilize savings for investments;
- They share profits;
- They improve and extend distribution channels;
- They create good investment opportunities for smaller investors;
- They work on development projects.
Companies
Publicly Traded Companies issue the stocks we see on the market. Every company that makes an IPO (Initial Public Offer) becomes a Publicly Traded Company and gets involved in the stock exchange traffic.
Market intermediaries
Stock market intermediaries are participants involved in financial transactions apart from the stock sellers and buyers.
An intermediary can be an individual or a company. The intermediary’s main role is to enable smooth activity flow on the market, ensuring all regulator rules are met. Trading market intermediaries can be:
- Depositories and Depository participants;
- Trading members;
- Clearing members;
- Clearing house;
- Clearing bank;
Investors and traders
In the end, it is you. The most important participants that keep the market “alive” and active are the investors and traders. You become an investor when you invest in a company on the stock exchange.
If you are a beginner, we recommend choosing the FoolProof stock trading service. Using this service, you can choose the right side of the trading market, learn how to trade stocks and options, and make a profit. The stock market has two types of investors:
- Retail investors - ones that directly invest in the stock market;
- Institutional investors - financial institutions that act like intermediaries. They can be domestic or foreign banks, AMC (asset Management Companies), insurance companies, etc.
Stock market traders focus on supply and demand and the stocks' price patterns. These parties maintain the liquidity in the market, increasing the volume of trades, buyers, and sellers. There are various trader categories:
- Informed traders - make trades to reach the broader market. They focus on financial ratios, economic data, and earnings.
- Uninformed traders - follow the price movements and make decisions based on volatility. They sometimes use technical analysis.
- Intuitive traders - find opportunities using only their instincts. They rely on their experience and sometimes use research reports and charts to confirm their intuitive thoughts.
Conclusion
Well, we have come to the very end. Therefore, what’s stock trading? We hope this article has met your expectations and helped you learn about stock trading and how different parties contribute to its smooth functioning.
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