What is stock trading?
Stock trading involves investors trying to make a profit by buying and selling shares in publicly listed companies. Over the last 40 years the size of the stock market has grown substantially, from US$2.5t in 1980 to US$93.7t in 2020, according to The World Bank.
- Stock trading refers to the buying and selling of stocks, which are units of ownership in a company. The goal of stock trading is to generate profits from changes in the market price of stocks.
- It is typically done through a brokerage firm, which provides access to a variety of stocks and financial markets. Traders use market information, technical analysis, and other tools to make informed decisions about buying and selling stocks.
- Stock traders use a variety of strategies to generate profits, including day trading, swing trading, value investing, and more. Traders must choose the right strategy based on their investment goals, risk tolerance, and market knowledge.
What is stock trading?
Stock trading is the practice of buying and selling shares of publicly traded companies on a stock exchange with the goal of generating profits. Stock prices fluctuate based on various factors such as company performance, economic conditions, and market sentiment. Traders buy stocks when they believe the price will rise, and sell them when they believe the price will fall, in order to make a profit.
Stock trading can be done by individuals or through the use of brokers, who provide access to stock exchanges and execute trades on behalf of their clients. There are different types of stock trading strategies, such as short-term day trading, long-term investing, and algorithmic trading, each with its own risks and rewards. Successful stock trading requires a good understanding of market dynamics, an ability to analyse company financials, and a willingness to take calculated risks.
What is the stock market?
The stock market is a marketplace where stocks (or shares) of publicly traded companies are bought and sold. It serves as a platform for companies to raise capital by issuing shares and for individuals and institutions to invest in those companies by buying shares.
The stock market operates through a network of stock exchanges, such as the New York Stock Exchange (NYSE), the NASDAQ and the Australian Stock Exchange (ASX), where stocks are traded on a daily basis.
The prices of stocks are determined by supply and demand and are influenced by a wide range of factors including company performance, economic conditions, and market sentiment.
The stock market is an important component of the global financial system and provides opportunities for individuals and institutions to grow their wealth by investing in a diversified portfolio of stocks. However, investing in the stock market also involves taking on risks, and past performance is not a guarantee of future results.
How does online stock trading work?
Online stock trading refers to the buying and selling of stocks through a brokerage's internet-based trading platform. To participate in online stock trading, an individual must first open a brokerage account with a firm that offers online trading services, such as Stake.
Once the account is set up and funded, the individual can access the brokerage's trading platform and place orders to buy or sell stocks.
The platform provides real-time quotes, news, and market data, and also allows the user to manage their portfolio and track the performance of their investments. Online trading typically involves lower fees and commissions compared to traditional, broker-assisted trading.
However, it also involves a certain degree of self-education and comfort with using technology for trading purposes. Online stock trading is convenient and accessible and can be done from anywhere with an internet connection. However, as with any type of investment, it is important to understand the risks involved and to learn how to conduct research on stocks before making any trades.
If you would like to open a stock trading account, get started.
What types of stocks can you trade?
There are various types of stocks that can be traded, including:
- Common stocks: These are the most commonly traded type of stock and represent ownership in a company. They usually provide voting rights in shareholder meetings and the potential for dividends and capital appreciation.
- Preferred stocks: Preferred stocks pay a fixed dividend, but do not provide the same level of ownership or voting rights as common stocks.
- Exchange-traded funds (ETFs): ETFs are securities that track a basket of stocks, bonds, commodities, or other assets and trade like a single stock on an exchange.
- Index funds: Index funds are a type of Exchange Traded Funds (ETFs) that tracks a specific market index, such as the S&P 500 or ASX 200.
- Penny stocks: Penny stocks are low-priced, high-risk stocks that trade for less than $1 per share.
Traders can also trade stocks from a variety of industries and markets, including domestic, international, and emerging markets.
How to trade stocks?
If you are ready to start investing in stocks then follow the steps below to get started:
1. Open a brokerage account
An individual can open a brokerage account with a firm that offers online trading services or a traditional broker-assisted trading platform. If you are ready, open a brokerage account.
2. Fund the account
Once the account is opened, the individual must fund it with cash or securities in order to make trades.
3. Research and analyse stocks
It is important to thoroughly research and analyse stocks before making any trades. This can include reviewing the company's financial statements, analysing market trends, and considering other factors that may impact the stock's performance.
4. Place an order
The individual can place an order to buy or sell stocks through the brokerage's trading platform. There are various types of orders, such as market orders, limit orders, and stop-loss orders, each with its own benefits and limitations.
5. Monitor and manage the portfolio
After making a trade, the individual must monitor and manage their portfolio to ensure their investments are performing as expected. This can include regularly reviewing stock prices, dividends, and other relevant information.
It is important to remember that stock marketing investing involves taking on risk and there is no guarantee of profit. Before making any trades, it is essential to understand the risks involved and to have a well-diversified portfolio to minimise risk.
Types of stock trading strategies
Some common types of stock trading strategies include:
- Value investing: Value investing is a strategy that focuses on investing in undervalued stocks with the expectation that their market price will eventually reflect their intrinsic value. Value investors typically look for companies with strong financials, a history of steady growth, and a low price-to-earnings ratio.
- Growth investing: Growth investing is a strategy that focuses on investing in companies with strong earnings growth potential, regardless of their current valuation. Growth investors typically look for companies in fast-growing industries, with a proven track record of innovation and market leadership.
- Momentum investing: Momentum investing focuses on buying stocks that have demonstrated strong recent performance and selling those that have underperformed. Momentum investors believe that trends in the market and individual stocks are likely to continue in the short term.
- Income investing: Income investing is a strategy that focuses on investing in stocks that pay regular dividends, with the goal of generating a stable stream of income. Income investors typically look for companies with a history of consistent dividend payments, strong financials, and low debt levels.
- Mean reversion: The mean reversion strategy assumes stock prices will return to their historical average over time. Traders use technical analysis and statistical methods to trade stocks that temporarily deviate from their average price, with the expectation of price correction. It is a risky strategy, as it assumes prices will return to their mean, which may not always happen.
- Statistical arbitrage: Uses statistical analysis to find market inefficiencies, thus generating profits from price differences between correlated stocks by buying underpriced and shorting overpriced stocks. Requires market knowledge and mathematical skill, used by algorithmic traders and hedge funds.
- Long & short trading: Traders take positions in stocks to profit from price changes, long is buying a stock with the expectation of a price increase, and short is selling with the expectation of a price decrease. This requires market knowledge and quick decision-making, and it can be extremely risky, especially due to the short leg.
- Carry trading: Takes advantage of interest rate differences between countries by borrowing in low-interest rate countries and investing in high-interest rate countries. Often used in the foreign exchange markets, it can be a profitable strategy but comes with high risk from changes in exchange and interest rates. This strategy requires an understanding of potential risks and rewards.
Trading can also take place during different timeframes, such as:
- Swing Trading: This strategy involves taking advantage of short-term price swings in the market, by buying and selling stocks over a period of several days to several weeks. Swing traders typically use technical analysis and momentum indicators to make decisions.
- Day Trading: This strategy involves buying and selling stocks within the same trading day, with the goal of capturing small price movements and profiting from short-term volatility. Day traders typically use technical analysis and a high level of market monitoring.
What’s the difference between investing and trading stocks?
Investing and trading stocks are similar in that both involve the purchase of securities with the expectation of making a profit. However, there are some key differences between the two approaches:
Investing: Investing is a long-term strategy, typically focused on buying and holding stocks for several years or longer. The goal of investing is to build wealth over time through the appreciation of the stock's value and the collection of dividends. Investing requires a deep understanding of the underlying companies and a focus on fundamentals such as financial performance, management quality, and market trends.
Trading: Trading is a short-term strategy, focused on buying and selling stocks within a matter of weeks, days, or even hours. The goal of trading is to profit from short-term price movements and market volatility. Trading requires a strong understanding of technical analysis and a high level of market monitoring.
Both investing and trading have the potential to generate profits, but they also come with different levels of risk. Investing typically involves a lower level of risk, but also a lower potential for short-term profits. Trading involves a higher level of risk, but also a higher potential for short-term profits.
It is important to understand the principles and limitations of both investing and trading before making any investment decisions and to tailor a strategy to an individual's financial goals, risk tolerance, and investment experience.
What are the advantages of stock trading?
Let's look at the main advantages of stock trading:
Potential for returns: Stocks have the potential to generate higher returns than other types of investments, such as bonds or savings accounts, particularly over the long term.
Diversification: Stock trading allows individuals to spread their investments across a variety of companies and industries, reducing their overall risk and potentially increasing their returns.
Liquidity: Stocks are widely traded and can be bought or sold easily, allowing individuals to quickly access their funds in times of need.
Transparency: Publicly traded companies are required to disclose financial information, allowing investors to make informed investment decisions and monitor the performance of their portfolios.
Flexibility: Stock trading offers a wide range of investment options, including individual stocks, exchange-traded funds (ETFs), and mutual funds, allowing individuals to tailor their portfolios to their specific investment goals and risk tolerance.
It is important to note that stock market trading also involves a level of risk, as the value of stock investments can be impacted by a variety of economic, political, and market-related factors.
What are the disadvantages of stock trading?
It's important to be aware of the disadvantages of stock trading, find them below:
Market risk: The value of stocks can be impacted by economic, political, and market-related factors, leading to fluctuations in the stock market and the value of an individual's portfolio.
Short-term volatility: The stock market can be unpredictable in the short term, and the value of an individual's investments can fluctuate quickly and significantly.
Information asymmetry: Some investors may have access to information that is not available to the general public, creating an uneven playing field and increasing the risk of fraud and manipulation.
Fees and commissions: Stock trading often involves fees and commissions, which can reduce an individual's overall returns and impact their investment results.
Emotional impact: Watching the value of their investments fluctuate can be stressful for some individuals and can lead to impulsive or poorly thought-out investment decisions.
What affects stock prices?
There are several factors that can impact the price of stocks, such as:
Economic indicators: Economic indicators such as gross domestic product (GDP), inflation, and interest rates can influence the overall performance of the stock market and individual stocks.
Company performance: The financial performance of a company, including revenue, earnings, and growth potential, can impact the demand for its stock and therefore its price.
Market sentiment: The overall sentiment of the market, including investor confidence and risk tolerance, can impact the demand for stocks and therefore their prices.
Industry trends: Trends and developments within a particular industry can impact the demand for specific stocks and therefore their prices.
Political and regulatory environment: Political and regulatory events, such as elections, trade agreements, and new laws and regulations, can impact the stock market and individual stocks.
Supply and demand: The simple law of supply and demand also applies to the stock market, and the price of a stock can be impacted by the availability of shares and the level of demand for them.
How is the stock market regulated?
The stock market is regulated by a combination of government agencies and self-regulatory organisations (SROs), like:
- Government agencies: There are government agencies responsible for regulating the stock market such as the U.S. Securities and Exchange Commission (SEC), and the Australian Securities and Investments Commission (ASIC) in Australia. The SEC is responsible for enforcing federal securities laws, supervising the securities industry, and protecting investors. In Australia, ASIC regulates the conduct of Australian companies, financial services organisations, financial markets and people involved in and advising on investments, superannuation, deposit-taking, credit and insurance.
- Self-regulatory Organisations: The stock market is also regulated by self-regulatory organisations (SROs), such as the Financial Industry Regulatory Authority (FINRA) and even the stock exchanges themselves, like the New York Stock Exchange (NYSE) and Australian Stock Exchange (ASX). SROs are responsible for enforcing rules and regulations, supervising broker-dealers, and promoting market integrity.
The regulations put in place by government agencies and SROs are designed to promote transparency and fairness in the stock market, protect investors, and maintain the stability of the financial system. These regulations cover a range of activities, including the issuance of securities, the trading of securities, and the disclosure of financial information by publicly traded companies.
Stock trading FAQs
Can you trade stocks with $100?
Yes, it is possible to trade stocks with $100, but it may be limited. Many online brokers offer the ability to buy and sell stocks with a small initial investment, and some, like Stake, even offer fractional shares for US-listed securities. However, it is important to keep in mind that the amount of money required to invest in a particular stock will depend on the price of the stock and the number of shares that an individual wants to purchase.
It is also important to consider other costs associated with trading stocks, such as fees and taxes. For individuals with limited capital, it may be more appropriate to consider alternative investment options, such as low-cost index funds or exchange-traded funds (ETFs), which can provide exposure to a broad range of stocks with a smaller initial investment.
The Australian Securities Exchange (ASX) has defined that you must invest $500 (excluding brokerage) when you buy Australian shares in a specific company for the first time. Otherwise known as the “Minimum Marketable Parcel” (MMP). If you have already bought $500 worth of stock in a particular company, then subsequent trades (for both buy & sell) can be of smaller value.
Is it better to be a share trader or investor?
Whether it is better to be a stock trader or investor depends on an individual's financial goals, risk tolerance, and investment knowledge.
Investing may be the better choice for individuals who have a long-term perspective, seek to build wealth over time, and are willing to accept market fluctuations and uncertainty. The buy-and-hold approach to investing allows individuals to benefit from the long-term growth potential of the market, while also earning dividends and interest on their investments.
On the other hand, stock trading may be more suitable for individuals who are looking to generate short-term profits, have a higher risk tolerance, and are comfortable with market volatility. Trading requires a strong understanding of market trends and technical analysis, as well as the ability to quickly make decisions in fast-paced market conditions.
Ultimately, the decision between trading and investing will depend on an individual's unique financial goals and circumstances.
This does not constitute financial product advice nor a recommendation to invest in the securities listed. Past performance is not a reliable indicator of future performance. As always, do your own research and consider seeking appropriate financial or taxation advice before investing.