What Is Trading Stocks and the Basics You Need to Know

Trading stocks can be a complex process, but at its core, it's quite simple. Stocks represent ownership in companies, and when you buy a stock, you're essentially buying a small piece of that company.

Stocks can be traded on various exchanges, such as the New York Stock Exchange (NYSE) or the NASDAQ. The value of a stock can fluctuate based on supply and demand.

Investors can buy and sell stocks through a brokerage account, which is a type of account that allows you to trade securities.

Getting Started is a straightforward process. There is a lot of information out there, but if you want to know how to start trading stocks, you can take some simple, concrete actions.

To begin, you can break down the process into six manageable steps. The logistics of trading stocks comes down to six steps.

First, you need to educate yourself on the basics of stock trading. There's no shortage of information available. You can start by reading articles and watching videos to get a feel for the market.

Next, you should open a brokerage account. This will give you a platform to buy and sell stocks. The process is relatively simple and can be done online.

Before you start trading, it's essential to set a budget. This will help you avoid making impulsive decisions based on emotions. You can set a specific amount of money to invest each month.

Finally, you should start small and be patient. Don't try to make a fortune overnight. Trading stocks takes time and practice to master.

Stock prices are based on expectations of future profitability, with the value of any individual stock being a function of supply and demand.

The stock market is created by many retail and institutional investors, who respond to different factors and then buy and sell stocks in response, making the market very fickle and prone to sharp price fluctuations.

You can only trade during regular stock market trading hours, which are weekdays from 9:30 a.m. to 4 p.m. ET, unless you have pre-market or after-hours trading available through your brokerage.

Stock trading involves buying and selling shares in publicly traded companies, with the value of the shares depending on factors like the company's financial performance, outlook, overall market conditions, and investor sentiment.

Trading can be contrasted with investing in stocks, the approach to the stock market that aims to gradually build wealth by holding assets over a long period of time, whereas traders hold stocks for only an hour, a day, a week, or a few months.

Day trading is actually the worst option for beginner investors, as for every person who makes millions off of a lucky trade, there are thousands of others who lost money trying the same tactic.

Stock trading comes in many forms, but it's often categorized based on the desired holding period. Long-term trading involves buying shares and holding onto them for several years or even decades.

Active trading is typically when an investor places 10 or more trades per month, trying to take advantage of short-term events to turn a quick profit. Day trading, on the other hand, means buying and selling the same stock in a single trading day, often based on daily price swings.

Day traders care little about the inner workings of the businesses and may use algorithms to help them place trades in milliseconds.

Day trading is a high-risk strategy that involves buying and selling stock within a single day. It's not for the faint of heart, and anyone considering it should do thorough research first.

To be a day trader, you need to be ready to make multiple trades in a short amount of time, often in a matter of seconds or minutes. This can be overwhelming, but some traders thrive on the fast-paced environment.

Day traders often focus on short-term price swings, trying to capitalize on small price movements. They may use technical analysis to make decisions, but it's not the only approach. Some day traders are more like gamblers, relying on intuition and luck.

One key aspect of day trading is being prepared to exit a trade quickly, even if it's on the way up. This can be tough, but it's essential to making a profit.

Position trading is a long-term strategy focused more on stocks' broader trends than short-term fluctuations or market news. It can take weeks or years to hold onto shares.

Position traders may use technical analysis to review a company's chart patterns and trends, helping to identify potential buying and selling opportunities.

By retaining shares for a longer period, position traders can ride out short-term market volatility and focus on the bigger picture.

ETFs are a popular choice for traders looking to gain exposure to a broad market segment. They trade like shares of stock, but each ETF share represents a basket of holdings in several different stocks.

This makes ETFs a more cost-effective way to capture larger market segments. Traders can gain access to an entire industry sector or asset class using a single instrument.

One of the key benefits of ETFs is that they allow traders to buy into a larger market segment without having to trade in and out of each individual security or index involved. This can be a more efficient way to trade.

Fundamental analysis involves evaluating a company's fundamentals, such as its revenue and earnings, to better understand its value.

A fundamental analyst will start with a company's financial statements.

Fundamental analysis can help you find stocks that are undervalued relative to their sector or the broader market.

You can then use technical analysis to pinpoint the best time to buy shares of that stock.

Analyzing stocks can be a complex task, but understanding the industry sector is a crucial step in making informed investment decisions. The industry sector a company operates in can have a significant impact on its stock performance.

A company's industry classification is known as its Global Industry Classification Standard, or GICS code. This code is a critical tool for investors who want to create a diversified portfolio or identify competitors in the same industry.

The GICS code defines 11 economic sectors, which are further divided into smaller categories. For instance, the consumer staples sector is a category that includes companies that make goods essential to consumers.

Consumer staples stocks tend to fare well in a recession because people will always need their products. This is in contrast to consumer discretionary stocks, which may suffer as consumers cut back on optional purchases when the economy falters.

Here are the 11 stock market sectors:

Understanding the industry sector is key to making informed investment decisions, and the GICS code is a valuable tool for investors to use in their analysis.

Growth stocks are shares of companies that are expected to grow faster than the overall market due to their potential for innovation, expansion, or disruptive technology. These are often smaller-cap and newer companies.

Growth stocks tend to be riskier than value stocks, as they're often associated with smaller, more unproven companies. Growth stocks can be volatile, with prices fluctuating rapidly.

Value stocks, on the other hand, are shares of companies that are perceived to be undervalued by the market. Value traders look for stocks with solid fundamentals, such as low price-to-earnings (P/E) and price-to-book (P/B) ratios.

Value stocks often pay higher dividends, which can be attractive to investors seeking regular income.

Fundamental analysis is a way to evaluate a company's financial health by looking at its revenue and earnings. This helps you understand whether the company is undervalued, overvalued, or fairly priced.

You can use financial statements to start your analysis, which is different from technical analysis that looks at statistical trends and patterns. While the two approaches are often considered opposing, combining them can give you a broader understanding of the markets.

Fundamental analysis can help you find stocks that are undervalued relative to their sector or the broader market.

Momentum is a key concept in stock trading, where a security's price and volume history are studied to identify trends and make informed decisions.

A security's price will often continue to move in the same direction if it's trending higher, and momentum traders look to benefit from these trends.

Momentum traders sell when the momentum dies down, as the trend is likely to reverse.

Identifying a security's movement trends can be done by studying its price history, which can help you predict its future behavior.

If a share of stock has been falling in value, it will frequently keep moving that way, experiencing a downward trend.

Momentum traders need to be aware of when the momentum dies down, as this is often a signal to sell and avoid further losses.

By understanding momentum and its role in stock trading, you can make more informed decisions and potentially avoid significant losses.

Developing a plan is crucial for analyzing stocks effectively. Your objectives should be clearly defined, whether it's to generate extra income or use trading as a part-time job.

Consider how much time you want to dedicate to stock trading. If you want to trade full-time, you'll need to be prepared to put in significant hours.

It's essential to determine your risk tolerance, as this will impact the kind of stocks you sell. Some companies are considered riskier than others, and you should be aware of this before making any trades.

Next, think about the personal trading strategies and risk-management techniques you want to use.

Managing risks is crucial when trading stocks. Stock prices are subject to fluctuations caused by various market factors, including macroeconomic conditions, geopolitics, and global events, which can result in significant losses if the market moves against a trader's position.

To manage these risks, investors should conduct thorough research and analysis, develop a well-defined trading plan, and set risk management measures such as stop-loss orders. This can help minimize losses and protect your capital.

One effective way to manage risk is to diversify your portfolio by not putting all your money behind one big trade. Consider using the 1% trade strategy, where you don't put more than 1% of your capital into any one particular trade.

Here are some key risk management strategies to keep in mind:

Setting a budget is crucial when it comes to managing risks in stock trading. You should invest only the amount of money you can afford to lose.

It's a good idea to invest no more than 10% of your portfolio in an individual stock, as putting more than that can be risky. If all of your money's in one stock, you could potentially lose 50% of it overnight.

Don't use money that's earmarked for near-term, must-pay expenses such as a down payment or tuition. This is money that you need to have available for important expenses, and you shouldn't risk losing it by investing it in stocks.

If you don't yet have a healthy emergency fund and 10% to 15% of your income funneled into a retirement account, you may want to ratchet down your investment amount. This will give you a safety net in case things don't go as planned with your investments.

Here are some key points to keep in mind when setting a budget for stock trading:

To practice with a paper account, you can invest your time in researching and analyzing stocks without risking any real money. This is a great way to get a feel for how the market works and to test out your trading strategies.

You can start by choosing a stock and watching it for three to six months to see how it performs. This can give you a good sense of how the market fluctuates and how different stocks behave.

Investing your time in paper trading can also help you learn the market and build up a track record before putting real dollars on the line. Many online stock brokers offer paper trading tools that allow you to test your trading skills and build up a track record.

Here are some key things to keep in mind when practicing with a paper account:

By practicing with a paper account, you can reduce the risk of losing money and make more informed decisions when it's time to start trading with real money.

Risk management is crucial in stock trading. It's essential to understand the different types of risks involved and how to mitigate them. Market risk, or systematic risk, affects the entire stock market and can result in significant losses if the market moves against a trader's position.

To manage market risk, diversification is key. Don't put all your eggs in one basket, as the saying goes. Some traders use the 1% trade, where they only put 1% of their capital into any one particular trade.

A well-defined trading plan is also essential. Before entering a trade, you should get a sense of when you will exit your position. This will help you avoid making impulsive decisions based on emotions.

Using stop-loss orders is another way to manage risk. These orders automatically execute trades when an asset drops to a certain price, helping to limit losses. For example, if you place a stop-loss order on a share of stock, it will automatically sell the stock if it falls below a certain price.

It's also important to set a stock trading budget. Even if you're great at trading stocks, putting more than 10% of your portfolio in an individual stock can be risky. Consider investing only the amount of money you can afford to lose and diversifying your portfolio to reduce overall risk.

Here are some key risk management strategies to consider:

Remember, risk management is an ongoing process that requires discipline and patience. By understanding the different types of risks involved and using the right strategies, you can minimize your losses and achieve your financial goals.

Emotions like greed, fear, and regret play a huge role in the trading process. These emotions can be both beneficial and destructive, depending on how a trader utilizes them in different situations.

Greed can be a powerful motivator, but it can also lead to impulsive decisions. In a bull market, greed can help a trader accumulate wealth, but it can be devastating when a bear market strikes. On the other hand, fear can hold a trader back from taking necessary steps in the trading process.

Regret is another emotion that can be a major obstacle for traders. Many traders jump into the trading process due to regret, only to lose more money in the process. To manage these conflicting emotions, it's essential to develop a trading or investing discipline that relies on more objective measures.

One popular example is to base trading decisions on the trend direction of a stock's price action. There are three main directions: up, down, and level or flat. These trends can be determined using technical indicators like candlesticks, moving averages, Bollinger Bands, and standard deviation tunnels.

Elite traders have been found to be better than random chance at buying stocks, but worse than random chance when selling. This may be because they don't track post-sale performance and spend more time thinking about buying than selling.

Here are some key emotions to be aware of when trading:

You can live on $100 if you're resourceful and know how to stretch your dollars. Many discount brokerages allow investors to buy fractional shares in a company with as little as $100 or less.

You can even trade stocks with $100, buying half a share if the stock price is $200. This is because commission-free stock trading is now available at many online brokers.

Living on a tight budget requires careful planning, but it's not impossible. With $100, you can start building an investment portfolio, albeit small.

You can also use $100 to buy a few shares of a company's stock, depending on the price per share. This is a great way to start investing, even with a limited budget.

To make the most of $100, you'll need to be mindful of your expenses and prioritize your spending.

Choosing a brokerage is a crucial step in trading stocks. You'll want to find a broker that fits your needs, whether you're just starting out or a seasoned trader.

To get started, you can open a brokerage account with an online broker in just a few minutes. This gives you the option to invest when you're ready.

Educational materials and training are essential for beginners, so look for a brokerage that offers these resources. On the other hand, advanced charting capabilities are more important for experienced traders.

A good broker should have a user-friendly interface that complements your trading style. You'll also want to consider fee structures, on-the-go accessibility, and stock analysis tools. Beginner traders should look for a firm with a wide offering that provides support during tough times.

If you're unsure where to begin, you can check out recommendations for the best stock trading apps.

Stock prices are based on expectations of future profitability.

The value of any individual stock is a function of supply and demand, with the price of any one share resulting from the supply of and demand for ownership rights in a particular company.

Day trading can be a high-risk option, with thousands of people losing money trying this tactic for every one who makes millions off a lucky trade.

The stock market functions largely on sentiment, with retail and institutional investors responding to different factors and buying and selling stocks in response.

Market Cap is a key concept in the stock market that helps investors understand the size and stability of a company. It's calculated by multiplying the value of its shares by the number of shares outstanding.

Large companies with bigger market caps tend to be more mature and stable, but may have less growth opportunity. On the other hand, smaller companies with smaller market caps can be riskier but may provide more long-term growth.

Here's a breakdown of the different market cap categories:

Understanding market cap can help you make more informed investment decisions.

Stock prices are based on expectations of future profitability, with the value of any individual stock being a function of supply and demand.

The stock market can be very fickle, shifting quickly and experiencing sharp price fluctuations, making it a challenging environment for investors.

You can only trade during regular stock market trading hours, which are weekdays from 9:30 a.m. to 4 p.m. ET, unless you have pre-market or after-hours trading available through your brokerage.

Day trading is actually the worst option for beginner investors, as it's a high-risk strategy that can lead to significant losses.

The efficient-market hypothesis (EMH) suggests that at any given time, prices fully reflect all available information on a particular stock and/or market, making it unlikely for any amount of analysis to help an investor make gains above the stock market itself.

In efficient markets, prices become not predictable but random, so no investment pattern can be discerned, resulting in the failure of any investment strategy that aims to beat the market consistently.