In this article, we’ll explore the fundamentals of stock trading, delve into the factors that influence stock prices, and offer practical tips for those looking to enter this market. Whether you’re a novice trader seeking to understand the basics or someone looking for a refresher on stock trading principles, this guide aims to provide valuable insights to help you navigate the world of stock trading.
What are stocks?
The terms stocks and securities are used interchangeably in the financial industry, although they have slight differences. “Security” is a broader term used in the financial sector, referring to financial instruments that represent an ownership position in a publicly-traded corporation (stock), a creditor relationship with a governmental body or a corporation (bond), or rights to ownership as represented by an option. For instance, if you buy shares in 50 different companies, you are diversifying your investment across these entities. However, the term “shares” refers to the ownership of a specific company, such as Amazon or Facebook. It is important to distinguish between stock trading and stock investing, two approaches with different goals and strategies.
How to trade stocks
Stock trading is one of the most popular activities in the financial markets, separate from the longer-term strategy known as investing. The equity market is usually the gateway for many people when they enter the world of trading. This is because, fundamentally, stocks, particularly those of the most famous companies, are one of the assets that are most widely followed by the specialized media, and therefore, investors have ample access to information to execute their decisions based on data.
Media coverage of stock prices usually increases when their value has been rising for some time. This often leads many traders to enter markets experiencing a prolonged uptrend. These traders adopt the strategy of waiting for prices to continue rising to generate the expected returns. Similarly, it is also common for some traders to identify peaks in the price of securities and decide to sell to avoid seeing the value of their holdings fall and lose strength in their investment portfolio.
This is just one of the many ways of trading stocks and to limit yourself to it is to miss the opportunity, for example, to make a profit even when the market is down.
What factors determine stock prices?
There are quite a few factors that can influence a company’s stock trading. Some of these factors are:
- Interest rates
- Market sentiment
- Current events
- Supply and demand
Interest rates
Interest rates influence stock trading. This is due to a trickle-down effect from the Federal Reserve, which can increase interest rates and cause the stock market to fall. Higher interest rates typically motivate individuals to sell their holdings. However, if the Federal Reserve dramatically lowers interest rates, the stock market rises. In Europe, high interest rates coupled with inflation can cause trading to grind to a halt and cause markets to move into the red.
Investor sentiment
It is not only interest rates that influence the stock market. Investors also play a crucial role depending on whether they are bearish or bullish about a specific market. As an example, a bear market is one in which investors are concerned about risks, resulting in a stagnant and declining stock price. This type of investor or trader has a lower tolerance for risk. In contrast, a rising market is one in which investors invest with confidence and take risks because they have a higher tolerance for risk, which causes both market demand and stock prices to increase.
Current events
Like all commodities, current events and in some cases politics can influence stock prices. Stakeholders should pay close attention to any large-scale events such as a civil war, political upheaval or terrorist attack. All of these factors can produce volatility in market prices and cause all share prices to fall sharply.
Supply and Demand
One of the most important reasons why stock prices fluctuate in price is supply and demand. When there is a disparity between both supply and demand, the price of a security automatically increases or decreases. For example, if there is a sudden shortage of toilet paper and the majority wants to buy it, the price of toilet paper will rise. This principle applies similarly to stocks, if a company reports impressive half-yearly or quarterly results and interest in buying its shares increases, a shortage of its stock may occur. When this happens, the company’s stock price will increase.
Stock trading vs. stock investing
But what is stock trading and how does it differ from stock investing? This is a common question, but fortunately the differences are simple to understand. People looking for short-term profits opt for stock trading, which is the speculation of stock price movements.
That said, there is usually a greater risk associated with stock trading, as the prices of these assets can go up or down in a short time. Investing in stocks involves the purchase of securities with the idea of earning long-term profits and is favorable for traders with lower risk tolerance.
How to start trading stocks?
Now that you understand what stock trading is and what you need, how do you start trading? Fortunately, the process is quite simple. Once you open a trading account, you can start trading stocks, although there are a few things you need to do first. It is advisable to do your research beforehand and of course, practice on a demo account until you feel confident enough to enter the real market.
It is important to study the basic terms of technical and fundamental analysis. Learning how to analyze price charts can help you better prepare for stock market movements. Also, explore all the tools available to maximize your profits while limiting investment risk. Remember never to invest more than you can afford to lose.
Don’t forget the risks involved in trading stocks. These risks can be volatility and continuous price changes. Last but not least, beginner and intermediate investors should be aware of the commissions that may apply in the market. As an example, stock trading involves commissions and charges. You should be aware of the initial and final charges that are levied when you are trading in the market.
Key Takeaways and Starting Points for Aspiring Traders
Throughout this article, we have talked about stock trading, what factors influence the value of this digital asset class and how to trade in this market.
Remember that all investments carry risks, so it’s crucial for each investor to know how to manage price volatility and other risks that may arise.
It is also important to say that first of all if you are someone who does not have much experience in the world of trading, it is advisable to first start with a demo account. Top brokers like OnEquity have at your disposal this tool and many more to help you improve your trading and understand the market behavior.
