Stock Trading: A Guide for Beginners

2024.03.26 2023.03.09 Stock Trading: A Guide for Beginners

Jana Kanehttps://www.litefinance.org/blog/authors/jana-kane/

Stock trading has gained popularity and momentum, particularly with the introduction of online platforms. Compared to traditional methods, online trading stocks is easily accessible and simpler. This is why more and more people are looking for the correct path to begin virtual trading. This article is a comprehensive guide on how to trade stocks, including its types, pros, cons, and how to trade shares for beginners.

Stock Trading: The Essentials

Stock trading means to buy or sell shares in a specific company, and actions are based on daily price fluctuations where short-term gains are prioritized over long-term gains. The person who buys and sells shares and engages in financial investments in the stock market is known as a trader. The key feature of stock trades is that a trader doesn’t own real shares but gains profit on stock price difference. Stock trading is done via trading CFDs (Contract for Differences), which refers to a cash-settled financial contract that uses financial derivations to pay the differences between the opening and closing trades. However, CFDs are complex instruments that come with a high risk of losing from investor accounts. Thus, it’s important to have the necessary knowledge and experience, as well as develop robust trading strategies to limit potential losses when trading CFDs.

You can trade stocks through a brokerage services firm or an agent. When someone says they trade stocks in the stock market, they refer to buying and selling company’s shares/equities on one (or more) of the stock exchanges that make up the broader stock market. The Nasdaq, New York Stock Exchange (NYSE), and Chicago Board Options Exchange (CBOE) are the top stock exchanges in the United States.

Various Stock Types: Which One to Choose

Shares or equities reflect ownership of a company’s portion, which directly entitles the stockholder to the assets and profits related to the subject portion of the company. “Shares” are the units of stock. 

Following are the four types of assets a trader can trade in the stock market:

Growth Stocks

A growth stock refers to a company that can grow above the average stock market rate, outpacing its peers with respect to gains and stock past and future performance. The benefits traders could receive are due to the significant share price rises — and these, in turn, result from a high growth rate, competitive advantages, a loyal customer base, and revenue. Examples of successful growth shares include Amazon, Meta Platforms, Apple, and Netflix. Amazon and Meta Platforms have, over the years, displayed a high growth rate. Similarly, Apple and Netflix enjoy a loyal customer base due to their competitive advantage.

Dividend (AKA Yield) Stocks

Dividend shares (also referred to as yield stocks) are the publicly-listed companies that provide regular dividends, are well-established, and perform well in bull stock markets. The yield on trading stocks, known as the trading costs yield or yield on cost (YOC), is calculated as the sum of the increase in price and the dividends paid divided by the purchase price. Most companies also use the current stock market price for calculating the yield on their shares. Because yield and share prices have an inverse connection, the current yield falls as a company's share price rises. The benefits of yield stocks include withstanding financial crises with less volatility, having cash backup, and the potential for positive long-term future performance.

New Issues

A new issue refers to a stock registered in a publicly-traded financial stock market for the first time. The majority of new issues originate from privately owned firms that go public, providing fresh possibilities for investors. An Initial Public Offering (IPO) is used to offer the new issue to the public via stock exchanges like the Nasdaq or the NYSE. The intention behind new issues is to raise capital for the respective company. The key benefits of investing in these assets include new capital and value for the company, easy investment realization, and exposure to a new company. Additionally, the share price on the IPO is usually low, which provides impressive prospects for future gains.

Defensive Stocks

Defensive stocks refer to the shares in a company that offers regular dividends and reliable final profit. Since there is a continuous demand for their products, they are more stable than the other types of assets, regardless of the stock market’s overall state. Defensive stocks provide a significant advantage over the other shares in long-term returns while posing a less high risk of losing money. They are opted for in times of economic instability. Examples of defensive stocks include Coca-Cola, Johnson & Johnson, Procter & Gamble, etc. However, in bull stock markets, the subject stocks offer smaller profits due to their nature of low volatility.

Advantages of Trading Stocks

The entire stock market is valued at $95 trillion, with the potential to grow in the coming years. It implies high risk of losing trades and has provided investors with significant profits as well as losses. It can be used to create revenue if the risk warnings are controlled. The main pros of online stock investing are discussed below:

1. Income: trading shares is based on buying and selling underlying assets without owning them. Thus, in a bear market, traders can take advantage of the weak market condition. Strategies include buying at lows to make gains and selling at highs. Online share trading is considered one of the most popular ways to make money. Once successful leveraging of the high risk is done, traders can make significant profits.

   

2. Hedging: stock investing helps to diversify your portfolio for both newibies and professional traders. Through portfolio diversification, a trader can collect varied investments, thereby assisting in reducing high risk of losing such as permanent loss of capital or their portfolio’s volatility. For diversification, a beginner trader can buy above 10 assets in a range of different industries in the stock market. This is recommended because during economic instability, buying stocks from one company can prove to have high risk and make retail investor accounts lose capital since the price falls.

   

3. Low funds: since there is no minimum amount for opening an investor account, a trader can begin speculating stock CFDs with as little as $100. This ensures the safety of your virtual funds. The amount may vary and depends on the trading plan a trader wishes to use. It also depends on the online broker the trader would opt for. Keeping these points in view, the funds would still be low enough for a trader to afford. However, keep in mind that CFDs are complex instruments and without the necessary knowledge may lead to losing money rapidly.

   

4. Easy scheme: trading shares is not as tough as one might initially think. It is simple and easy, particularly if the trader is familiar with Forex. Once the trader's brokerage account has been set up and funded, he can move on to researching and deciding on the trade he would like to proceed with. Traders know that a simple rule is to buy low and sell high to earn gains.

Disadvantages of Trading Stocks

The stock market is extremely volatile in nature, with new highs and lows being created every second. Due to this factor, there are several drawbacks of trading this instrument as well. The main cons are discussed below:

1. High volatility: Since the stock market positively correlates with the economic conditions, trading stocks can be challenging if the market conditions change rapidly.

2. Time: Proper research is necessary before trading with a company’s shares. This includes learning how to interpret financial institutions’ statements, annual reports, and news. Moreover, traders must also keep an eye on the market, as even the finest companies' stock prices can collapse in a market crash, correction, or bear market.

3. Corporate competition: Stock trading and its market contain both beginners and industry experts, the latter of which have the time, knowledge, tools, models, and computer systems to trade shares.

4. Emotional factor: Due to their volatile nature, stocks experience highs and lows in their prices every second. This can create emotional responses, such as fear and greed.

Types of Stock Trading 

Knowing and understanding the different types of particular stocks is an essential step towards the process itself. This is because once a trader gains knowledge on the available stock types and other investments details he can examine his financial objectives and choose which trading technique is best. Following are the different types of stock trading available in the market:

Day Trading

Also known as intraday trading, this type requires buying and selling assets on the same day and is the most common type. Before the stock market shuts off, day traders register their gains and losses swiftly and close their positions. Intraday trading is aggressive and necessitates rapid choices. The type is best suited for active traders who can react quickly to market changes. 

Day trading is done using tools and software; therefore, good technical analysis and risk management techniques are important. It is done on low timeframes, from 1 minute to 4 hours. Lack of knowledge and experience in the trading sphere may push your retail investor accounts lose money.

Read more about intraday trading here.

Monitoring in short-term trading

In speculative investing, it is important to analyze the information from professional journals, analytics; to read the reports on industrial capacities, explore local laws, analyze new products and services in the company, its share prices for at least a few months. It makes sense to study the performance of not a single trade and single corporation, but some of them in the same industry, to choose the best instrument of the best. It is better to be an expert in one industry than have a vague idea of a few ones; it will hardly help you estimate a company’s position. You need to follow the events that can influence the company’s share prices in future. For example, if a company’s share price increased by 0.1 before the innovation is introduced, then it is likely to grow higher in future. If you have completed a list of companies with all economic indicators, next, you should choose the one, whose stocks can be traded to gain profits with the minimum risk of losing money.

Short-term traders try to gain more than they lose. This approach can well suit you as well.

Middle-term trading

In speculating, when the positions are hold on opened from a few days till a few weeks, you need to carry on a thorough analysis. It includes graphic analysis, and analyzing the news about a company's stock prices over the last year; considering reliable experts’ opinions; and such economic indicators as quarterly earning, dividends payments, share, held by the company owners, liquidity amount, company’s debts, the price-to-earnings ratio, or P/E that is the ratio of the market stock price to the company’s earnings per share.

Position Trading

Positional trading covers the holding of assets over longer timeframes, ranging from several days to several weeks, sometimes longer. Solid long-term trends are anticipated in the hopes of making a large profit based on fundamental analysis (factors like political situation, market cap, interest rates, etc.) and technical tools (indicators, chart patterns, etc.). Consequently, short-term fluctuations are not paid heed.

In position investing, minimum alterations or management is required. This aspect makes it suitable for busy professionals who would prefer to work on other tasks by not committing extra effort and time while still generating fair profits. This investing type is dependent on the company’s or stock’s future price performance potential.

Swing Trading

Swing trading refers to the strategy where investors trade stocks over the upward and downward trends. Traders intend to capitalize on the small price movements within a larger overall trend. In swing trading, assets are held for over 24 hours so that market changes may convert to profits. Estimation of overnight market changes is carried out.

Positional trading and swing trading share similarities, except that the position remains active for less than a few months. Swing traders aim to profit from the underlying momentum. This type is no doubt risky and may lead to losing money rapidly, but the level of risk is lower than intraday trading.

Scalping

Through scalping, active traders wish to gain profits from smaller market price movements and reselling. They search, recognize, and select narrower or wider bid-ask spreads. The goal is to trade with lots of small profits.

In scalping, traders need to have a strong exit strategy since a single trade bigger loss could wash out all the smaller profits the trader has procured. To ensure this, the correct tools, strategies, and time is required.

Steps to Start Stock Trading

You aren’t going to buy stocks in fact. You aim at making money on the difference between a stock prices during a certain period of time. Look at the shares quotes, select the shares, you are going to trade, and study their price charts.

Stock investments for beginners should be kept simple by making investments in different low-cost index funds. Read more on how to invest in stocks. The mechanics of trading many stocks, on the other hand, may be broken down into six steps. Learn how to trade shares by following these steps:

Open a Brokerage/Trading Account

To initialize the stock investing journey, funding a broker account would be required. This account holds the trader’s investments for future use. If an individual does not have a broker’s account, it is recommended to open one. The process would take a few minutes. Funding is not immediately required. The trader can navigate through the account to become familiarized with the platform's interface. Once the trader is ready to foray into stock trading, he may deposit virtual funds into the account. To sum up, let’s say a trader has selected a broker and wishes to open an account. The following steps can be followed:

• Open the broker’s official website and complete the registration form.

• Choose the convenient payment method to deposit your account. 

• Complete the verification process if required.

• Choose the trading asset and start trading directly through an online trading platform.

In order to make robust trading acumen, you can use analytics and signals for an instrument, as well as built-in indicators to create your own trading strategy. If stock trading is completely new to you, try using the copy trading service to copy trades of professional traders and own money by yourself.

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Learn Through an Online Stock Trading Demo Account

Most online brokers offer online trading retail investor accounts with demo capability so that beginner traders can experience trading before facing the live market and this way not lose money when trading various financial instruments. The trader can follow real-time market momentum and practice buying and selling actions. Such retail investor accounts offer market simulators that mimic the visuals and actions of a real-life stock exchange. Through this, the trader can make several transactions with various holding periods and techniques, then examine the outcomes for obvious faults. Once the trader is confident, he can switch to live trading on the stock market. Automatic platforms are also available where a robot takes care of most of the process.

Set Your Online Stock Trading Budget

Deciding and setting up a stock trading budget is of utmost importance since funds are central to stock trading. It is recommended to allocate less than 10% of the portfolio to individual stocks. Investments should be equal to the amount a trader can afford to lose.

Set Your Benchmark and Measure Returns Against It 

Measurement of indexes is critical in stock trading. Pick assets and remember to lead a benchmark index based on their location, industry, and volume, such as the Nasdaq Composite Index, the Standard & Poor's 500, or any other such index. Measure the future performance of the equities against the benchmarks. This will help in looking at the right index for future performances.

Choose a timeframe and start trading

Day trading stocks suggests only a basic analysis. The longer is the timeframe, the more thoroughly should one analyze the corporation and the industry, it belongs to. You also need to estimate the stocks liquidity, which is defined by a large volume. It is necessary to follow the stock price movements over a few months, or even years. You’d better choose the equities of the company, you are well familiar with. Beginners shouldn’t consider risky assets that can make their investor accounts lose money, that is for professionals. Try opening the price chart for any instrument and see how it is changing; I opened the chart of META quotes as an example.

Selection of the right timeframe is a vast subject and if I delve in details, there will be one more article :) Therefore, I strongly suggest you read an excellent review by my colleague — Time Frame in Forex trading: a skeleton key that will open any door.

Keep Your Perspective

A trader should remember to maintain his perspective on online stock trading. Since hundreds of traders would wait for the same market movements, it is not essential to always recognize the next biggest stock catch before others, but it’s vital to find the best market signals to enter and exit the market. In this context, it is essential for a trader to do fundamental research (pay attention to economy state, market caps, interest rates, etc.), technical analysis, watch market actions, create trade records, and monitor market status.

Learn About the Broker's Commission

Expenses cover the money a trader provides to the broker for online trading. This includes the commission fee, which should be checked while selecting a broker. Individual stocks bought through a broker may not incur commission fees. “Bid” refers to the selling price of a stock, and “ask” refers to the buying price. “Bid-ask spread” refers to the difference between these two prices, which the broker takes as a commission for trade execution. Another important aspect a trader should consider is risk tolerance - how much of a loss the trader can afford to take within the portfolio.

Check the spread amount for stock trading here.

Best Online Stock Trading Platform: Features

A good trading platform should have the following key characteristics:

1. Order Execution Tools: These tools would be required for placing market order and limit order and must include bracket, reverse, hidden, basket, timed, complex, peg, add-on API, and algorithmic scaling.

2. Stocks: The platform should include a wide range of financial instruments, including complex instruments like CFDs.

3. News Feeds: This feature provides the latest financial news relevant to the market.

4. Scanning Tools: These tools are essential for searching the market for potential traders.

5. Research Tools: These tools will contain stock-based information, ratings, and reports.

6. Technical Tools and Indicators: A wide range of technical tools and indicators should be present to be used for technical analysis.

7. Customer Service: Customer service is essential for technical and informational help.

Stock Trading vs. Forex Trading

How to Learn to Trade Stocks

Below are the different ways interested individuals can learn to trade:

1. Read trading blogs.

2. Opt for a mentor or guide.

3. Opt for online classes.

4. Seek advice and recommendations from experts.

5. Conduct market analysis.

6. Open a demo virtual account.

The Bottom Line

Online stock trading holds immense opportunities for creating gains. It is essential to understand that the practice has both advantages and disadvantages. One can aim to become a successful trader by learning and understanding how the financial markets connect and move, analyzing price actions, charts, and market trends, and developing strategies, plans, and budget allocations. Practice with a LiteFinance demo retail investor accounts, and once confident, shift to live trading.