A lot of you out there would have been curious about the stock market at some point or the other in your life, and a lot of you must still be eager to know how things work. Have you wondered what being a stock broker is like? Is it exciting and risky, or is it nothing more than a quick way to make money?
This article gives a basic understanding of trading for beginners, along with some terminologies and strategies. To become a master trader, you would need to learn from experience by actually trading in markets, but you can start your journey here by getting to know a few basics.
Some Terminologies To Better Understand
Given below are some of the common terms and phrases (in alphabetical order) that you will come across when reading about stock markets and trading.
Arbitrage is the process of making a profit off securities purely from the difference in prices. For instance, if a stock is at $1 in market A and $1.50 in market B, a trader can buy 100 stocks in market A and sell them in B, keeping the difference of $50 for himself.
This is the scenario where the market is in decline, typically having fallen 20% or more from recent highs. It means that share prices are continuously dropping, leading to a downward trend. As a result, the economy slows down, and unemployment is on the rise as companies start to lay off workers.
A bull market is the one that is on the rise, where the economy is strong, and the employment rate is high. This means that the market experiences a prolonged period of rising stock prices. In a bull market, you see strong demand and weak supply for securities.
It is the process of buying and selling securities (bonds, stocks, options, etc.) within a single trading day. This is typically seen in stock markets and Forex (foreign exchange) markets. Day traders aim to make money off short-term market fluctuations, especially in highly liquid stocks and currencies.
The index is the indicator or measure of something, used as a reference marker for traders and portfolio managers. Indices are meant to replicate a certain area of the market; for example, the S&P 500 and the US Aggregate Bond Index are common benchmarks for the American stock and bond markets, respectively. Note that since you cannot directly invest in an index, index funds are created to track their performance.
Open, Close, High and Low
These four terms are often used when referring to the price of a particular stock daily. As you can guess from the names, open and close are the prices of the stock when the market opens and closes respectively, while high and low refer to the highest and lowest prices of the stock during the trading hours.
A collection of investments owned by an investor are collectively called his/her portfolio. It can contain stocks, bonds, commodities, currencies, and cash equivalents, as well as their fund counterparts, including mutual, exchange-traded and closed funds.
The place where traders and brokers buy and sell securities is called a stock exchange. For a stock to be traded in an exchange, it must first be “listed” on the exchange, i.e., the company should be recognized as a public-owned company, and people can trade shares. The New York Stock Exchange (NYSE) and NASDAQ are the two biggest stock exchanges in the world.
Strategies For Beginners
While it is impossible to cover all the possible strategies that you can try as a beginner, here are a few of the common practices you can explore in day trading.
Devote Time For Trading
A common misconception is that day trading can be done with minimal effort in your free time. This is wrong: even though trading is not the primary profession for you as a day trader, if you are serious, you should set aside a couple of hours every day dedicated for this purpose. Based on whether you are a risk-lover or not, trade accordingly when the market is volatile (as soon as the market opens and just before it closes) or steady (around lunchtime).
What Parameters To Look At
In deciding which stocks to target, a day trader typically looks at three things:
- Liquidity: how easy it is to enter or exit a trade deal, i.e., how easy it is to convert an asset or security into liquid cash.
- Volatility: the range in which a day trader operates. More volatility means greater fluctuation of the stock price, which results in greater profits or losses.
- Trading Volume: how many times a stock is bought and sold in a given time period. The higher the volume, the more the people are interested in that stock.
Know All The Rules
It takes a lot of experience with trading to understand all the rules and their implications, so you need to read extensively about the regulations of trading. It is easy to be confused by rules like the wash sale rule or the PDT rule, but you must be aware of them so that you don’t flout a rule by mistake. Of course, with further experience, you will also get to know how to use the rules to your advantage.
Keep A Cool Head
Even the veteran traders occasionally make the mistake of letting their emotions interrupt trading. As a beginner, you are more likely to fall prey to this: you might get excited when you make a streak of profits, or you might feel depressed when you keep losing money.
As a beginner, you must keep calm at all times without getting carried away by your wins or losses. Try your best to cap your losses and quit while you are ahead.
Are You Ready to Trade?
By now, you should have a much clearer picture of stock trading. Remember that if you are serious about becoming a trader, you need hands-on experience. Luckily, several online stock trading platforms let you trade with virtual money so that you can get the experience without anything to lose, so start trading today!