Stock trading has gained popularity and momentum, particularly with the introduction of online t...
Stock trading has gained popularity and momentum, particularly with the introduction of online trading platforms. Compared to traditional methods, online trading in stocks is easily accessible and simpler.
This is why more and more people are looking for the correct path to begin trading. This article is a comprehensive guide on stock trading, including its types, pros, cons, and how to trade stocks 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 stock trader.
The key feature of stock trading is that a trader doesn’t own real shares but gains profit on the price differences.
Stock trading is done via CFD (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.
Stock trading can be done through a brokerage firm or an agent. When someone says they trade in the stock market, they refer to buying and selling 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
Stocks 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.
Growth Stocks
A growth stock refers to a company that can grow above the average market rate, outpacing its peers with respect to gains and stock performance.
The benefits traders could receive are due to the significant price rises - and these, in turn, result from a high growth rate, competitive advantages, a loyal customer base, and revenue.
Examples of successful growth stocks include Amazon, Facebook, Apple, and Netflix. Amazon and Facebook 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 stocks (also referred to as yield stocks) are the publicly-listed companies that provide regular dividends, are well-established, and perform well in bull markets.
The yield on stocks, known as the cost 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 market price for calculating the yield on their stocks. Because yield and stock prices have an inverse connection, the current yield falls as a company's stock price rises.
The benefits of trading defensive stocks include withstanding financial crises with less volatility, having cash backup, and the potential for positive long-term performance.
New Issues
A new issue refers to a stock registered in a publicly-traded financial 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 trading in these stocks include new capital and value for the company, easy investment realization, and exposure to a new company.
Additionally, the stock 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 profits. Since there is a continuous demand for their products, defensive stocks are more stable than the other types of stocks, regardless of the stock market’s overall state.
Defensive stocks provide a significant advantage over the other stocks in long-term returns while posing a reduced risk. Defensive stocks are opted for in times of economic instability.
Examples of defensive stocks include Coca-Cola, Johnson & Johnson, Procter & Gamble, etc. However, in bull markets, the subject stocks offer smaller profits due to their nature of low volatility.
Types of Stock Trading
Knowing and understanding the different types of stock trading is an essential step towards the process itself. This is because once a trader gains knowledge on the available stock trading types, he can examine his financial objectives and choose which trading technique is best.
Following are the different types of stock trading available in the stock market:
Day Trading
Also known as intraday trading, this type requires buying and selling the stock 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 stock trading positions.
Intraday trading is aggressive and necessitates rapid choices. The type is best suited for active traders who can react quickly to stock market changes.
Day trading is done using trading 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.
Position Trading
Positional trading covers the holding of stocks 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 and technical analyses. Consequently, short-term fluctuations are not paid heed.
In position trading, 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 to stock trading while still generating fair profits.
This stock trading type is dependent on the company’s or stock’s future potential.
Swing Trading
Swing trading refers to the strategy where traders buy and sell stocks over the upward and downward trends. Traders intend to capitalize on the small movements within a larger overall trend.
In swing trading, stocks are held for over 24 hours so that stock 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, but the level of risk is lower than intraday trading.
Scalping
Through scalping, active stock traders wish to gain profits from smaller market 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 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
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. (Continue reading with LiteFinance)
