What Is Stock Trading? A Beginner’s Guide

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Investing in the stock market is one of the best ways to build and preserve wealth over the long term. The average stock market return is about 10% per year — way higher than the average return of a savings account in the United States.

While stock trading can seem complicated at first glance, most anyone can do it with a bank account and a brokerage app on their phone. Here’s a beginner’s guide to learning what stock trading is and how it works.

What Is Stock Trading?

New investors have several ways to invest in the stock market. While there are plenty of stock market guides for “dummies,” this online stock trading guide for beginners offers a look at the different terms, strategies and more so you can get started as a stock trader.

Stock Trading Overview

One of the most popular ways to invest in public markets is to trade stocks. Stocks are an investment that represents an ownership stake in a publicly traded company. When you buy a share of a company’s stock, you are purchasing a percentage of the company.

The stock market operates much like a public auction house. Investors buy and sell shares of a company’s stock by negotiating prices on an exchange. Ideally, you buy a stock that you expect will go higher, and you sell when you believe the stock will head lower.

Types of Stock Trading

Stock trading is not a one-size-fits-all activity. Here are some common strategies:

• Day trading: This is the strategy of actively buying, selling and flipping stocks over a very short period — even within the same trading session. Day trading is considered risky and is not recommended in stock trading for beginners.
• Swing trading: This is a short- to medium-term strategy. You might hold onto a stock for a few days and up to several weeks and are monitoring the market a bit less frequently.
• Long-term investing: This strategy refers to buying stocks and holding onto this for a longer amount of time, possibly several years, to earn from its compounded interest and dividends. It’s one strategy to grow and build your wealth.

How Does Stock Trading Work?

Here’s a quick overview of how exactly stock trading works:

Stock Markets Explained

The stocks you’ll likely be trading will be on the New York Stock Exchange (NYSE) or NASDAQ. From here, you can find any available publicly listed company and keep an eye on which stocks are moving

Buying and Selling Stocks

You’ll first need to open a brokerage account. From there, you can select the type of stock you’d like to buy. There are a few options:

• Market order: Buy a share at that current price
• Limit order: Choose to buy or sell when the share reaches a certain price
• Stop order: Sell if the share drops below a set level

Factors Influencing Stock Prices

The factors that influence stock prices are varied, but they include: supply and demand, company performance and any news or media updates and generally how investors feel in general about the stock. If a company issues a a positive earnings report or makes waves in the media after a particularly successful quarter, that can lead to a stock price rise.

On the other hand, the opposite could happen if the company runs into bad news and the general feeling among investors isn’t very warm. These are the factors you should pay attention to as an investor.

How To Start Stock Trading

Here’s a look at a few simple steps you’ll need to follow to get started trading stocks:

1. Open a Brokerage Account

You can sign up with a broker who will purchase shares and make recommendations in exchange for commissions. Or you can do online stock trading yourself by applying for an account with a discount brokerage. First-time investors can also choose from a variety of mobile apps that can save time and money when trading.

2. Set a Budget for Stock Trading

No stock market trading guide is complete without the reminder that every type of investment has a degree of risk. Stocks are the riskiest, and the risk increases with the potential return.

Set limits for yourself so you’re not tempted to spend money earmarked for other expenses. Even better, add an investment category to your budget. Then you can invest freely.

3. Learn the Different Types of Orders and Start Trading

When you’re ready to buy stock, you place an order through the trading platform or brokerage. The order gives specific instructions for when to buy or sell a particular stock — either a market order, limit order or stop order.

Individual brokers may have additional order types. Ask your broker about their specific policies for investing in the stock market.

4. Measure Your Returns Against the Right Benchmark

Market benchmarks are indexes that represent the market. Investors use them to evaluate the performance of their portfolios. When using a benchmark, make sure its asset allocation matches your account.

For example, don’t use the S&P 500 as a benchmark for real estate investment trust stock. You won’t get an accurate comparison. The S&P 500 tracks the performance of large-cap U.S. stocks — not real estate.

5. Invest for the Long Term

In most cases, investors who use a long-term approach are more successful than those who try to time the market. Stock markets can fluctuate dramatically over short periods of time as they react to what’s going on in the headlines.

Risks of Stock Trading

Stock trading can lead to impressive gains if you’ve managed your buying and selling strategy well, but of course, it’s not a risk-free venture. Knowing what could go wrong and how you can fix and even prevent it is a smart move. Here’s what you should know.

Market Volatility

As you know, a stock’s price can always fluctuate. This isn’t necessarily a reflection on the company solely. You have to take into account that there might simply be an upswing in the market, as well as a downward trend that can mean a loss of your funds. It’s best not to react too quickly when your share is on a downswing. Having a portfolio comprised of lower-risk investments can help buffer any potential losses.

Emotional Decision-Making

Don’t rely solely on emotion-driven decisions as an investor. It’s easy to get caught up in trends around rising stocks so that you’re not left out, for example, but only invest if you believe in the research and the value of it, not because of hype.

Lack of Diversification

It’s never a bad idea to diversify your portfolio. If you’ve got stake in only one stock, that can backfire on you if that single stock plummets for whatever reason. Try different types of assets and balance tiers, to give yourself a better chance of gaining a return that’s worth the effort.

Stock-Trading Strategies for Beginners

There’s no one-size-fits-all when it comes to stock trading. If you’re a beginner, though, you might try a few different approaches — buying an undervalued stock or purchasing only well-known company stocks, as examples. Here are some ways you can plan better and be wise with your trading.

Value Investing

Value investing means intentionally buying stocks that are lower in price, in comparison to how large or strong the company’s financial performance has been. If you’re looking at this approach, you’ll be searching for companies that are known to have a steady earning history and long-term growth potential. This method is a long-haul approach, so patience is key.

Growth Investing

If you’re ambitious and like to invest on the up-and-coming, then you might like growth investing. This means buying share from companies that are in rapidly growing and expanding industries. They may report strong profits and revenue, though the share prices could be a bit higher. These tend to be a bit more volatile, but with that risk, there is also potential for a higher reward as well.

Dollar-Cost Averaging

Dollar-cost averaging refers to continuously investing in a stock in intervals, without paying much attention to its price fluctuations. This strategy helps smooth out any market volatility, since you’re buying consistently rather than trying to time the market.

Melanie Grafil contributed to the reporting for this article.

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