What is Stock Trading?

The stock market has never been more accessible to everyday, average investors than it is today. For the new investor looking to get started in the stock market, the options are plentiful, but possibly a little confusing — especially when a person examines how volatile the stock landscape has been over the last few years.

But the best way to learn about stocks is to take a hands-on approach — to start a brokerage account, get used to the process, and prepare yourself to be educated along the way! The basics of learning stocks are fairly easy to explain.

What is Stock Trading?

Learning the Stock Market

What is Stock Trading?

Trading shares of stock in companies is the building block of the securities market. Most, if not all, of the investment opportunities one has — retirement funds, mutual funds, ETFs, a 401(k), and so forth — are structured on the most basic transaction:  Purchasing shares of ownership in publicly traded businesses.

The stock market was constructed to benefit both companies and investors. Companies sell shares of ownership, also known as “equity,” as a way to raise the business capital they need to fund operations — everything from developing new products, research, and marketing to obtaining office space, hiring employees, purchasing raw materials, and more.

As the business grows — which it hopefully will — more investors climb on board and purchase shares in the company, which drives the value of the shares higher. That’s how investors attain profits in their portfolio, by strategically buying and selling their shares to maximize capital gains.

Some companies issue quarterly dividends — percentages of their overall profit that they distribute to investors — as another means of “rewarding” investors. But when someone’s talking about their overall portfolio strength, they’re most likely referring to how the values of their shares are going up or down.

What is the Stock Market?

The stock market is the general apparatus on which shares are exchanged. Investors pick what companies they want to own shares in, place their orders, and receive confirmation of their transaction.

In the era before the Internet, the stock market was anchored by activities on the floors of stock market exchanges, like the New York Stock Exchange (NYSE). Traders received share orders from their clients and literally bid for and bought them at the stock exchange in a process similar to that of auctions. Private investors placed their orders on the phone to whoever managed their investment account, and all trading was done by proxy.

These days, most investors conduct their own share trading online through brokerage accounts or investment apps like Robinhood. They place a direct order and execute the transaction themselves. They’re more empowered to do so by the great wealth of investment advice available online.

In recent years, almost all of the major stock-related financial institutions — both long-time businesses like Schwab and Fidelity and newer apps like Robinhood or Acorn — have done away with per-transaction charges and commission fees, so investors are encouraged to be a lot more active in the marketplace.

To evaluate the overall performance of the stock market, observers rely on indices like the Dow Jones Industrial Average and the S&P 500. These indices measure how the largest and most influential companies are performing in the stock market. The Dow Jones tracks the 30 biggest stocks and the S&P 500 tracks the 500 biggest stocks.

Certain indices focus more on types of companies. For example, the Nasdaq Composite trends toward technology and internet-related stocks. All these indices are used to help measure the overall health of the economy, alongside other factors like gross domestic product and employment.

The stock market is generally known as a secondary market. That simply means that companies release their stock shares to the various stock exchanges for them to sell to the public. Investors don’t buy shares directly from the company themselves; they’re buying them from virtual vendors on the exchange.

In contrast, the primary market happens when companies issue new stocks and securities for the very first time, usually as initial public offerings (IPOs) to get their investment structures in place. From that point onward, most transactions happen on the secondary market.

How Do You Start Trading?

Getting into a position to trade on the stock market is extremely easy, especially with the advent of online trading. Most shareholders now invest on their own, without the need for an intermediary, and brokerages have adapted their business models to draw in the do-it-yourself trader.

The basic steps for getting into the stock market for the first time are very simple:

Determine How Much Money You Want to Start Investing With

Most brokerages don’t insist on a minimum account balance, although you’ll need at least some money upfront to start trading. Some services let you get into the stock market with as little as one dollar. But the more you can invest, the more meaningful your portfolio will be and the more quickly you’ll see returns.

If you can spare $1,000 for your first few investments, that’s great — but if $100 is all you can afford at the moment, that’s enough to get started, too. Figure out how much you’d like to set aside for investments, while accounting for your other living expenses, like mortgage or rent, food, car payments, and other basic needs.

Open an Online Brokerage Account

The modern investor has a nearly impossible range of options when it comes to online brokerages to choose from. Some are connected with long-time investment houses like Charles Schwab, TD Ameritrade, Fidelity, Merrill, and more. Other brokerage services — like Robinhood and Interactive Brokers — were specifically designed for the online trader.

Almost all institutions now offer commission-free, no-charge transactions — even the old-school brokerage houses have done away with the fees for basic, everyday trading.

Practice Your Online Trades First

This step is optional, but it can be very helpful before you start making real transactions. Stock trading simulators — like Wall Street Survivor or MarketWatch — allow you to construct mock portfolios to practice making investments and to begin to build an overall strategy. Trade simulators can help take a lot of the mystery out of securities investments before you start doing the real thing.

What is Stock Trading?

How Do You Buy Shares?

When you’re finally ready to start buying actual shares, the overall process is straightforward. The exact steps that you take depend on what brokerage you’ve signed up with, but the general procedure is the same no matter which service you’re with.

Pick Your Stock

Decide what company you want to invest in first — we’ll give you basic strategies for finding your first companies in just a little bit. Search for the company (i.e., Microsoft) or its ticker symbol (i.e., MSFT) at your brokerage site. Their homepage for the company should contain a fair amount of information about the company, as well as options to buy or sell.

Choose “Buy”

Hopefully, this is self-explanatory. You’re buying stock. You don’t have anything to sell yet.

Select How Many Shares You Want to Buy

Most brokerages give you the option to buy a certain number of shares or buying a certain monetary amount of shares (which can result in ownership of fractional shares). To start out, we recommend buying whole shares:  3 shares in Apple, 2 shares in Disney, 1 share in Netflix, and so on.

Choose Your Order Type

You can purchase shares in one of two ways:  Market orders or limit orders. When you place a market order, you’re telling the brokerage to “buy my shares at whatever price they’re currently at.” So if the stock you want is currently priced at $25.72 per share, you’ll get your share(s) immediately for $25.72 each.

When you place a limit orderyou set a price at which you want to buy the share. If and when the share price hits that price, your order automatically executes. For example:  As of this writing, the cost of a share in Disney is $170.97. If you don’t want to pay that much, you can set a limit order for a lower price — maybe $168.00 — and once the Disney share hits a value of $168.00, your order will go through.

Market orders save time. The stock is (virtually) yours the minute you confirm the transaction. Limit orders, on the other hand, can save money, but may take a while to go through.

In most cases, the price of an individual stock doesn’t fluctuate too much over one day (with some very notable exceptions), so if you’re conducting orders during regular stock exchange business hours, you’ll probably be fine with a market order.

Choose “Time in Force”

Your choices usually include “day” (to buy the stock before the end of the day), “good until canceled” (to keep the order active until your price is met or you cancel the transaction), “on the open” (to buy when the stock market opens), or “on the close” (to buy shortly before the market closes).

If you’re making a market order, you’ll probably want to choose “day.” If you’re making a limit order and select “day,” then your order will be canceled before the end of the trading session if the stock price doesn’t reach the limit you set. You can also keep limit orders alive with “good until canceled” — the order will go through when it hits the stock price or you decide to cancel it.

Review Your Trade

Once you order, you’ll get a page that will ask you to confirm your trade. Look over the details. You can change or correct any mistakes on this screen before you confirm.

Confirm the Trade

If everything on your order looks good, press the option to confirm your order. If you’ve placed a market order, your online portfolio should update almost immediately. If you’ve placed a limit order, it will go through once your limit is met.

Basic Stock Analysis

The best way to learn about stocks is to keep a close eye on your investments and analyze their ongoing chances of turning a profit. You have several ways of doing this, especially if you have an online brokerage account. The best brokerages offer a huge amount of supporting information for the stocks they carry, even for a free account. Other brokerages give you comprehensive research tools for a subscription fee.

Either way, you’ll be dealing with a lot of data. While it’s important to have as much information as possible, it can be a bit daunting to deal with right at the start of your investment experience. But some of the most vital tools to evaluate stock are easily. Some key statistics you’ll want to watch include:

Price-to-Earnings Ratio (P/E)

This is a calculation that divides a stock’s share market price by its earnings per share. Generally speaking, the lower the P/E, the more favorable the stock is — but it’s not always bad to invest in companies with slightly higher P/Es.

Equity Rankings

Most brokerages offer a very rough “rating” to stocks and commodities that indicates the current analytical sentiment about the company in question. For example, Fidelity shows an “equity summary score” for each publicly traded company that runs on a scale of 0 to 10. The higher the score, the better the analysts feel about the company’s chances for gain.

Market Capitalization

Companies are classified according to their overall market value. Large-cap companies are worth at least $10 billion. Mid-cap businesses are between $2 billion and $10 billion. Small-cap companies are worth between $300 million and $2 billion. “Micro-cap” companies are worth even less. Not all large-cap companies are solid investments, and some small-cap companies may be worth consideration.

Price Performance

You can review any company’s movements in share price over a certain period — the last 6 months, year-to-date, the last 5 years, or the company’s entire history. Overall, this value should reflect consistent growth.

These are just a few of the most important pieces of data that you can consult when choosing a stock to buy. Others include annual earnings, dividend yield, trading volume, fundamental analysis, leadership structure, and market news.

Pick your sources for research carefully. There are plenty of books and online articles that help investors find their footing in the market. Study the most successful, profitable investors in the market, like Warren Buffett, to start learning stocks. Pay at least some attention to the stock market’s daily movements and biggest news stories, as well.

Guidelines for Success

There’s no patented, surefire formula for stock market success. No matter how experienced or inexperienced you are as an investor, there will always be an element of risk involved. You’ll get a lot of conflicting advice and suggestions from both real and self-appointed industry experts. While there’s no failsafe plan for profiting off of the stock market, the best way to learn about stocks is organizing and disciplining yourself to improve your chances.

Here are some additional things you should do:

Accept the Risk of Loss

Every single stock that you buy will have its good days and its bad days. You’ll see this happening the minute you start investing. This is normal. If you build a portfolio of shares in 30 different companies, 5 of them may lose you money over the short term, while the other 25 might show some profitability. Most of the time, that’s an acceptable ratio. Just be prepared to see some securities go into the red and decide what to do about them after you’ve researched your options.

Don’t Make Emotional Decisions

One of the toughest parts to learning stocks is learning to control your reactions to both positive and negative outcomes. Never make a decision based on a sudden hunch or a gut feeling. Always use those occurrences to look more deeply into your stock buys and research your options — don’t select “buy” or “sell” until you’ve done some practical work, as well.

Start Slow, But Look to Diversify

When you’re just starting out in your investment adventure, start with just one or two stocks — preferably a blue-chip based stock that generates dependable profits from a company that has weathered decades of economic storms.

But prepare yourself to diversify down the road. Having a portfolio that covers multiple companies across different business sectors, industries, and market caps can limit your risk exposure and reap greater rewards.

Be Patient

The stock market is a long-term game. It’s not necessarily set up for get-rich-quick schemes — 99.99% of the time, your investments will grow through gradual steps. Give yourself a lot of room to learn about how the stock market works and keep persisting in your efforts to learn.

What is Stock Trading?

Learning the Stock Market:  Depend on Gorilla Trades

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