How to Trade Stocks for Beginners
The meeting place or market where stocks, shares and other securities are traded is commonly known as the Stock Exchange. Some Exchanges are physical locations where traders exchange stocks and shares, whereas others are virtual consisting of a number of networked computers enabled to traded electronically. There are two types of markets, the primary market and the secondary market. The primary market is concerned with assisting Companies sell shares in their business. When a Company does this for the first time, it is called an IPO or Initial Public Offering. The secondary market is concerned with trading those same shares and those of other companies, between traders and institutions without the involvement of the company themselves.
There is a wide range of knowledge and skills sets required to trade stocks successfully, and in this article I will discuss how to trade for beginners focussing on the top three areas of critical importance to a beginner trader. These are how a stock is valued, how a trading plan is created, and the types of trading methods that can be employed to execute a transaction.
Profit from trading stock is derived from buying a stock at a low price and selling it a high price, covering all trading expenses, and delivering a return on the original investment. The value of a stock is determined the two economic factors being supply and demand for the stock, and the market factor being the price to earnings ratio. The volume of buyers bidding on a share, or demand, against the number of sellers will to sell at the price being bid, or supply, determines the price of the share. Hence the price is driven by market forces, almost like a continuous auction cycle. There are several other factors that influence the selling pricing and the buying price of a share, including the price to earnings value, which determines the share’s intrinsic value. The intrinsic value is the value to the holder derived from the share when it is purchased like a dividend.
There are a number of aspects to consider when creating a stock trading plan. The top three include the trader’s needs and goals, the budget and the strategy to achieve the traders needs and goals.
Firstly the goals are ascertained and defined clearly in writing. The budget, together with the necessary trading account and brokerage firm appoint to execute each trade, is established. Then the strategy is determined. This is the most critical of the elements of a trading plan. It is true that a trading plan cannot be executed without money, and is derailed without a goal, however without a strategy in place or the methodology on how the goal will be achieved, all is lost. The strategy will vary from trade to trade, and must be a learned skill set that one can acquire through an online course or attend a physical seminar. Purchasing an online course is a great place to start, as you can go through the materials in your own time and commence learning the strategies as a home study course.
When considering a stock, there are two types of analysis available to the trader, technical and fundamental analysis. Fundamental analysis considers such factors as the financial health of the company in which you’re considering a share of, the historical share value or price points at which it has sold previously, any corporate news and press releases on decisions around the business’ direction and activities, the current economic climate and the state of the markets in which the company trades, as the basics. When considering these factors, the trader can begin to map out a picture of what a share in this company will really mean to their portfolio, will it be a shining star or will it be hard to determine what the share’s future holds. Those traders who use this style of analysis will usually become long term investors, holding the stock for a long period, even years.
Those who are more interested in short term trading of a share, will use Technical Analysis. Technical Analysis involved analyzing the patterns and trends in the share’s price. Leveraging the volatility o the market conditions to their advantage, the Technical Trader buys low and sells high, taking a profit on the transaction. The most prolific of these traders are typically day traders, who are named this as they will not hold a stock for more than a couple of days, and in most cases buy and sell on the same day within hours, sometimes minutes of each other. This is a very different trading practice to those using Fundamental Analysis.
Finally, training is critical. Obtaining the right information and the gaining the opportunity to learn about this field before you invest your own money, particularly borrowed money, is essential. Learning online through a home study course is probably the best place to start for a beginner. These home study courses are comparatively low cost and will provide you with the fundamental knowledge and skills to get going. Always remember that the most valuable in trading stocks is not money, it is knowledge. Your education in how to trade stocks is the most crucial element to your success.
