What is stock trading?
Stock trading is a popular way to invest and make money. Millions of people earn money through the stock market. Although it can get quite complicated, the basics are not hard to grasp. Here are some things you should know.
In the beginning, the stock of a company goes through what is known as an initial public offering, or IPO. The company’s shares are now available to the public and are traded on public exchanges. A stock market is a place where buyers and sellers trade and decide on price.
Stock exchanges first appeared in the 16th century in big hub cities like Antwerp, Amsterdam and London. For hundreds of years, stock markets have been in a physical location, such as a large building. Usually, there is a trading floor where hundreds of brokers yell out prices. However, times are changing and now stock trading is virtual. Trading is done on computers and everything is done electronically.
When you buy a stock, you are almost always buying it from another investor (not the company itself). Likewise, when you sell, you are selling to another investor. The exception might be an initial public offering and a share buy back.
Stock indexes, such as the Dow Jones Industrial Average, or Standard and Poor’s are a basket of stocks that are held to be a barometer of the entire market. The Dow Jones has thirty stocks while the Standard and Poor’s has five hundred.
Value investing is one of the most popular types of investing. It holds that the best investments are undervalued companies. A very popular book regarding this methodology is the Intelligent Investor. Warren Buffet is one of the most well known investors of this style. It has made him a billionaire!
The other popular style of investing is growth. It says that one should invest one’s money into the fastest growing companies. Lately, this has been technology stocks. The FANG acronym lists 4 tech companies that are growing quickly (Facebook, Apple, Netflix, and Google.)
The P/E ratio is the ratio of price to earnings. Companies are valued on many things but the main theory is that stocks are worth their discounted cash flow. PE ratio is how expensive a stock is.
A dividend is a portion of a company’s profit that is paid out quarterly to investors. It is popular with retirees as this is seen as a stable stream of income.
For those comfortable with a lot of risk, swing trading and day trading are options. In swing trading, the trader holds the stock for less than two weeks. The basic strategy is to identify patterns. Once they are identified, the investor bets money and tries to “capture” some gains while the stock is still trending. Swing trading often uses a lot of technical analysis, which is looking at charts.
In day trading, all positions are closed before end of day.
Stock trading is a great way to build lasting wealth. The basics do not need to be complicated.