How does stock trading work?


If you have ever thought of investing in the stock market but aren’t quite sure how it all works, then you are not alone. Although it is not actually a hard market to wrap your head around, the terminology and processes involved can seem daunting for newcomers. However, that need not be the case.

How do you trade in stocks?

If you are wondering how the stock market works in terms of being a trader, then it is not that difficult to understand. The stock market itself is just a list of companies in which you can purchase stocks to then sell later on, hopefully, when they have risen in value. With the digital nature of modern trading, you can use an online broker to buy or sell shares in companies listed on a particular stock market. Before you rush into buying stocks in a company, though, you need to do your research!

All successful traders take in the latest news for the day that may affect share prices. This can also be done online via the many online news sources around, including Hammerstone Markets Inc. Its stock analysis feed free trial service is a great way for new traders to stay up to date with the latest stock market information.

Before you buy stocks there two things that should be considered. Are you investing for growth over the medium to long term or would you prefer a mixture of growth and regular income through dividend payments?

Investing for growth

When a decision is made to invest in the stock market a strategy needs to be formulated. It is necessary to firm up that strategy before plunging in and making rash decisions that could mean a heavy financial loss. One of the first choices that has to be made is whether the intention is to invest for growth or income. When investing for medium to long-term growth, stocks should be picked in companies that are just coming to the market in an initial public offering or those that are already in the market but are judged to have a high-growth potential. Getting that right is not easy for an investor and the adage ‘the value of investments can go down as well as up’ must always be fully understood. That brings us to the subject of acceptable risk.

The risk factors

Investor appetite for risk can vary enormously with individuals. Some like a high-risk investment environment and are quite happy to invest for example in foreign mining shares where the value of a mine has yet to be proven. Other investors prefer the safer bets with companies that see enormous annual profits, like Apple and Microsoft. The most important thing is to make sure that you never invest more than you can afford to lose! Ensure that all your other financial affairs are secured before you invest in the stock market, particularly savings for a rainy day, and a pension plan that will ensure you will have an acceptable standard of living upon retirement.

Investing for income

Profitable companies pay a dividend to shareholders that is calculated per share. The amount of dividend payable is related directly to the profits the company has made having accounted for any financial outlay involved in future expansion and growth of the enterprise. Dividend payments are usually made quarterly. It is very satisfying to see regular dividend payments appearing on your bank statement while, hopefully, the price of the stock is rising steadily over the year.

When doing your research to identify companies that can provide an income look for those that have shown a steady rise in dividend payments over several years. Favorites for income are pharmaceuticals, oil companies and well-established firms that are making handsome yearly profits. The problem with this is that stocks in such companies are often too expensive for the small investor. The way to get around that is to look at unit and investment trusts that specialize in income funds. They are a cheaper way for the small investor to invest for income.

Company research is vital

Once you have decided on your investment goals, you need to research the company you may fancy investing in further. You need to take the time to look into its last few years of accounts and try to work out if its current share price is good value. If you think that a well-run company that normally gives a good return is having a temporary blip, then you may wish to invest, as the share price on that day could be lower than usual. The bottom line is that you are doing your research to look for shares that are likely to go up from the price that you buy them at.

Time to make that trade

Once you feel confident in opening your trade, you need to do this via your broker. That is usually simple as the modern online brokers make it easy to place an order. Just pay attention to how many shares you buy so that you don’t overspend! Once you have put your trade on, it is a case of monitoring it going forward to see if the price has risen as expected. Once it has got to a point you wish to sell at, you simply sell the stocks via your broker and count your profits.

Of course, they may also go down if things don’t pan out how you expected. If this happens, then you need to make a choice. Do you think it will pick up eventually and hold them, or do you cut your losses by selling? This again needs to be done after checking the news around the markets and on the company in particular.

Stock trading made easy

As this article shows, the basics of how to trade stocks are pretty simple. However, don’t be fooled! Becoming a successful stock market trader needs a lot of hard work, an in-depth market knowledge and plenty of experience to work. If you make sure to put all this in, then you will soon see that investment in the stock market is worthwhile and will benefit from a good return over the medium to long term.


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