July 25, 2024

Stock Trading: What It Is And How It Works.

Stock Trading: What It Is And How It Works.

The stock exchange market is a very large profitable market and is a centralized market where shares and stocks of companies are publicly traded. In this market, investors meet to buy and sell shares and securities of companies that publicly list their shares. The stock exchange is different from other exchanges because the assets traded are limited to stocks, bonds and other ETPs (Exchange-traded products). 

The stock exchange market involves stock trading and it is important to know how to trade stock in other to make a profit. Every investor desires to make profits from whatever business he invests in. Likewise, stock traders desire to make profits and grow their portfolios. But for this to happen, they must understand what stock trading is and how it works in the real stock market. 

In this article, We would be explaining in detail what stock trading is, the various types of trading and how stock trading works. 

What is Stock Trading?

Stock trading is the act of buying shares or selling shares in a company. For you to be able to buy and sell shares in a company, that company must have listed their shares publicly. Buying a company’s shares means that you own a piece of that company and you are entitled to their profits and loss. 

Stock traders use various methods when they are trading stock in the market. A stock trading method is simply a technique used by stock traders to profit from the market. It is a principle that has been successfully deployed by stock traders over the years in the stock market and has received positive results. 

This method was successful because of its unique style of trading. The various methods include carefully following trends, the technical analysis of the market, swing trading, the invested value, momentum trading as well as growth investing. 

For smooth stock trading, a trader must have a trading plan. A trading plan is a set of principles and rules that guide a trader. These rules are there to help the trader determine when to make entries and exits from the system, how to manage his risk and have the right mindset to trade. The trading plan serves as a check and balance for the trader. It helps the trader to maintain discipline and protects him from his weaknesses, while he consistently makes a profit from his trade. 

Types of Trading

There are five types of trading and they include;

  1. Day Trading: Day trading involves buying or selling stock shares on a particular day without holding a position overnight. In day trading, the stock trader closes all his open trade before the close of the stock market that day. 
  2. Scalping: This is an act of taking small profits repeatedly. In scalp trading, the trader tries to build wealth by taking profits at every small price change. Both scalp trading and day trading require discipline so that you will not be tempted to go beyond your limit.
  3. Swing Trading: In swing trading, the trader aims at making profits on a particular stock within a week. Unlike the day trader, the swing trader patiently holds a particular stock for more than a day. Swing trading requires careful technical analysis of the stock to invest in within a short-term price swing. The trader is not concerned with the current value of a stock, rather they are more interested in the patterns of trends of price. 
  4. Position Trading: A position trader opens a particular stock and trades for weeks or months. In position trading, the trader does not concern himself with the fluctuations of price. Rather, they look at the current trend and predict the momentum over the next weeks or months. This type of trading is usually a long-term investment. 
  5. Momentum Trading: this type of trading requires the stock trader to be observant and jump into a particular stock that is about to gain momentum. They channel their focus to stocks that show the potential of significantly moving in a direction of high volume. 

How Stock Trading Works

When you decide to trade stock for the first time, always remember that keeping things simple and diversifying your trade-in low-cost index funds would help you maximize profit. To begin, there are four basic steps of trading stock and they include;

  1. Opening a Brokerage Account: For you to trade stock, you must open and fund your brokerage account. This account is meant to hold your investments. But funding your account does not mean you have started trading. It is just an avenue for you to invest or trade once you are ready. 
  2. Set a Budget for Your Trade: As a trader who is keen on making a profit, it is important to set a trading budget for your stock. It is always advised not to stake more than ten per cent of your portfolio in a particular stock. Your account can be blown off overnight if the market becomes very volatile so always take precautionary measures to protect your portfolio. 
  3. Utilize Market Orders and Limit Orders: Once you open your brokerage account, you will be required to place a stock trade. Several options such as an order type would be presented to you. An order type prescribes how the trade would go. You would be required to set your market order. A market order involves the buying or selling of stock at the best price available. Also, an option would be presented that requires you to set the limit order. A limit order involves buying or selling a stock at a better price than an initial set price. 
  4. Always Measure Your Stock Returns Against a Standard Benchmark: Measuring your result against a standard benchmark is a good way to determine how well your investment is doing in the market. Always ensure your investment outperforms the set benchmark. 

These are just basic ways in which stock trading works. Remember to always practice with a demo account. A demo account helps you to feel how a real market operates and also enables you to perfect your plans before investing real capital. Ensure to remain disciplined while trading stock. When these methods are applied, you will reap profits from the market. 

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