Stock trading is a type of investing where individuals and companies can buy and sell shares of a company’s equity. Investors can spread their money by trading stocks, betting on how a company will do, and guessing where the market will go. With the help of trading platforms like SimpleFX, stock trading is now easy, convenient, and affordable. However, it is important to understand the fundamentals of stock trading and its associated risks before getting started.
Table of contents:
What Is Stock Trading And How Does It Work
Stock trading is one of the ways you can invest your capital. You can invest in stocks online with the help of trading platforms like SimpleFX. This makes it easy, convenient, and affordable. Many people considering investing in the stock market wonder what stocks are, how stock trading works, and how to invest in them.
The idea of shares in companies has been around since the Dutch East India Company. At that time, large companies came up with the idea that, thanks to the support of investors, they could continue to develop. In return, they could pay investors a percentage of their profits.
Note: Equities represent a fraction of a company’s value. There are also so-called shares, which, in theory, are something other than stocks. Shares refer to other investments, such as ETFs, mutual funds, or private companies. Whereas shares only refer to securities that are traded on the stock exchange. However, “equities” and “shares” are often used interchangeably in everyday life.
So basically, stock trading is when companies divide their capital into parts, each a share or stock. Other companies and individuals can buy these shares by becoming shareholders of such a company. The more shares in a company someone owns, the more they can influence its functioning.
Majority Shareholders And Their Privileges
Suppose any entity owns more than 50 percent of the shares and is called the majority shareholder. This means it has real power over this company and can choose its board of directors. It happens too so that several large shareholders with a majority shareholding act in concert and jointly make decisions. If someone has one share of a bank that costs $50, that doesn’t mean they can go to any branch and pick up a share of that value. Or pay attention to cashiers for too slow service. Aside from the fact that it’s rude, that’s not what stock ownership is about.
To make it clear, let’s list the most fundamental rights that sharing ownership gives you:
- The right to participate in the profit (the so-called dividend).
- The right to participate and vote at the general meeting (meeting of all shareholders).
- The right to dispose of the share, i.e., between others to sell it.
- Right to a share in liquidation assets in the event of bankruptcy.
Types of Stock Trading
You can come across two types of stock trading: active and day trading. Or, to put it more bluntly: you can trade stocks by buying them directly and in absolute terms or by speculating on how the stock price will behave.
- Active trading is when a trader makes 10 or more monthly trades. They often use strategies that rely heavily on market synchronization. They try to take advantage of short-term events (in the company or the market) to make a short-term profit.
- Day trading means playing with stocks buying and selling the same stocks in one trading day. Day traders are interested in something other than the inner workings of companies. Based on daily price fluctuations, they try to make money over the next few minutes, hours, or days.
Stock Valuation
Stock price and stock value are not the same. The value of each item is influenced by many factors, not only the cost of its production but also how attractive it is to a potential buyer and how much they need it. So what does it mean that stocks are cheap or expensive? Do cheap stocks always mean an attractive investment? Where does the stock price come from when trading stocks? The answer to this question is complex.
Analysts use earnings per share to determine whether a stock is cheap or expensive. To do this, they divide the company’s entire net profit by the number of its shares. However, the final valuation of a stock could be more precise and transparent and depends on many factors, including company earnings etc. It is influenced by the entire context in which a given company operates now, has operated before, and what may happen in the future. Also, macroeconomics plays a big role in stock value, including interest rates, CPI, etc.
In addition, it is often the case that the valuation of analysts’ shares differs from the prices of these shares on the stock exchange, sometimes even significantly. An analyst may value a company’s stock at $10, but it will trade at $15 on the stock market. Or after 7. Why?
What Influences The Stock Price?
Companies get into trouble – sometimes, they are one-time events and sometimes permanent problems. Their boards take corrective action, try to get them out of trouble, and then investors assess the chances of success of these actions. They do not only look at the past but above all. They wonder what might happen in the future. This applies not only to companies in difficulty but also to those that generate profits.
Meaning:
- the growth rate of these profits,
- company development prospects,
- new products,
- increasing or decreasing the number of customers.
However, all these are subjective elements, so the result of the valuation depends to some extent on the analyst’s experience, intuition, and assumptions.
Stock Trading – How to start?
Currently, anyone who is willing can trade shares. The best solution is using a unique trading platform like SimpleFX. Then you get access to information from all global markets, and you can manage your entire investment portfolio from one account. Choosing a proven, trusted, and automated stock trading platform is worth choosing because you have a security guarantee, including technical support. To learn more, look at our How to Start Trading Stocks guide.
Is Stock Trading Profitable?
Before investing money in stock trading, it is worth preparing for it properly. The keys to success are often the same attitude, moderation, and common sense. There is no doubt that stock trading is an activity that gives you an extra adrenaline rush and also allows you to make a profit. But it would help if you also remember that trading comes with the risk of losing money.
