Stock Trading

Updated on April 4, 2024
Article byPrakhar Gajendrakar
Edited byPrakhar Gajendrakar
Reviewed byDheeraj Vaidya, CFA, FRM

Stock Trading Meaning

Stock trading refers to buying and selling shares of an entity listed on a stock exchange. By buying a share of an entity, the trader obtains a piece of entity ownership. It is a method used in the stock market to generate profit.

It requires basic knowledge of the stock market, research, analytical skill, etc. Moreover, it involves a primary focus on making a profit in the short term by buying and selling shares. Hence short-term price fluctuations are important for stock traders and usually experience high risk and returns.

Key Takeaways

  • Stock trading refers to buying and selling shares of an entity listed in the stock market. 
  • It is a method used in the stock market to generate profit. Therefore, it requires basic knowledge of the stock market, research, analytical skill, etc.
  • Some famous types are day trading, scalping, position trading, and swing trading.
  • One of the primary steps in “how to buy stocks” is opening a trading or brokerage account. Then it is followed by steps like selecting and analyzing stocks.

Stock Trading Explained

Stock trading is eased by the stock exchanges. Most stocks are traded on the NASDAQ
or the NYSE. The NYSE, located in New York City, is one of the oldest American exchanges. The Nasdaq is a global electronic marketplace for buying and trading securities. These exchanges are regulated and monitored by important government bodies such as the Securities and Exchange Commission (SEC) in the United States.

Both professionals and amateurs do trade. They typically know about economicsEconomicsEconomics is an area of social science that studies the production, distribution, and consumption of limited resources within a society.read more, finance, or mathematics. However, a specific knowledge requirement is not mandatory because there is no established strategy for trading effectively. Instead, it entails undertaking extensive research and observing the movements of financial marketsFinancial MarketsThe term "financial market" refers to the marketplace where activities such as the creation and trading of various financial assets such as bonds, stocks, commodities, currencies, and derivatives take place. It provides a platform for sellers and buyers to interact and trade at a price determined by market forces.read more. It is performed by fundamental research and industry-specific technical analysis, backed by various information sources to monitor asset or organizational performance. Furthermore, human psychology also influences trading performance and is an important factor in determining the trader’s success or failure in the trading process.

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Types of Stock Trading 

There are different types of trading based on the difference in strategies used. Some famous types are day tradingDay TradingDay Trading refers to buying & selling securities/financial instruments within the same trading day to earn profit through margin loans. Day traders are also called speculators as they do a lot of guesswork in terms of securities. read more, scalpingScalpingScalping refers to an intraday trading strategy in which traders seek to profit from small price swings in securities, currency pairs, and commodities over a short period. It requires them to enter and exit a trade in a matter of seconds, minutes, or hours in a single day.read more, positional tradingPositional TradingPosition trading is a strategy in which a trading position is held for a long period in order to achieve a profit goal. In position trading, a trader will typically think long-term, and the position will be held for a long time, regardless of short-term fluctuations.read more, and swing trading.

Stock Trading

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Day Trading

In day trading, the trader will buy and sell the securities on the same day. This type of trading demands advanced knowledge, expertise, and full-time devotion to the share market. The traders earn or lose from the market fluctuations and leave the market at the end with either a profit or a loss.

Position Trading

Position trading usually portrays a long-term trading strategy resembling buy-and-hold investing. A trader buys and holds shares for a larger period, like weeks or months, ignoring the short-term fluctuations.

Swing Trading

Swing trading is a form of speculative trading seeking the right opportunity to gain from the price swings. Swing traders hold securities for a day or more based on fundamental and technical analysisTechnical AnalysisTechnical analysis is the process of predicting the price movement of tradable instruments using historical trading charts and market data.read more but not for long-term periods.

Scalping

The scalping strategy focus on reaping small profits from small price fluctuations continuously. For instance, they may complete 10 to 100 trades in a day. The success of the scalping strategy significantly depends on the appropriate selection of entry and exit points. For example, a scalper can buy when a market rally starts and sell immediately to gain a small profit.

Examples

Let’s explain a simple example of trading. Mr. A is an amateur trader keen to learn advanced investing and trading strategies. Fascinated by meme stockMeme StockMeme stocks attract retail investors through social media debates, leading to a surge in prices and trading volumes.read more trends, he bought 10 GME shares spending $20.99 per share on 28th December 2020. After holding it for a month, he decided to sell the shares when the GME stocks traded at a highly escalated price ($325 on 29th January 2021) and made an alluring profit.

Consider another example in which Mr. A purchased ten shares of Amazon Inc. for 2,785.58 on 8th March 2022. On Wednesday, 9th March 2020, Amazon announced a 20-for-1 stock split and a $10 billion share buybackShare BuybackShare buyback refers to the repurchase of the company’s own outstanding shares from the open market using the accumulated funds of the company to decrease the outstanding shares in the company’s balance sheet. This is done either to increase the value of the existing shares or to prevent various shareholders from controlling the company.read more. After the stock split news, Mr. A hoping for a price surge decided to sell ten shares. Amazon shares were up 5.4% to $2,936.35 in early trading on Thursday, 10th March, and Mr.A received a substantial profit.

How to Trade Stocks?

The most convenient and first step toward “how to buy stocks” or “how to do stock market trading” starts with opening a trading or brokerage accountBrokerage AccountA brokerage account is a taxable investment account in a brokerage company where a person deposits its assets and instructs the company to trade in shares or bonds on their behalf. In addition, the company deducts some brokerage or commission.read more. There are multiple online stock trading platforms like Fidelity that individuals can connect with and create a trading account. In addition, a user may be asked to create a margin account, through which the brokerage can lend users money to trade and pay later.

Another vital phase is selecting and analyzing stocks; every trader must evaluate the companies they want to invest in. It depends on an investor’s perspective and long-term financial planningFinancial PlanningFinancial planning is a structured approach to understanding your current and future financial goals and then taking the necessary measures to accomplish them. Because this does not begin and end in a specific time frame, it is referred to as an ongoing process.read more on how they want to invest and which stocks they should invest in. Once the investor has identified the stocks, they can initiate trading and execute orders.

Investors should keep investing and grow their portfolios by investing at regular intervals. With time, it becomes vital for an investor to start identifying market trends and the right time to invest or exit a certain stock; with the right bunch of stocks, an investor can create and maintain a good portfolio with maximum returns and long-term wealth creation.

Frequently Asked Questions (FAQs)

How do I trade stocks?

The first step is to create a brokerage account. There are several online trading platforms with which an individual may join and open a trading account. It is followed by critical stages such as stock selection and analysis. After that, it is up to an investor’s viewpoint and financial planning to decide how and which stocks to invest in. Once an investor has discovered the stocks, they may begin trading.

Can I get rich by trading stocks?

The possibility of becoming wealthy is quite great, but so is the level of risk. One fundamental method is to invest in the stocks of a valuable or thriving firm and hold them for a long time.

Explain stock trading for beginners?

Novices should start modest and study as much as possible. Long-term wealth creation is often achievable, but it takes time and perseverance. Beginners must understand that losses are a normal part of the stock market. They can research and analyze market patterns and invest in excellent stocks to develop while minimizing losses.

This has been a Guide to Stock Trading. We explain how to buy stocks in the stock market specifically for beginners, stock trading online platforms, & apps. You may also have a look at the following articles to learn more –

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