A guide to trading stocks

What are stocks?

Stocks, otherwise known as equity, is an asset that represents a fraction of ownership of a particular corporation. Units of stocks are also called a share. These instruments entitle the trader to an amount of a business’s assets and earnings that are equal to how much stock they own.

Stocks are typically purchased and sold on stock exchanges. They make up the foundation of many investors’ financial portfolios. There are two main types of stocks: common and preferred.

Common stocks

Common stocks represent shares of ownership in a corporation and the kind of stock that traders usually invest in. The great majority of stocks are issued in this form. They give voting rights, with investors can use to elect board members. This means stockholders have the ability to exercise some kind of control over corporate policy and management issues.

These stocks typically outperform bonds and preferred shares. However, when it comes to dividends, common stocks take the least priority. Common stockholders are also last in line when it comes to the claims over a company’s earnings and income during insolvency. This means common stockholders will not gain any money until after preferred shareholders are paid out.

Preferred stocks

What makes preferred stocks different from their counterparts is that they come with no voting rights. This means that when it comes time for the company to vote on any form of corporate policy, or elect a board of directors, preferred stockholders have no say in the future of the company. As such, preferred stocks typically function like bonds since investors are instead guaranteed a fixed dividend.

Preferred stockholders also have a greater claim to a company’s earnings and assets. This means dividends are generally higher when compared to those of common stocks. Preferred stock also gets priority, so if a company ends up missing a dividend payment, preferred shareholders are paid first before common shareholders.

Where are stocks traded?

Stocks are generally listed on one or more exchanges, and people usually trade stocks online. Stocks can also be traded on over-the-counter (OTC) markets. These include exchanges such as the New York Stock Exchange (NYSE) and the NASDAQ. These exchanges provide a centralised marketplace for the buying and selling of stocks, and they also set rules and regulations when it comes to trading activity.

On the other hand, OTC trading does not take place on the stock exchange. Instead, they can occur via electronic communication networks (ECNs), or through dealers who specialise in a specific market or security segment. As a result, OTC trading is usually reserved for smaller or less well-known companies, and they often come in the form of penny stocks. However, OTC trading does come with its own risks, such as reduced liquidity and transparency. Therefore, traders need to exercise caution and conduct thorough research before diving into OTC trading.

Types of stock trading orders

Stock trading offers a plethora of orders that traders can pick, depending on their trading style, investment goals, and risk tolerance levels. Here are some of them explained and listed below:

  • Limit order: This order seeks to sell or buy a stock at a specific price or better. Limit orders help to give traders more control over the price they will pay to either sell or buy a stock. Limit orders can remain in effect until they expire, are executed, or are cancelled.
  • Market order: This is the most basic type of stock order that a trader can use. It instructs the broker to complete the order at the best available price. The great thing is that market orders are usually often executed unless there is no trading liquidity.
  • Stop order: This order tells the broker to either sell or buy the stock once it reaches a specified price above or below the current price. A stop order can be a market order – this means it will take any price when it is triggered. It can also be a stop-limit order, which is only executed within a certain price range after being triggered. Stop orders are typically used to minimise losses in case the market moves in an unfavourable direction.
  • Day order: As its name suggests, a day order must be executed within the same trading day when the order was initially placed.
  • Immediate or cancel (IOC): This order means it will only remain active for a very short period of time, for instance, a few seconds.
  • Good till cancelled (GTC): This type of order only remains in effect until they are either cancelled or filled.
  • Fill or Kill: These orders must be completed immediately and completely, or not at all. It basically combines an AON order with an IOC order.
  • All or none (AON): This order indicates that the entire size of it must be filled. Basically, partial fills will not be accepted.

Strategies in stock trading

In order to do well in stock trading, there are a variety of strategies to help investors and traders make informed financial decisions and manage risks effectively. Here are a few common stock trading strategies we have explained below:

Buy and hold: This strategy involves purchasing stocks of fundamentally strong companies and holding them for an extended period of time. Traders and investors who use this approach typically believe in the long-term growth potential of the company and they are less concerned with short-term price fluctuations.

Swing trading: Swing traders hold positions for several days to a few weeks, aiming to take advantage of short to medium-term price movements. They usually look for stocks with potential price swings based on technical or fundamental analysis.

Day trading: Day traders open and close positions within the same trading day, aiming to take advantage of intraday price movements. They often make multiple trades throughout the day, and all positions are typ8ically closed before the market closes.

Momentum trading: Momentum traders look for stocks with recent positive price movements and high trading volumes and believe that these trends will eventually continue. They aim to capitalise on short-term price momentum and typically hold positions for a shorter period.

Technical Analysis: Technical analysis involves analysing historical price data, chart patterns, and trading volumes to identify trends and potential entry and exit points. Traders using technical analysis use indicators and patterns to make trading decisions.

Fundamental Analysis: Fundamental analysis involves evaluating a company’s financial statements, earnings reports, industry position, and management quality to determine its intrinsic value. Traders using this approach aim to buy stocks they believe are fundamentally strong and undervalued.

Bottom line

Overall, it is important for traders to remember that successful stock trading requires patience, discipline, and continuous learning. The stock market can be volatile, so traders need to be prepared for ups and downs and be flexible in adapting their trading strategies as needed. If traders are unsure about a trade or need certain advice, they should consider seeking guidance from a financial advisor or a seasoned trader.

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