How to trade stocks, once the sole domain of Wall Street, trading stocks has become easily and affordably available to all in the last 20 years, thanks to online brokerages. Prior to online trading, people relied on the services of a stock broker, who would make buy and sell orders on the customer’s behalf. Today, individuals are able to execute buy and sell orders themselves in a fraction of a second using computerized trading services.
While buying and selling stocks — which are shares of ownership in a company — can make you a fortune, it’s just as easy to lose that money. To become a successful trader, it is crucial that you become familiar with the tools of trading, the theory behind it and the daily reports that drive market shifts.
Stock market basics
Like all businesses, the stock market operates on a system of supply and demand. When you purchase stock, your hope is that other traders become more eager to own a share of that company over time. When the stock’s popularity increases, traders will compete to own it and bid up the sale price. In theory, a rising share price is the result of improvements in the firm’s value and potential, also known as its fundamentals. In reality, stock prices change for any number of reasons, only some of which investors are able to predict. [What is NASDAQ?]
Researching and choosing stock
There are two main schools of thought regarding how to choose stocks. The first, called fundamental analysis, relies on the use of a company’s financial reports and public statements to analyze the health of the business. Balance sheets, income statements, yearly and quarterly earnings, and news releases from the company are all important tools for a fundamental analysis. Fortunately, those reports are easily searchable online, as are tutorials on how to read them, such as those offered by the SEC. Market and industry trends, media publications and historical analysis also play a role.
The second school of investing is called technical analysis. Technical analysts believe that swings in stock prices follow patterns that traders can learn to detect and profit from. Technical analysis is not as widely accepted or practiced as fundamental analysis. However, many traders use a combination of the two techniques to choose stocks. Choosing a company with sound fundamentals and then occasionally trading on a technical indicator is a safer strategy that relying only on technical indicators.
Before deciding to buy or sell any stock, you should thoroughly research the company, its leadership and its competition. Sites such as Yahoo! Finance offer excellent compilations of news stories, financial statements and stock price histories (called charts) that provide insight into the company. Stock sites also display professional analysts’ ratings of a given stock, indicating whether that analyst advises a trader to buy, hold or sell a stock. Examining the records of those analysts may help you assign value to their opinions.
Practice your skills
Learning to trade begins with education. Reading the news and financial websites, listening to podcasts and watching investing courses are all excellent ways to gather information. Joining a local investment club will give you the opportunity to discuss your education with more experienced traders.