Stock trading: a beginner’s guide
Why trade stocks? What are the risks of trading stocks? What really went wrong with GameStop? How to profit from the ups and downs of the stock market? Find the answers to these questions and more in this week’s stock trading webinar.
Why trade on the stock market?
Before getting to the heart of the matter of stock trading, let’s first answer the question of why trade stocks besides Forex?
Individual stocks and entire indices can exhibit multi-year trends that you can take advantage of. Look at companies like Amazon and Apple over the past 5-10 years as prime examples:
As you can see in the graph above, Amazon has been on the rise for years, starting in 2017.
Apple has also been in a long-term uptrend for years:
Around 2017-18, Apple shares were worth $ 20 per share. Now they’re at $ 146 per share.
Multi-year trends are often not the case in Forex pairs.
Wide range of opportunities
Depending on the stock market you want to focus on, there may be hundreds, if not thousands, of trading prospects. This high number of opportunities means that you can choose the best trends or trading setups. In contrast, Forex is limited to a few tradable pairs.
How to trade stocks
You can access the stock markets (also called equity markets) in several ways:
Buy and sell the underlying stocks
Buying and selling the underlying stocks is the easiest way to trade the stock markets. You own the shares, which means you own part of the business. Most common shares carry voting rights. But buying the stocks usually means you have little or no leverage. In addition, it is not always possible to sell a stock short. If you sell a stock short, your losses can be unlimited as there is no cap on how much and how fast the trade can go against you. Institutional investors experienced this reality when they were short on US GameStop stock and the price rose several times, causing huge losses for short investors.
There are two types of stock options: call options and put options. Call options give you the right to buy a share; put options give you the right to sell a stock. Call options can provide leverage in long positions. Put options make it easy to profit from falling stocks without the risk of unlimited losses. The options can be complex and require a learning curve. When you have a long option, the dissipation of the value of time can work against you.
Contracts for difference (CFDs)
CFDs allow leverage, but you don’t own the underlying stock, which means no voting rights. CFDs have overnight funding fees. Anytime you have a leveraged position, you risk multiplying your losses and facing margin calls. CFDs can be an inexpensive way to access non-national stocks. You can trade CFDs with InvestMarkets, a premier brokerage that offers stock trading among many other assets.
Equity exchange traded funds (ETFs)
ETFs are inexpensive and can focus on different indices, geographies, sectors, and investment styles. They allow you to diversify or focus on a particular area of the economy. There isn’t a lot of downside to trading ETFs.
Stock index futures
Stock index futures are heavily leveraged and very liquid with low spreads. They usually trade through central exchanges, such as the Chicago Mercantile Exchange (CME). There is also not much downside to trading index futures.
Where can you trade stocks?
The infographic below shows that on a global scale, the US stock markets are dominant.
As of April 2020, the New York Stock Exchange and NASDAQ accounted for 45% of global stock markets.
The most important US stock indices are the S&P 500, the NASDAQ 100, the Dow 30 and the Russell 2000.
Let’s look at some examples of stock indices, starting with the S&P 500:
The S&P 500 is in a long term uptrend. You can see where the market dipped when the impact of COVID-19 became apparent, but the market has since recovered and continued its overall uptrend.
Make sure to always expand your opportunities for the best trades available. Sometimes that means waiting for setup or looking at different charts to expand trading possibilities.
Also make sure you always pay attention to your risks. Good risk management is the key to profitable trading.
If you want to learn more about stock trading, there is no better place than FXAcademy.com, where you can deepen your knowledge of the stock markets with hundreds of articles and videos.