Stock Market Basics: What You Need to Know About Day Trading

Wed Dec 30, 2020, 10:03 am | by Ashley Hart | No comments

Interested in trading on the stock market? There are just a few things that you need to know first. Here’s the information that you need as you begin your journey.

What is the stock market?

The stock market is a collection of markets and exchanges where people can trade shares of publicly-held companies. You can buy, sell, or issue these shares on the stock market. Despite the name, you can trade more than stocks or equities on the stock market. Other financial securities can be traded as well, including:

  • Exchange-traded funds (ETF)
  • Corporate bonds
  • Derivatives based on stocks, commodities, currencies and bonds

There are quite a few stock exchanges in the United States that make up the country’s stock market. The leading stock exchanges include:

New York Stock Exchange (NYSE): This is the largest equities-based exchange in the world based on the total market capitalization of its listed securities. Based in New York City, this stock exchange dates back to 1792. 

Nasdaq: Nasdaq is newer, having begun operations in 1971. It was created by the National Association of Securities Dealers (NASD) to allow investors to trade securities on a computerized system, and now is a global marketplace for trading securities. 

Over-the-counter (OTC): Over-the-counter means that the securities are traded through a broker-dealer network instead of via a standard stock exchange. You may want to trade a security OTC if the security doesn’t meet the requirements to be listed on a standard market exchange.

Although the phrase “stock market” refers to this collection of markets and exchanges as a whole, keep in mind that the terms stock market and stock exchange can be and frequently are used interchangeably.

What are stocks?

Stocks (also known as equities) are a type of security that gives stockholders a share of ownership in a company. 

Stocks can be broken down into several categories, but the most important thing to understand is the two main types of stocks:

Common: These stocks entitle stockholders to vote at shareholder meetings. As a common stockholder, you can also receive dividends from common stocks.

Preferred: In most cases, stockholders of preferred stocks don’t have voting rights. However, they usually receive dividend payments before common stockholders do. If the company that you own preferred stock in goes bankrupt and its assets are liquidated, as a preferred stockholder you’d have priority over common stockholders.

How does the stock market work?

The stock market is made up of public companies and investors. Public companies rely on the stock market to raise capital. The company’s stock price can also give the company some insight into what investors think about their company and its prospects. Investors use and rely on the stock market for investment opportunities to increase their capital. 

You can think of the stock market as an auction. Sellers show up to the stock market offering prices to sell off their shares of stock. Buyers are there to place bids on the shares of stock. When a match is made between the asking price and the bid, a trade will occur. 

What Causes Stocks to Move in Price?

The price of a stock represents what the stock market — including the buyers and sellers in the market — considers the value of that stock to be. The price depends heavily on supply and demand. If more sellers are trying to sell off their shares than there are buyers who are interested in buying those shares, the price of the stock will decrease. 

National and global news can also influence the stock market. Many traders try to anticipate what the next news cycle will bring, and use this as a strategy to determine which stocks to buy or sell before the news hits the general public. Some examples of how news can affect the stock market include:

  • Government economic reports: These reports can be an indicator of the strength of the economy overall. One example is the U.S. Census Bureau report on durable goods orders. This can be used to make an educated guess about the confidence that retailers have in how much spending consumers will be doing in the future months. 
  • Industry/company news: By keeping an eye on which products and companies are trending, traders can estimate the value of certain companies and industries. 
  • Clinical trials: If a company is making huge advances in science, they’re sure to become top-of-mind for many, including the national and global news stations and publications. This kind of positive attention can lead to an increase in the company’s value on the stock market.

Since the market is so defined by the state of the economy, 2 phrases are used to describe the general state of the stock market:

Bull market: A bull market means that the market is on the rise, meaning that the economic outlook is positive. 

Bear market: A bear market means that the economy is not doing as well, so most stock values are declining. 

What’s the difference between Trading and Investing?

To put it simply, the difference between trading and investing is the approach that you take to it. 

Active trading

Trading as an active trader means that you’re making frequent transactions on the stock market. The goal of an active trader is to generate returns by purchasing stocks at a lower price and selling them at a higher price within a short time. In bear markets, active traders could also generate returns by selling stocks at a higher price and then buying them back at a lower price — also known as selling short.

Long-term investing

The goal of a long-term investor is to build wealth gradually over an extended period. Investing involves buying and holding onto a portfolio of stocks, baskets of stocks, mutual funds, bonds and other investments over years or decades. Even when markets fluctuate, long-term investors hold tight and trust that any losses will eventually be recovered because they have a strong and diversified portfolio. This is the strategy that is often used for retirement accounts.

How Do I Make Money Trading Stocks?

There are a few ways that you can make money by trading stocks. The most basic way to make money in the stock market is to buy stock and then sell it for a higher price than you bought it for.  This is known as capital appreciation. Active traders may also short-sell, which means that they sell their stocks and then buy them back at a lower price. 

Another way to make money is through dividends, which is what most long-term investors rely on. Dividends are payments that are made to shareholders by the companies on a per-share basis. You can use dividends as a cash payment, or you can use them to reinvest and buy more shares to increase your holding. By increasing your holding, you’ll earn more dividends the next time around. It’s important to remember, though, that not every company pays dividends, and the ones that do aren’t required to continue to pay dividends in the future.

How Do I Trade the Stock Market?

Before you trade on the stock market, it’s essential to educate yourself about the market by reading financial articles and stock market books. You can even explore website tutorials if you’d like! 

When you’re ready, the next step is to open a trading account. There are several brokers to choose from, so you may want to read some reviews and compare pricing before you open an account. After you’ve opened an account, you’ll want to fund it so that you have money available to trade on the stock market with. 

Before you begin to make trades, you may want to practice trading. Some brokers offer free simulations to help you get familiar with making trades without putting money on the line first. Many brokers also offer free resources to help you understand how to analyze the market, which can be useful in making successful trades.

What are the risks?

While you can certainly benefit from the stock market, there are also risks to take into consideration. Some strategies are riskier than others, so it’s a good idea to carefully pick out your investment strategies before you begin trading. You’ll also want to figure out how much risk you’re willing to take on. By understanding these risks, you’ll be better prepared to succeed in the stock market.