No one is born knowing how to trade. If you’ve never traded before, looking at stock market pages can feel like reading text in an alien language. Don’t despair! It’s easier than you think!
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No one is born knowing how to trade. If you’ve never traded before, looking at stock market pages can feel like reading text in an alien language. First of all, good news! All those phrases that seem like an alien language – like “earnings movers” and “intraday highs” – aren’t necessarily things you have to understand to be a successful investor. You don’t even have to understand the red and green lines you see on the screen when you check financial pages. For example, if your portfolio is for a long term investment as you’re saving for retirement, you don’t need to understand much of it at all.
However, you will require an understanding of the stock market and a basic knowledge of how it works if you intend to trade stocks. You can always try trading once you have the basics down, and if you feel you need more – expand your education.
The stock market is a collection of exchanges. An exchange – aptly named – is where you exchange stocks. Even if you’ve never dabbled in trading, you probably heard such names as the Nasdaq or the New York Stock Exchange.
Each exchange has lists of its specific stocks. Thus traders looking to buy and traders looking to sell all come to the same exchange. The exchange doesn’t just bring buyers and sellers together. It keeps track of each stock’s supply and demand. The exchange sets the value of a stock based on its supply and demand.
You don’t even have to understand the red and green lines you see on the screen when you check financial pages.
You can’t buy stock as you would buy items in a shop. You can’t merely show up at an exchange and start purchasing stocks. As an individual trader, you need a broker to represent you. A broker is your representative at the stock market. You tell your broker what actions you want to be done on your behalf. The broker then deals with the stock market.
Finding a broker is relatively easy. Thousands of brokers around the world are always happy to take on new clients. Most of these brokers have an extensive online presence, with their entire system set up in websites, apps, and downloadable programs.
All you have to do is choose one. Choosing the right broker for you might seem tricky, but it’s a fairly simple process. First, remove the unlicensed ones from your list. Make sure you get your service from a licensed and registered broker.
Secondly, define your needs:
Once you have eliminated the unsuitable ones, you can now look at the ones that remain. Some offer 24/7 service. Others offer classes and extensive educational resources. Some have more advanced online systems than others, while others have specialized programs for your specific needs.
Choosing the right broker for you might seem tricky, but it’s a fairly simple process.
Now that you’ve chosen your broker, it’s time for you to –
You’ve probably heard terms like “the market is up”, or “the market is down.” These phrases are referring to a major market index. Market indexes track the supply and demand of groups of stocks. The index – made of a group of stocks – represents the market as a whole or a specific market sector. For example, when phrases like “the technology market is down,” it refers just to the technology sector.
These indexes are not just a performance tracking device. Investors can choose to invest in an index instead of a specific stock. To invest in an index, you will need to select an ETF instead of an individual stock.
What is an ETF?
Here’s a quick basic explanation of ETFs. An ETF is an Exchange Traded Fund. They can be bought and sold like stocks, but they contain a sector of stocks. They are similar to mutual funds in that they are more diversified than individual stocks, but a trader can trade them throughout the trading day.
An ETF seller is someone who owns a group of assets. The seller organizes these assets into a fund that can track the assets. Then the seller can sell shares of that fund to investors. These investors may own shares in the fund, but not the assets within. The investors receive dividend payments for the individual stocks in the ETF despite not holding them.
Now that you have your basic understanding of the stock market, we thought there are three terms you need to know before you plunge in:
1. Bull market/Bear market.
You will probably see the bull and the bear depicted in brokers’ ads and logos. These animals represent the start of an economic trend. The bear represents a downtrend – it means the market is falling. There’s no specific number attached to it, but consensus has it at a minimum of about 20%. It means investors are pulling out of the market, and prices are falling. The bull market will represent rising markets – investors are going in confidently.
The bull and the bear follow each other, and historically bull markets have lasted longer than bear markets. That means that falling markets will eventually go up. While it can be scary to watch your portfolio lose value, often seeing it through to the next bull market can be a smart decision.
The best investment tip anyone will give you is never to invest money you can’t afford to lose.
2. Stock market crash
Don’t be alarmed. Yes, a stock market crash can – and has – happened. It’s what happens when the stock market drops by a great deal in one day. For example, the famous 1987 stock market crash where the market dropped 23% in one day.
As previously mentioned, it’s important to remember to breathe and wait for the bull market. Furthermore, the best investment tip anyone will give you is never to invest money you can’t afford to lose. Investing is a risky business, don’t invest your livelihood.
Finally, the concept of not putting all your eggs in one basket becomes a significant investment staple. As you know – stocks aren’t tied together. They don’t follow each others’ trend. When one falls, the other rises. They’re influenced by technological progress, business dealings, and world events. For example, a global gas shortage can cause stocks for electric car companies to rise, while gas-powered car companies’ stocks fall. It can also cause wind turbine company stocks to rise.
By holding a diverse portfolio, you’re spreading the potential earnings (and losses) across a broader range of sectors and assets.
If you’d rather not invest time and energy hunting the stocks you wish to diversify with, you can invest in a fund (mutual or ETF) and receive a prepared diverse basket of assets. In fact, you can do both: choose individual stocks you believe in, and invest in a fund for the rest.
So what have we learned? We learned what the stock market is, how to buy stock, and how to choose a suitable broker. We also looked at some basic terminology and recommendations for calmer and more successful trading. We hope this article has helped you dip a toe in the waters of the stock market.
Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 65% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money. Please consider our Risk Disclosure