Getting to grips with investing in stocks can seem like an intimidating prospect and there’s no denying that it gets complicated. But the basics are relatively easy to understand, so why not take a bit of time to familiarise yourself with the fundamentals and start your stock trading journey today, before you invest.
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What are stocks?
A stock or a share is the unit of ownership of a publicly quoted company. Publicly quoted companies are companies that are listed on a stock exchange. A company can only list on the stock exchange (i.e. the secondary stock market) after conducting an initial public offer, where a certain portion of the ownership of the company is sold to the general public.
Company ownership can also be acquired via private placements. This step usually precedes the public offer and is usually open only to high net worth investors. This article will therefore restrict itself to secondary market operations, where people can buy or sell stocks on a stock exchange.
Stock investing is the buying and selling of shares of companies in order to profit from the change in value at the two transaction ends. Typically, there are two methods of stock investment.
- You can buy and hold the shares purchased for a period of time. Those who purchase stocks in this manner usually do so for long term investment, and typically hold these shares for months or years.
- You can also trade stocks, in which case the aim is to profit from short term price changes in the value of the stock. This method of stock investment uses price triggers to determine when the value of a stock will rise or fall. You can profit by buying on expectation of price increase, or you can sell on expectation of price reduction.
Traders can decide to trade stocks directly via stock brokers, where actual ownership of the shares in question is taken. We also have stocks CFD trading, where stocks are traded as contracts-for-difference assets and trades are performed on the basis of price movements, without actual shares exchanging hands.
Before you start trading
To invest in stocks, you need the following:
- Access to your preferred stock market. Popular stock markets include those of the US (Dow Jones Industrial Average, Nasdaq 100 and S&P500), UK (FTSE100) and Germany (DAX). There are stock brokers who provide access to these markets using trading platform. Unlike in forex, stock trading platforms are usually proprietary i.e. unique to the broker offering you service.
- A trading account with a broker. You will be required to provide personal and financial information during the course of account opening. This trading account should be one that can give you access to a variety of stocks from the exchanges mentioned above.
- You will also be required to verify your details by submitting a government-issued ID such as an international passport or a drivers’ license. A proof of residence such as a utility bill or a bank statement is also required.
- Trading capital is required to purchase your first set of shares and to finance all subsequent stock trading transactions. Your broker will indicate what currencies you can maintain your account in.
- You must have a means of depositing funds to your stock trading account. Your stock broker should be able to offer several payment methods to deposit funds, including debit and credit cards and bank transfers.
- You must have some knowledge of how to buy and sell stocks from the various global exchanges.
We’ve compiled a list of stock brokers who can provide you with a stock trading account to trade stocks globally.
How To Invest in Stocks
You can only buy or sell stocks using a trading account. The stock market is a venue which brings together buyers and sellers from all over the world. Stocks are usually listed on national stock exchanges. Your trading account also comes with a trading platform, which will list the stocks that you can trade, pooled from the available exchanges.
The Basis of Stock Trading
Stocks are traded on the basis of technical and fundamental analysis. Fundamentals always precede technical analysis. This is why there is a popular market dictum: trigger fundamentally, enter technically. It simply means there must be a fundamental trigger which starts a good move on the price of the stock. Technical analysis comes in to identify good price levels for trade entry and exit.
Fundamental Analysis: The Trigger
Stock prices have certain fundamental triggers. The common ones are the following:
- Earnings reports
- New product or a breakthrough in processes or product development
- Change in company management
- Mergers and Acquisitions
- Product failure
Let’s take a closer look at these fundamental triggers.
These are considered the primary fundamental triggers of stock price movements. They are released according to a schedule, covering the 4 quarters of a year. Two important components of earnings reports that every stock trader must know are the earnings per share (EPS), and the profit/revenue projections for the next quarter or full year.
The earnings per share is the amount made in profit or loss by the company, divided by the number of shares in the company. Every earnings report contains a market consensus figure, and the actual figure is used to provide guidance on whether the company surpassed earnings expectations or missed them.
For instance, if stock XYAB has a consensus EPS of $0.40 per share, and its earnings per share came out to be $0.28, this is considered an earnings miss and will cause investors to dump the shares in response to the news. If however, XYAB has an actual EPS of $0.47, then it is considered to have beat expectations and there will be demand for the stock, driving the price upwards.
Similarly, the profit or loss projection is a key component of the earnings report. Is the company projecting that it will meet, surpass or fall short of profit projections for the year?
It is possible for a company to have an EPS that surpasses expectations for one quarter, but if profit projections are revised downwards, investors may still decide to dump the stock. Typically, you may see a see-saw movement where the stock price goes up, then comes down.
The exact methodology of trading earnings reports is beyond the scope of this article but it’s reasonable to say that EPS and profit/revenue projections are the two key metrics traders tend to look for.
If a company releases a well-received product its stock is likely to respond positively. Considere what Viagra did for Pfizer’s stock, or what the iPhone did for Apple. These are both examples of products that were so good that they were always destined to sell extremely well and boost the company’s earnings. Such product news drives demand for a stock and causes the stock price to go up.
In contrast, products that are found to have problems and require recall (e.g. car recalls), total removal from the market (e.g. defective drugs), or are later found to be total failures (e.g. Boeing’s 737 MAX aircraft whose systems have been implicated in 2 air crashes, leading to vast loss of lives), are bad for a company’s stock price. For instance, Boeing’s shares have been hit hard by the grounding of the Boeing 737 MAX.
Such news does not have a release schedule, and therefore traders will need access to news sources that can provide them such news as it happens.
Change in Company Management
A change in company management can be good or bad for a stock, depending on the perception of the market. The rumoured death of Steve Jobs a few years before he actually died caused the shares of Apple to tank the moment the rumours hit the newswires. When these rumours were debunked, the shares bounced back.
Mergers and Acquisitions
Mergers and acquisitions are usually good for the entity being acquired or the weaker company in a merger.
Technical Analysis: Entry and Exits
Technical analysis is the use of information from stock price charts to determine the future price movement of a stock. This includes the use of price patterns, candlesticks, volume patterns and other information from the charts to determine when to buy/sell a stock, or when to exit the stock.
Technical analysis can be used to purchase or sell stocks outside of the news windows. Some knowledge of technical analysis, no matter how rudimentary, is required to be able to profit from the stock markets.
Stock trading means buying and selling a stock in order to profit from short-term price changes in the chosen stock asset. Stock trading allows for bi-directional trading: you can buy a stock if you feel the price will go up, or sell a stock if you feel the price will go down.
Stocks are traded in units, where a unit of a stock is equivalent to one share. Usually, your stock broker will indicate the minimum number of stocks you can buy at a time, and in what multiples. For instance, a broker may stipulate that you can only buy a minimum of 100 units of a company stock, with the ability to buy in multiples of 10 thereafter. This means you can buy 140, 170 or 590 stocks, but you cannot buy 157 stocks because the last figure does not obey the multiple purchase stipulation.
To trade a stock, you would need to do the following:
- Select the stock using the stock symbol. For instance, if you want to trade Amazon, you would need to search for the symbol AMZN. Some brokers have a search bar which allows you to enter the stock symbol and search for the stock.
- The trading interface shows a BUY and SELL price. These correspond to the BID and ASK prices. Usually, you BUY a stock at the ASK price, and SELL a stock at the BID price. You have the option of choosing market orders (immediate buy or sell) or pending orders (limit or stop buy/sell orders).
- You can set a Stop Loss (SL) or a Take Profit (TP) price level. These are used to limit losses when the stock price is moving against the trader’s position (SL) or capture profits at a particular price level (TP).
- You also have to set the number of units you want to purchase.
- After entering all the parameters, you can execute the trade.
Let’s take a look at some examples of how a trade might unfold.
Short Trade example:
Let’s assume that stock XYAB has moved from £1.34 to £1.02, and that the trader entered a short trade with 500 units of this position. How much has been made from the trade?
- The entire move was 1.34 – 1.02 = £0.32.
- The trade volume is 500 units. So a move of £0.32 is worth 0.32 X 500 = £160.
How are profits made in short trades? The trader borrows the stock from the broker and sells it at the higher price, then repurchases the stocks at a lower price and returns them to the broker, keeping the differential as profit. However, thankfully brokers keep it straightforward by allowing traders to use a simple SELL button to represent the process.
Leveraged Trade example:
Some brokers allow the use of leverage to trade stocks, especially if these trades are done on the basis of Contracts for Difference (CFD). When buying stocks that command price in three digits, this comes in handy to make these trades affordable.
Let us assume that stock XYAB is priced at £340 per share, and that the price has moved from £340 to £362, what will it cost to purchase 100 units of the stock using a leverage of 1:5, and what profit is made?
- Purchasing 100 units of XYAB at £340 per share will cost a total of £34,000.
- A leverage of 1:5 (one-fifth) allows the trader to buy this position with 20% of the total amount. One-fifth of 34,000 = 6,800.
- Profit made is (362 – 340) X 100 = £2200.
What To Look For With Your Stockbroker
It is impossible for all traders of the world to gather physically on the floor of the New York Stock Exchange or the London Stock Exchange to buy and sell stocks from each other. This is why stock brokers exist. They are regulated, registered entities who are licensed by law to provide their clients with access to the stock markets. They provide trading platforms to enable their clients get access to the market, where their buy or sell orders can be matched automatically either in-house or with external venues.
So what should you look for in a stock broker?
Stock brokers have partnerships with various payment processors, which enables them to use various methods to deposit or withdraw trading funds. The oldest and most widely used method is the bank wire method. However, other so-called e-wallet options have emerged over time. These methods are usually faster and some even allow same-day withdrawals. Instant funding and same-day withdrawals can be done with PayPal. We have a PayPal funding guide that describes how to use PayPal as your stock trading payment gateway.
Can they can serve your device?
The advent of smartphones and tablet devices in 2006 allows today’s stock traders to trade from their hand-held gadgets. Most stock brokers offer proprietary software, so you can be sure of getting access to a mobile app for the Android or iOS devices.
In terms of platform development for devices, stock brokers have been able to advance their proprietary platforms to their clients in a much better what than is obtainable in the forex market. The fact that each brokerage offers a unique platform to its clients allows the brokerage to express their product offering intimately to clients. Stock mobile trading platforms therefore have better identity than forex trading mobile apps.
You will have access to a mobile trading guide that will teach you how to trade stocks using mobile devices and mobile apps.
Do they have the markets you want to invest in?
In terms of numbers, the stock market offers the largest asset class of all financial assets. In the New York stock market alone, there are several submarkets: the Dow Jones Industrial Average, the NASDAQ (where technology and biotech stocks are traded) and the S&P500. There is also the Over-the-Counter (OTC) market where penny stocks and small cap stocks are traded. These three markets alone feature tens of thousands of stocks.
Moving over to Europe, we have stock markets in London – home to the the FTSE 100 and FTSE250 – along with the stock exchange in Belgium (EuroStoxx). Dubai, Saudi Arabia (Tadawul), China (Shanghai), Singapore (Straits Times) and Australia (ASX) are also home to major international stock exchanges. All these markets contribute thousands of stocks from various categories.
Collectively, these markets provide traders with stocks from various sectors and from different countries You will have stocks from the oil sector, biotechnology stocks, technology, manufacturing, retail, sports, restaurants, hospitality, etc. so you should find that there’s a stock or two to trade at any given point in time. Fortunately, many stock platforms assemble stocks from various countries to give their diverse client base options on what to trade.
What Stocks & Shares To Buy
One strategy of buying stocks is to buy into emerging industries. In the last few years, some sectors have developed very strongly in terms of growth potential. For instance, many stocks that are classified as so-called “cannabis” stocks (companies licensed to develop marijuana strictly for medical use) have done well. Companies founded on the blockchain, artificial intelligence, alternative energy and other emerging technologies are also regarded as having good growth potential.
Traditionally, certain companies have always offered good price volatility to enable day trading of stocks. Many companies listed in the NASDAQ, S&P500, DAX and other exchanges present great opportunities for intraday and swing trading.
Why Invest In Shares?
Investing in shares can be a rewarding experience for the following reasons:
- Portfolio diversity
- Wealth transfer
Investing in shares is considered one of the less risky and safer forms of financial market investment out there. When you buy shares, they become yours until you decide to sell them. Even if a stock loses 98% of its value, you have not technically sustained any loss until you make the decision to liquidate your holdings by selling them. Only then will you lose money on your investment. But if you hold on to your shares and they appreciate with time, you can still make a profit.
This differs from the forex market and other leveraged investments where exhaustion of leverage from contrary price movements could cause liquidation of your positions, causing you to lose everything. The safety net provided by stock investments could be seen as better for beginners, especially those who prefer to hold on to their stock holdings for some time.
Investing in shares is also a method of portfolio diversification.
Look no further than Bill Gates for a good example of this: Bill Gates stock holding in Microsoft, a company he founded, has dropped over time. Yet his personal fortune is increasing. Why? Because Bill Gates is now investing in other companies by buying shares through his Cascade Investments holding company. In 2016 he had stocks in Coca Cola, Caterpillar (CAT), Wal-Mart and Ecolab, among others. Gates has had an 11% return on his investments since the mid-90s netting him far more money than if he’d have had he stuck solely with Microsoft. Stock investing therefore offers a great way to grow wealth through portfolio diversification.
Stocks can also be used as collateral to obtain loans.
Read on to find the answers to a number of frequently asked stock trading questions.