CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 83.14% 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.

A Complete Guide to Stock Trading

A stock is a financial security that denotes ownership of a company. Stock trading involves buying and selling stock to profit from short term price movements.

A Complete Guide to Stock Trading
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INFINOX

23rd February 2022 - 12:35 pm

Table of contents

A stock is a financial security that denotes ownership of a company. Stock trading involves buying and selling stock to profit from short term price movements.

Stocks and shares define the fundamental aspects of company ownership. Trading shares in a company allows you to take part in financial markets, while helping put your money to good use. Stock trading and investing can also be one of the most common ways to diversify your portfolio.

This guide will break down the basics of stock trading, and teach you all you need to know about trading vs. investing in stocks.

 

This article at a glance:


  • Units of stock are known as shares, and tie in with the idea that you own a “share” of the company.
  • Stock trading is the short term buying and selling of shares to take advantage of price movements.
  • Traders can place buy or sell orders in the span of months, weeks or even minutes, based on the type of trade.
  • Stock investments, on the other hand, are held for longer periods of time.
  • Retail traders can start trading stocks through online brokerage platforms.

 

What are stocks?

A stock is a financial security that denotes ownership of a company. Units of stock are known as shares, and tie in with the idea that you own a “share” of the company. Stocks entitle the shareholders to a part of the company’s profits and losses, and a proportionate vote on company matters.

Think of it this way - your neighbor wants to set up a lemonade stand, but doesn’t quite have enough in the bank to get started. They reach out to you and a few other friends who decide to pitch in. Of course, there’s no such thing as free lemonade, so in return, you and the other investors now have some ownership in the company.

Your neighbor decides that their total capital need stands at 100 USD. They divide the ownership of the lemonade stand into 100 shares, each with a price of 1 USD. You contribute 20 USD towards that total pool, for 20 shares. Relative to your investment, you now own 20% of the lemonade stand (congratulations!). This means that you hold 20% of its stock, will receive 20% of its profits or losses, and have a 20% say in company decisions.

Were you to offer 51 USD, instead of 20 USD, you would be the majority shareholder in the lemonade stand. Not only will you receive over half of the company's profits or bear the burden of over half its losses, but your vote would override all others as well. Even if there were five other investors in the company, the total value of their stock would be 49% - still less than your controlling stake.

Buying and selling stock

Shares have a price that can increase or decrease based on demand and other market conditions. Therefore, stock trading is all about buying shares in a company you believe will increase in value. With stock investments, you’re paying X amount to buy Y shares in a company. If the value of the company increases, the value of your investment increases. If the value of the company decreases, so too, does that of your investment.

Back at the lemonade stand, business is booming and you feel great about your investment. As the company’s value grows, so does the value of your stake in it. If the stand continues to do well, this value will keep climbing, making you all the richer when you sell your shares

However, as winter draws near, fewer people now visit the lemonade stand, opting instead for a steaming cup of coffee at the local cafe. As the company’s value declines, so does the value of your stake. If you were to sell your stock now, you would likely end up doing so at a loss.

Fun fact: Shares of the Warren Buffet-led holding company Berkshire Hathaway are the most expensive across the world. At the time of writing, the company’s shares were trading at 485379 USD.

How does stock trading work?

At the most basic level, stock trading uses the same principles of buying and selling we discussed earlier. The difference is that when you trade stock, you buy and sell in a shorter time frame (less than a year) to take advantage of price movements. Stock trading is much more sensitive to short term changes in the prices of different stocks. Traders can place buy or sell orders in the span of months, weeks or even minutes, based on the type of trade.

Conversely, if you’re investing in stock, you’re likely to hold on to it for a while so that its value can appreciate in the mid-to-long term.

When trading stocks, you have the opportunity to put your money in a variety of companies, from newly listed upstarts, to well-established corporations and big tech. You can base your strategy on specific industries, or take a trend-based approach.

There will also be plenty of data to consume. Every listed company produces regular reports. These reports allow you to see how much income a company has earned, and what their financial performance looks like.

Financial reports are a crucial indicator of the company’s past performance. Their analysis, and an analysis of its stock performance over the years, help traders theorize about how the company will do going forward.

Where can I trade stocks?

Stock trading takes place on a stock exchange, such as Nasdaq in the US or the Shanghai Stock Exchange in China. Companies list their shares on these exchanges, and traders can buy and sell through a brokerage firm.

If you’re a retail investor, an online brokerage platform is likely to be your go-to option to get started. The first step is to find a brokerage platform that works for you, and set up an account with them. You should be good to go after completing some initial KYC steps online, and can start to buy and sell stock based on your trading strategy.

Another way to invest in stocks is through contracts for difference (CFDs). These financial instruments allow you to speculate on the price of an asset without actually owning it.

This means that traders don’t actually buy or sell any stock. Instead, they make a play on whether they think stock prices will increase or decrease, and accordingly make a profit or loss. You can trade CFDs on stock, and also on other assets, such as precious metals, forex, or futures. Find out more about trading stock through CFDs on the INFINOX platform.

For beginner traders, IX Social is an innovative tool that allows you to track and copy the investments of professional traders, based on their profiles and performance data. IX Social allows you to auto-copy their investments at a level that suits your budget. It also lets you source the most followed traders, best live trades, most copied trades and the most profitable trades. Find out more about IX Social and how to get started on your social trading journey.



The cost of stock trading

Remember what we said about free lemonade? It’s true for stock trading as well. Without considering all the variables in play, you run the risk of spending more than you can afford. The three factors you need to consider before you buy shares are:

Account opening deposits and fees

Different brokerage platforms have different rules about minimum amounts before you can start trading. Some will charge a nominal fee for you to open an account with them, but may not have any minimum deposit requirements. Some others may expect you to maintain a minimum balance in your account to trade with them.

As a trader, you need to weigh these options against the platform’s offerings, and take a call on what would be the best deal for you.

Fees and commissions per trade

Using a broker that gives you access to the financial markets will incur certain costs in terms of commissions or monthly account fees.

Some online brokers charge a monthly fee and no/low commission on each trade. Other brokers may not charge a monthly fee, but the commission on each trade will be higher. You can find the complete list of our commissions and fees here.

Currency Conversion Charges

Currency conversion charges may also apply to your trades and deposits, depending on what currencies are supported by the platform of your choice. Check out the different currencies eligible for trading on the platform, and factor in the cost of conversion in case your local currency is not supported.

Stock trading do’s and don'ts

Trading stocks, like any other form of trading, is an inherently risky activity. However, there are some rules to this game that you would be wise to follow.

  • Diversify your portfolio. Stock trading is a great way to build a diverse portfolio and spread your risk because you’re free to focus on a variety of companies. Having interests in multiple companies means that you can offset your losses.
  • Get your research in place. With stock trading, as with all trading, there will always be swings in either direction. If you can do the necessary research, get in at the right price, and time your entry/exit to perfection, there is money to be made.
  • Have a strategy. When trading stocks or stock CFDs, remember to formulate a strategy and stick with it. This will help you steer clear of impulsive decision-making, a habit that may hurt your trading prospects in the long run.
  • Know when to cut your losses. It can be tempting to hold on to a trade in the hopes that its price will move in your direction, even after it’s way past your loss threshold. Know when to call it a day and close the trade to mitigate your losses.

Ready to get started with your stock trading journey? Head on over to the INFINOX platform to trade stock CFDs of some of the world's biggest and most popular brands, using smaller margin amounts.


This material is for general information purposes only and is not intended as (and should not be considered to be) financial, investment or other advice on which reliance should be placed. INFINOX is not authorized to provide investment advice. No opinion given in the material constitutes a recommendation by INFINOX or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.


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