It seems to be a very fascinating career path to trade stocks in the market and earn quick dollars in the form of dividends and capital gains. However, it may not be an easy task to do so for beginners since stock trading can get very tricky. Every day, thousands of people buy stocks for the first time in their life with the hope of becoming a successful professional stock trader in the future; however, only few of these people actually achieve their dream. It is surely possible to learn the art of stock trading. But it requires a lot of willpower and eagerness to succeed. If you have these qualities then we are here to guide you through the basics of stock trading. Following are some of the important things that you need to do and understand in order to kick-start your fulltime or part-time career as a stock trader.
1) Learn the basics:
It is no secret that you need to learn the basics before practically starting to trade. Since stock trading is a complex job, even the basics can include a wide range of things. Firstly, you need to understand basics of accounting and finance which can range from things like reading and interpreting balance sheet to popular methods of valuation of stocks. At the same time, you must be aware about how stock trading actually happens. Commonly, it happens in two ways; on the exchange floor and electronically. The next point covers them in further detail.
2) Trading methods:
As mentioned above, you should know how trades take place. You would have seen scenes of “on the exchange floor” trading in movies like The Wolf of Wallstreet. If you are trading using this method, you need to tell your broker about the shares and their number which you are interested to buy. The broker follows a process and a trader who is willing to sell those shares is found. The price is agreed upon and the trade is made.
On the other hand, it is usually easier to trade electronically. All you need is to login into the stock brokerage platform. A sophisticated system of computer network is used to match sellers and buyers. The system is obviously faster than exchange floors and instant trades can be made and confirmed.
3) Understand real-life valuation:
In an ideal world, each stock would be traded at a fair value. The valuation techniques you learned in the first step would allow you to determine the exact price which should be paid to buy the stock. However, real world does not work like this and most stocks are either under-valued or over-valued in the stock market. You should be looking to use various techniques to value a stock and then look if the stock is under-valued at present. Though it won’t achieve its real value quickly, such a stock can be expected to increase in its value in the near future and you will have an opportunity to earn profit.
4) Be aware of triggering events:
Each financial market is hugely affected by different triggering events. You should learn how to keep an eye on all these events and take decision accordingly. For example, if a government has suddenly announced massive tax cuts for IT industry, the industry will become hugely attractive for investors. Stock prices of promising IT companies will increase; hence, you should be looking to react quickly and make an investment. However, it is equally important to realize that all major news do not necessarily affect each industry. For example, massive tax cuts for IT industry will have no major impact on the construction industry.
5) When to make trades:
By making a trade, it means to either buy or sell a stock. With practice and continuous analysis of the market, you will be in a better position to know when to buy or sell any stock. For example, it is a good time to buy when market as a whole is pessimist about any particular industry or company but you see potential for future growth and vice versa. It is obviously not an easy task to master this skill and it comes only with trial and error and constant practice.