So you want to trade on the Stock Market?
Ultimate Guide to Stock Market Trading
“Unless you can watch your stock holding decline by 50% without becoming panic-stricken, you should not be in the stock market.” – Warren Buffett.
Stock trading has been an extremely fascinating enterprise for centuries. Since the opening of the first stock market in Amsterdam, Netherlands in 1602, stock markets have gone ahead to spread to nearly all countries of the world.
What you will learn in this module are:
Stock Trading is a popular enterprise. In fact, its popularity may render any further introduction on it largely pointless. It is so much around us that we cannot escape being told about it every single day. Even when you switch on any of your television or radio any of these days, chances are very high that you will hear one thing or the other about the performance of the stock market for the day. The stock market has gone up! The stock market is coming down! and so on are the pieces of news that make the headlines from time to time.
The stock market has become an economic behemoth over the years. It holds a pride of place in the economic climate of any country. As a matter of fact, economic experts do measure the economic performance of each country along the performance index of their stock markets. Most pension schemes and similar retirement plans invest the majority of their funds in the stock market. Indeed, there is an inextricable link between the economy of a country and the stock market.
Stock is also known as ”share” or “equity.” It is a financial instrument that indicates ownership in a corporation. That is, if you own a share in a company, you own a portion of the company. As a result, a stockholder has a claim to the corporation’s assets and earnings. In other words, your share entitles you to receive dividends from the company. Your stock opens you to every benefit that results from the growth of the company. Therefore, owning stocks in a company is a very convenient way to boost your finances.
Although the two terms “share” and “stock” are often interchangeably used, they are not the same. Subtle difference exists between them, and it must be acknowledged in other to get full appreciable meanings of the two terms. While “share” suggests fractional ownership in a company in relation to the total ownership which is the total shares, stock, on the other hand, is all of the shares that make up its total ownership. That is, the stock of a company is the total shares representing its ownership, while a shareholder is just a part-owner of it. In simple terms, share is a chunk of stock. Stock is an aggregate of shares.
A shareholder is someone who owns one or more shares. The more the shares of a shareholder, the more of the company he/she owns. That is, as a shareholder, your stake in the ownership of any company is proportional to the number of shares you own. But how do you determine that? You determine it by evaluating your shares in relation to the company’s total number of outstanding shares. For example, if Company A has 1,000 outstanding shares, and you own 100 shares, you automatically have 10% to the company’s ownership.
Likewise, if the outstanding shares are a million and you own a thousand, you become a 10% owner of it. And as a result of your stake, you are entitled to the same proportion of its assets and earnings. The benefit of having shares in a company lies in the fact that shares have fantastic potentials to increase in value as time ticks on.
Types of Stocks
There are two types of stocks: Dividend Capture and Voting Rights
• Dividend Capture
Dividends are payments made by corporations from their quarterly profits. Sometimes, there are special dividends which, as the title reflects, special payments made from companies’ monetary reserves, and not necessarily from the quarterly profits they make. It offers continuous flow of profit opportunities.
• Voting Rights
Voting rights are rights conferred on shareholders that empower them to have a say in the way the affairs of the companies whose shares they own are run. By virtue of those rights, they are able to vote on key corporate issues (e.g. membership of the board) and make vital operational changes. The major point here is in the fact that the number of votes a shareholder has is proportionate to the number of shares he or she owns in the company
Major Stock Exchange around the World
What is stock exchange? A stock exchange is a marketplace where the trading of shares, bonds and securities take place. It is an organized and regulated facility where stockbrokers and traders can buy and sell securities which are widely known as shares of stock or bonds. It is traditionally a building in a particular country with a designated name. But its modus operandi has been diversified by the advancement of ICT. The major stock exchanges around the world are:
• New York Stock Exchange (NYSE)
The New York Stock Exchange (NYSE) is located on Wall Street in New York. It was founded in 1817 but started operating with the name NYSE in 1963. It is unarguably the largest stock exchange in the world by market. Over 2400 companies are listed on the New York Stock Exchange. These companies cut across sectors such as finance, healthcare, consumer goods and energy.
• London Stock Exchange (LSE)
The London Stock Exchange (LSE) was founded in 1801. Though it first started as a publication outlet as far back as 1698 when it published twice-weekly paper on market prices. This makes it the one of the oldest stock exchanges in the world. It is owned by the London Stock Exchange Group, which was created in 2007. It is the most international stock exchange, with over 3000 companies from more than 70 countries.
It is located in the famous Times Square, New York. It stands for National Association of Securities Dealers Automated Quotations and was founded in 1971 by a group of local stockbrokers. The NASDAQ is the first electronic stock exchange. Some of the NASDAQ’s top listed companies are Apple, Microsoft, Facebook and Tesla.
• Shanghai Stock Exchange (SSE)
The Shanghai Stock Exchange (SSE) is an independent stock exchange which is based in the People’s Republic of China. Though it was just founded in 1990, it is the fourth largest stock exchange in the world. The largest stocks on the Shanghai Stock Exchange include PetroChina, the Industrial and Commercial Bank of China and the Agricultural Bank of China.
• Tokyo Stock Exchange (TSE)
The Tokyo Stock Exchange (TSE) was founded in 1878 and is the largest stock exchange in Japan. The TSE has successfully survived many debilitating problems such post World War II mess when it was suspended between August 1945 and April 1949 – due to the role Japan played in the war. It was rebranded in 1949 and is now commonly known under the name of its owner: Japan Exchange Group. The Tokyo Stock Exchange currently partners with other exchanges all over the world. There are over 3575 companies listed on the Tokyo Stock Exchange.
• Hong Kong Stock Exchange (SEHK)
The Hong Kong Stock Exchange (SEHK) was founded in 1891 by the Association of Stockbrokers in Hong Kong. It was renamed to the Hong Kong Stock Exchange in 1914. The SEHK is one of the three stock exchanges in China, but the physical trading floor of the SEHL was closed in 2017 because of its shift toward electronic trading. The SEHK is the third-largest stock exchange in Asia, and the fifth largest in the world. The Hong Kong Stock Exchange only trades in Hong Kong Dollars (HKD) and all the listed companies are primarily based in Hong Kong.
The Euronext Stock Exchange is based in Amsterdam, Netherlands. It is a pan-European exchange which covers the Netherlands, Portugal, Belgium, France, Ireland and the UK. It was founded in 2000 to represent the economy of Europe as a whole, and it operates only in euros. Euronext is the seventh largest stock exchange in the world.
The Toronto Stock Exchange (TSX) was founded in 1852. It is the largest stock exchange in Canada, with over 1500 companies listed. The TSX is the third-largest stock exchange in North America by market capitalization, and the ninth largest in the world.
Choosing the Right Stock
Choosing the right stock often seems a herculean task to many traders. In other words, it seems like you need an oracle to choose the right stock for you. It is customary for traders to either be a loser or a winner in choosing. Choosing the right stock is more of an art than some esoteric science. The good news here is that you will not be a loser if you adhere to the techniques that will be outlined here for choosing the right stock.
First and foremost, the most tested and proven method for picking a good stock starts with picking the right company. Picking the company involves a careful look at its products, services, and financial strength. You must evaluate these indicators in number, not by any theoretical impressions. The current information age has made doing evaluation of a target company a lot easier in that you can conveniently browse through the past records of the company at your own pace and without hassle.
The right stock lies in recognizing its potential value. The value of a stock is more or less proportional to the value of the company that is issuing it. When you look at the value of a company, it puts you in good position to anticipate greater success. The more ways that you can look at a company and see value, the better you become. The company’s value shows its ability to generate profit. You can measure value in different ways, so you need to know the difference and understand the impact that value has on your decisions.
Every company has book value, intrinsic value, sales and earning value. These are very integral to the strength of the company and are also viable indicators of the company’s potential success. You can also evaluate the value of a company by asking the following relevant questions: how much is company’s debt load? Is it less than the company’s equity? Are sales healthy and increasing from the prior year? How is the company faring in its competition with other companies in the same industry? Answers to this question will undoubtedly reflect the vitality of the company.
Fundamentals of Stock Market Trading
Trading in the stock market is unarguably the most convenient method to make more money while doing less. It only requires little time and little amount of money. Unlike conventional business enterprise that requires a lot of boring paperwork and capital, you do not need huge amount of money and time before you can trade in the stock market. All you summarily need is the fundamentals of stock market trading.
The fundamentals of stock market trading revolve round making orders. There are two major types of orders that are available in the major stock markets: Market Order and Limit Order
• Market Order
A market order is an immediate order to buy and sell a stock at the best available price. It is used when you want to get the order done immediately at the market price. However, there is often no guarantee that this order will be executed at a guaranteed price.
• Limit Order
A limit order is an order to buy or sell a stock at a specific price or better. Although a limit order is not guaranteed to execute. A limit order to sell will be filled at or above your price. It ensures that an investor does not pay more than a predetermined price for a stock.
Understanding Orders and Trading Techniques
To be successful in trading goes beyond picking the rising stocks; it’s also about the techniques you adopted in doing it. This section presents some of the best trading techniques for stock trading
- Get familiar with both time-related orders and condition-related orders because these are invaluable tools for successful trading. Combination of these two orders helps you to have a perfect strategy for a successful trading. It also helps significantly for wealth building by maximizing the gains and minimizing the losses in your trading activities. What then are time-related orders and condition-related orders? Time-related orders simply mean the orders have a time limit while condition-related orders are orders that are only executed when certain conditions have been met.
- When you want to buy stock, don’t rush into buying. Many traders have a tendency to rush into buying a stock without giving some thought to what they could do to get more for their money. Take your time to carefully study available records on the stock market before buying.
- When you want to sell, don’t rushing into selling. Many traders often jump on the bandwagon when it comes to selling. In order to sell at a fairly better price, use the condition-related orders. It is a useful technique that can enhance your ability to sell at a better price and to ultimately minimize potential losses. It is a proven and tested method by which you can consciously prevent a major decline in a stock that you own.
Do I need a Huge Amount of Money for Stock Trading?
This is has become lingering question that has been troubling the mind of many potential stock traders. This simple answer to this baffling but important question is an emphatic No. You do not need a huge amount of money before you can become a stock trader. The good news here is that there are many stock market suits everyone’s pocket. As a matter of fact, the amount of money you need for stock trading depends on the type of securities you want to buy.
There are plenty opportunities in the stock market from which you can make good money. Grabbing such opportunities is not about the amount of money that you have to trade in the stock market. It is about maintain some strategies and following some basic rules of the stock market.
Strategies to win big in stock market trading
“Trading strategy is the process of determining your major trading goals and then adopting a course of action whereby you allocate the resources necessary to achieve those ends.” – Howard Abell
Successful trading essentially comes down to deploying appropriate strategies that center on results-oriented trading plans. A trader who aims to win big must develop personal strategies that fit the overall trading plans. The right strategies produce the right result.
- Do research on the stock market through regular reading of financial literature. Know everything you can find out about the market. Familiarize yourself with the current trend of stock trading. Follow the trend but do not ever follow the rumors. You can also go ahead to attend investment courses and seminars.
- Have an updated knowledge of market policies. A significant point of note is to be aware of the technicalities of online stock trading where buying and selling of stocks occur via internet, thereby bypassing broker through an inexpensive online system.
- Select your trade properly. You can trade only in stocks that have high volumes because stocks with low volumes are always very volatile. You must trade in proportion to your strengths, interests, seed capital, time constraints and abilities. To all intents and purposes, avoid trades that do not match who you are as a person.
- Fully understand your motives for trading. Do not trade with unclear mind. Understand your motives for trading fully and keep reexamining them daily to find out if you are trading along them. Always take into consideration your motivations for trading. Many inexperienced traders are often in constant conflict with their motives. Do not join them because a house in disarray hardly prospers.
- Do not borrow money to trade because stock markets have unstable temperaments. Do not be tempted into borrowing to trade because the market is a volatile environment which do not promise anybody steady stream of profits. Borrowing to trade has been considered by many financial experts as a very high-risk trading strategy.
- Seek assistance from qualified experts. You can consult with an attorney who specializes in securities law. Seeking expert’s advice reduces complexity that you may encounter in your trading activities. It also save time and increases your confident for a better result in trading. Doing this ultimately make you feel safer and encouraged to shoot for the stars.
Other strategies to consider include the following:
- Plan your trading objectives all the way to the end.
- Exercise self-discipline and do not be emotionally attached to the market situations.
- Be committed to your trading strategies
- Always remember to monitor your trading performance.
Trading for Income
“Your success in stock trading relies heavily on your willingness to dedicate yourself and your abilities to learn the techniques required to be successful.” Mark Seleznov
What all traders desire in stock trading is nothing less than gaining substantial amount of income from their stocks. This sort of income is basically known as dividends. A dividend is nothing more than money paid out to the owner of stock. The basic truth behind trading for income is that successful trading goes far beyond theory; it is only realized in action. Market wisdom is largely instinctual. Hence, trading for income essentially requires some specific physiological skills such as compelling personal motivation, state of mind management, focus, anxiety control and goal setting.
• Compelling personal motivation:
This largely involves doing everything possible to win at trading. It is sticking to your trading plan and not allowing a momentary impulse based on fear and greed to control your decisions and subject you to doubts. Many traders unfortunately have faltering motivation that initially appears unshakable. This is not a good ground on which the flower of profitable trading can blossom. It is important to have a mind of steel and have a really compelling self-motivation that endures to the very end of the trading activities.
• State of mind management:
Have a positive state of mind which allows you to maintain high level of self-esteem, unwavering confidence and resourcefulness. Develop a positive state of mind that forbids the concept of failure. A positive state of mind results from constant positive verbal attitudes and belief system. This state of mind constitutes viable weapons that can be used to battle the demons of fear, doubts and greed.
Therefore, expect the best of yourself and establish a personal standard of excellence. You can conveniently do this by communicating positively and effectively with yourself in a bid to ultimately re-create yourself to a positive, empowered and resourceful being. You can also take a further step to manipulate an abiding system of personal beliefs that can enhance your state of mind adequately.
Concentrate your mind and attention on your activities towards successful trading. You need to develop an internal terrain that promotes nothing but sheer excellence. Staying fixed on your particular approach will allow you to resolve any intrusive issues that you may experience in the course of your trading. Remember, where attention goes, energy follows and desirable result manifest in no time.
You must develop a pool of personal beliefs that constantly reinforces your self-esteem in the execution of trade whether you win or lose. This involves the ability to effortlessly expect good results while restraining fear of failure and intrusive pressure. It embraces hard work, discipline and a total focus on an effective and proven trading methodology.
• Goal setting:
This gives direction and focus to the trading objectives. It ultimately allows you to make laudable decisions without unnecessary delay. Hence, you should have a clearly defined goal in writing. A set of goals written down is better than a memorized set of goals.
Additionally, you must be constantly aware of what you are trying to accomplish if you really want to achieve an excellent trading result. Do not forget that you must set trading goals that are Specific, (that is precise, unambiguous and well-defined) Positive, (that is uplifting and high-reaching), Measurable, (that is goals that are readily quantifiable), Controlled, (that is goals that you are within your control and ability), Realistic, (that is goals that are feasible and reasonable), and Time-framed, (that is goals are stated within a specific period of time).
Other relevant psychological skills are: discipline, courage and swift response to myriad of emerging financial events. These skills are inestimably relevant to success trading and they must be consistently practiced day in and day out until they are inseparably built into your system of thinking and dictate your everyday behavior.
Furthermore, a trader who aims for phenomenal profits must focus his/her energies and evolve a method that is highly consistent in his/her drive for excellent profit. It is essential to develop a consistent, disciplined approach based on the information available in the market as regards price and other statistics.
Two rules from Bernard Baruch’s ten rules for successful speculation are also relevant here.
- Periodically reappraise all your shares to make sure they are appropriate to your particular strategy.
- Know when you can sell to your greatest advantage (of course this also applies to buying)
A Simple Formula for Trading for Profit
Well analyzed trade plus Compelling Personal Motivation plus Proper Execution based on Confidence and Focus plus Resourceful State of Mind = Successful Trading
While applying this formula,
- Make sure you completely avoid getting locked up in the jail of your personal opinion. Be open and be a keen observer of the happenings in the market and around you. And do not confuse your subjective opinions with the objective actions of the market.
- When market gives you profit, do not make further hesitation to take it.
- Be ready to take opportunities that comes your way.
- Have a well-defined money management system
- Have the right state of mind.
In summary, trading for incoming involves putting in place the right attitudes and necessary psychological skills.
Recognizing the Risks in Stock Market Trading
The stock market has an ever-changing temperament. It is replete with risks which you must quickly recognize and at best avoid if you really want to become prosperous or at least break even in the stock market.
What is Risk? Risk is the unanticipated possibility of losing part or all of your initial investment in the market. It is also the likelihood of making a profit that is less than what you anticipated in the market. Trading in the stock market is riskier than many other forms of trading. The reason for this is that share prices rise and fall all the time as economic and market forces change. However, the higher risk involved also means that you have an opportunity to make a greater profit. Usually, higher risk means a higher return (profit).
You don’t really need to fear risk if you understand and plan ahead for it. To recognize risk, you need to get familiar with the concept of risk. Risk is ever present in every undertaking that involves money.
First, understand the laws of supply and demand in the market. The price of the stock you purchase can rise or fall on the fickle whim of market demand. Buying and selling occur each minute of every trading day and this invariably affects the share price of your stock. This fact makes the market very unpredictable and also makes it largely impossible to judge which way your stock will move tomorrow or next week. We all sail by the tide of the market.
Recognizing risks requires diligent work and research before dashing straight into the market. It really pays to gain knowledge about how risks can impact your wealth-building. Major risks in stock trading are: personal risks, emotional risks, political and governmental risks. For example, politics and government policies can kill off companies. If you own stock in a company that is exposed to political and governmental risks, you need to be aware of these risks because a single new regulation or law is enough to send such company into bankruptcy. While for other companies, a new law could help them increase sales and profits.
On personal risk, be sure to set money aside for sudden expenses before you buy stocks. And make sure you are not forced to prematurely liquidate your stock investments to pay emergency bills. On emotional risk, know that logic and discipline are critical factors in trading success. Do not let emotions take over the reins of money management and cause you monumental loss. For stock trading, try as much as possible to avoid the three main devils of emotions: greed, fear, and love. You need to understand your emotions and what kinds of risk they can expose you to.
Easy Ways to Protect Yourself from Fraud
Protecting your money is of the same importance as making money. Many agencies are after your money. They are set out to take out of it no come what may. Many of these agencies take your money through legal means while some others take it through illegal method. The bucks stop at you to protect yourself from the agencies that are ready to take your money from you illegally.
Scammers are one of the agencies you should be wary of. They take money using every illegal method at their disposal. They are most prevalent during favorable economic conditions and market boom. They operate through fraud and theft most especially when the economic conditions are really favorable. This section will teach you tips to avoid being scammed of your hard-earned money.
• Be Wary of Unsolicited Calls and E-mails
Be wary of phone calls or e-mails that come from unfamiliar sources especially the ones that are soliciting money from you while introducing either new trade or investment plans. It is common for such calls or emails to come with mouth-watering offers that you may be tempted to consider. But, believe me, they are Trojan horses. Do not hesitate to question every promise of extraordinary returns. Many promises of extraordinary returns often end up being largely illusory or becoming a great risk. You need to be particularly careful not to trust your money with them.
• Get to Know the SEC
Get to know the Securities and Exchange Commission (SEC) long before you go into stock trading. It is one of their primary responsibilities to protect you from fraud and other unlawful activities that are bent to fleece you. SEC has appropriate legal tools to crack down on all questionable trading practices. They also help you watch out for fraud, get better understanding of the financial markets and how they work. They can also handle complaints lodged against
brokers and companies that have committed fraud or other abuses. You can visit their website or look up the telephone numbers of any of their regional office that is close to you. Feel free to call and ask your questions about any dubious activity.
• Don’t Trade If You Don’t Understand
Stock trading can frequently come in complicated forms and can be hard to understand. Scammers do exploit traders that are being overwhelmed by large amount of the trading details to the point that they ignore the mechanics of the deal. Don’t fall for such approaches. You should really understand exactly what you’re doing, how it will generate more money, and the risks that are involved. If you still find it difficult to come to terms with the details of the trade, it is advisable you review the details with an advisor that you can trust.
• Verify the Stock Market
If anyone asks you to trade in a market, first verify that the market exists. Very many people have lost their money in a bad or dubious market. If you are not willing to lose your hard-earned money to any phantom market, make rigorous verification first.
Here are some questions to ask in order to make verifications: What government agency oversees the market? How can I contact that agency? Have articles been published by major media sources on this market?
– Francois Oosthuizen
[Content correct at time of publishing and are subject to change without any notice.]
DISCLAIMER & NOTICE
The information is for educational purposes only and not financial- and or investment advice. Trading can be very risky. Never trade with money you cannot afford to lose. Always seek the advice of our preferred regulated FSCA Broker and or a regulated FSCA Financial Advisor.