Stock trading typically refers to the frequent buying and selling of stocks on the secondary market for short-term profit. Typically, stock traders must have high risk tolerance, conduct detailed technical research and be very attentive to the stock market in order to pivot and make investment decisions to maximize short-term returns.
What Does It Mean to Trade Stocks?
For stock market traders and investors, the trade is how things get started. Trading stocks typically refers to buying and selling shares to take advantage of changes in stock price.
Trading strategy aims to buy a particular stock at a low price and sell it when the share price increases to make more money. Traders use technical analysis of stock price and stock liquidity rather than an in-depth historical study of a company and its past performance and financial goals.
A stock trader will book a profit or loss depending on the price at the end of the day. For example, if you buy Apple Inc. for $151.25 per share on Monday and the market closes at $142.50, you will have recorded a loss from your trade.
The short-term strategy of individual trades differs from the long-term strategy of investing in stocks.
Long and Short Positions in Stocks
An experienced investor may short-sale stock to take advantage of shifting stock prices. A "short" position on a stock, according to Investor.gov, means selling a stock you don't own when its price is falling, with the expectation that you can repurchase it at an even lower price. This risky strategy is not for beginners. In contrast, a "long" position on a stock is when you own it and hold onto it, expecting an increase in value over time.
What Is a Day Trader?
Day traders engage in daily trading of stocks and exchange-traded funds to generate quick returns. Some day traders work independently, while others perform day trading for financial institutions.
Day traders need a brokerage account and may use a stockbroker or broker-dealer to execute their trades, or they may invest through a relatively low-cost or commission-free trading platform. Day traders pay taxes on their trading activities.
Many well-known investment companies and brokerage firms, such as Fidelity, offer trading platforms and intermediary services for investors and stock traders. The Financial Industry Regulatory Authority oversees U.S. broker-dealers to protect investors and uphold the fairness and integrity of financial markets.
Swing traders perform regular trades but with more time between the buy and the sale to take advantage of trends and market volatility.
Types of Brokerage Accounts and Trading Accounts
To engage in trading, a trader needs an investment account through which stock market trades can be transacted. Trading accounts were introduced when stock traders were no longer required to be physically present on the trading floor.
- Trading accounts allow the modern online stock trader to buy and sell stocks and securities on multiple stock exchanges in real-time. For instance, a trader can simultaneously conduct business on the New York Stock Exchange and Shanghai Stock Exchange.
- Cash accounts are brokerage accounts requiring you to have the funds to pay for any trades you make. If you want to purchase $10,000 in stocks, you must have that amount in your cash brokerage account.
- Margin accounts are a type of brokerage account that allows a broker-dealer to lend you cash to trade with interest. This also allows a trader to engage in short selling. The U.S. Securities and Exchange Commission warns beginner traders of the exposure to more significant losses with a margin account.
How Does a Beginner Stock Trader Get Started?
Investing in day trading can be high risk, and it requires knowledge and understanding of the financial markets and investment strategy. You'll also want to learn about the different order types, including market, stop and limit orders.
Investors considering stock trading should seek investment advice from a trusted financial adviser. When it comes to new investment products and stock market activities, always carefully consider your risk tolerance and financial goals.
This article was written by PocketSense staff. If you have any questions, please reach out to us on our contact us page.