The Basics of Stock Trading Online
Although stocks trading was once solely possibly in the major stock exchanges of the world, today it is affordable and easily accessible to everyone thanks to the internet which has allowed anyone with an interest in investment to try their hand at playing the financial markets. Before online trading became possible, investors were reliant upon the services of their stock broker, who was responsible for making buy or sell orders on behalf of their client. Today, however, it is possible for individuals to execute their own buy or sell orders in just a few seconds through the use of computerised trading services in the comfort of their own home, or even through a mobile device whilst on the move. Although purchasing and selling stocks allows a trader to make large profits, it is also a risky business with the possibility of losing just as much money in a short space of time. In order to become successful in any trading enterprise it is essential for an investor to familiarise themselves with the tools of trading, the daily market reports and the theory behind stock trading online.
What are Stocks?
Put in basic terms, a stock is an ownership share of a particular company and represents a claim upon the earnings and assets of that company. The more stock owned by an individual, the greater their ownership stake in that company. There are many interchangeable terms for stock, such as “equity” and “share”, but in the end, they all have the same meaning. When a person holds stock in a company they become one of the shareholders or owners of the company and therefore they have a small claim to everything owned by the company in question. When someone becomes an owner, they have an entitlement to their own share of the earnings of their chosen company and are given voting rights which are attached to their stock. Stocks are represented by stock certificates which prove ownership. In the past, these were actual paper documents, however today these records are kept electronically by the broker in order to make it easier to trade stock.
There is no longer any need for an investor to physically take their own certificates to the broker in person as trading can be done online with just a click of their mouse. Although shareholder status does not give a stock holder any say in the business’ everyday running, it does allow the investor a single vote per share that they own which allows them to have their say in the election of the board of directors at the company’s annual general meeting. Shareholders are also able to vote to remove the management of the company, in the event that they are failing to increase the firm’s value. When someone is a shareholder in a company they have an entitlement to a corresponding portion of the profits of the company and also have a claim on its assets. These profits are usually paid to the shareholder in the form of a dividend, and the greater the number of shares owned by the individual, the more profits they will receive. Should a company go bankrupt, the shareholder can also receive a portion of what remains of a liquidated business once the company’s creditors have received their share. Stock owners are also not liable personally should the company be unable to pay its debts and therefore the maximum amount that can be lost in the event of liquidation is the investment value itself and not any personal assets. Like any business, the stock market relies on a supply and demand system and when a trader purchases stock, it is with the hope that other investors will also buy into the same company, pushing up the stock’s value thus increasing their own profits.
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What Causes Changes in Stock Prices?
Stock prices are in a state of constant daily fluctuation because of different market forces including supply and demand. At its most basic level, if there is more interest in purchasing a particular stock, its price will rise whereas if there are more people who wish to sell it, the price will fall. The reasons for supply and demand are more difficult to understand. The main theory behind stock price movements is that it is based on what the investors believe that the company is worth at a given time. The factor which has the most influence upon a company’s value is its earnings however there are other elements which change investor sentiment towards the company’s stock which allows stock prices change for numerous reasons and can alter rapidly.
What Kinds of Stock Trades can be Done Online?
Once an investor has selected their online brokerage service, they can begin to purchase stocks. There are no less than 12 different types of trade which can be placed and it is important to become familiar with all of the terms and what precisely they mean to enjoy success.
This is the simplest kind of trade that can be placed. With a Market Order trade, an investor simply transmits the number of shares of the stock they wish to sell or buy to their broker and thereby to the exchange where the order is filled at whatever the current price happens to be. There is usually only a small amount of commission on this type of order as it is the easiest type to execute.
Limit Orders allow the trader to set a maximum or minimum price before their stock trade is converted into a Market Order and transmitted to the stock exchange. The investor will set either the maximum amount that they are prepared to pay or the minimum amount that they are prepared to accept when purchasing or selling their stock, however there is no guarantee from the broker that a Limit Order will be executed. For novices, a Limit Order is the best choice as it protects the trader from sudden shifts in the market.
All or None Orders
This order type enables the investor to tell their broker that they are only prepared for their order to be filled if all of the shares that they have been instructed to trade can be bought or sold in a single transaction.
Stop Orders and Stop Limit Orders
In order to avoid incurring a further loss or to protect a profit should a stock value drop below a particular level, a trader can execute a sell stop order. Stop Limit and Stop Orders are also referred to as “Stop Loss” orders. An executed Stop Order will automatically become a Market Order should the specified price be reached whereas a Stop Limit Order will convert automatically into a Limit Order once the Stop Price has been reached.
Sell Short and Buy To Cover Orders
While selling stock short can lead to huge losses it can also enable an investor to make a profit from falling stock. When a Short Sell Order is executed, the broker is instructed to sell shares of stock that are not actually owned by the trader. Should the stock fall, the transaction can then be closed using a Buy To Close Order which will replace the borrowed amount of stock taking the difference as profit.
Day and Good Till Cancelled Orders
A Day Order expires once the trading day has come to a close should it not have been filled. A Good Till Cancelled (GTC) Order will not expire for up to 60 days.
Extended Hours Orders
An Extended Hours Market enables an investor to place a trade between the hours of 8pm and 8am when traditionally the markets are closed. This allows traders to react to any news releases or announcements before the next session begins. Some risks are associated with this type of order due to potential increases in volatility due to decreased liquidity.
Trailing Stop Orders
This type of order allows the investor to protect their profits. As the price of stock rises, an investor can tell their broker to trail it and then sell if it should fall a certain amount. A Trailing Stop Order is a good way to automatically protect gains while limiting loss.
A Bracketed Order allows a new trader to get the best of both worlds by protecting their profits, limiting losses and structuring orders according to their own outlook for a stock. One step beyond a Trailing Stop Order, a Bracketed Order allows the trader to set a trailing stop as well as an upper limit which will result in the sale of their stock once it has been reached.
What are the Advantages of Trading Stock Online?
Stocks trading online has many benefits which makes it appealing to all kinds of people from all over the world:
- Working from home – As stock trading online is done from a PC or laptop, it is possible to access the internet and trade stock from the comfort of your own home and in a way that fits around family life and other commitments. It is even possible with the advent of trading apps and mobile optimised broker websites to trade stocks when out and about and on the move anywhere in the world.
- Low Commission – In the past stock brokers were able to charge a large commission on trades however today there is a lot of competition and therefore most online brokers are keen to offer low commission on executed trades.
Variety – there are hundreds of types of stocks to select from which gives investors the freedom to choose any stock they prefer.
- No Time Constraints – With modern possibilities of 24 hour and out of hour trades, it is possible to trade stocks all day and all night at any convenient time to fit in with lifestyle, work and other commitments.
- Quick Money Making – When trading stocks online it is possible to make a profit in just a few minutes as long as you do your research well and find out as much as possible about the markets before making an investment.
No Limits To Investment – There is no need to be bound by investment thresholds and traders can begin trading in stock with any amount that fits within the budget, whether that be a small or large sum.
- Rapid Returns – There is no need to have long waits to receive returns on stock trading.
- No Need To Be Experienced – While being an experienced trader will enable an investor to make greater profits, there is no need to have any experience at all to get started. No formal education or qualifications is required to commence trading and anyone can get hold of the necessary information to enable themselves to become successful.
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Tips for Trading Stock Online
While trading stock online may be nerve-wracking for novice investors, it is still possible to make a good profit if wise investment decisions are made. Here are some tips to avoid the pitfalls of online stock trading:
- Never invest any money that you cannot afford to lose – it couldn’t be more essential to make an intelligent decision about the amount of money you can afford to spend on your investment and to start slowly. You can reinvest any profits that you make from your early investments into more stocks.
- Develop a diverse portfolio of investments – although trading stocks may seem to be an easy way of generating an income you should also consider investing some of your funds in an ETF fund which is more diversified.
- Do your research – if you lack the time or inclination to research stock trading thoroughly you should not trade at all. It is important to practice your trading skills and to always keep up to date on daily market reports and financial news in order to enjoy the best possible success.
- Outline a trading plan – before investing in any stock you should think ahead to the circumstances in which you wish to sell it. Knowing how much you plan to invest, why you are buying a particular stock, how much you expect your returns to be and having a clear exit strategy is key to making a profit.
- Avoid buying high – stock often trends upward very rapidly and in that situation you shouldn’t always rush to purchase stock but instead wait for a chance to get a lower point of entry.
- Don’t give in to fear – although trading stocks online can be nerve-wracking you should avoid making an irrational decision based on fear. If your chosen stock’s value begins to drop don’t rush to pull out your investment. Instead, remember that trading stocks is actually a long term investment which needs perseverance and patience in order to enjoy success.