Stocks Beginner Guide 2022
The Complete Guide to Stocks Trading: Everything You Need to Know
By Suriya On 2 April 2022 [11 Mins Read]
#2: How Does Stock Trading Work?
#7: Myth Vs Truth On Stock Trading
What Is Stock Trading?
Stock trading refers to selling and buying shares of a particular company. If u buy the shares of a particular company, it means you own part of the stocks and that you own a piece of the company. Stock trading is more of a short-term investment compared to long-term investment.
How Does Stock Trading Work?
Stock trading works by buying and selling the shares of companies based on the change in daily prices of the shares. Most investments are usually long-term, but stocks are more of a short-term investment. A company share can rise very fast in a short period of time, but as much as it rises, it can also drop as much too. At first, when trading stocks was introduced, u needed to understand the trends and patterns, and possibly have an algorithm created to help with your stocks trading. Now, however, there are many online brokers available, which makes trading stocks even easier at the convenience of your mobile phone or computer. With algorithms created by online brokers, the algorithms follow a set of instructions to place a trade. The trade can generate profits at a high speed and frequency which is quite impossible for a human trader to do. however, be careful when choosing an online broker, as some may be potential scammers.
Types Of Stock
Common Stock: This stock is the most basic kind. The majority of the stock issued by the companies is common stock. When holding common stocks, you have the right to vote on company decisions, the more stocks you have, the more powerful your rights in the company will be. However, if the company goes bankrupt, the shareholders will be the last to get paid.
Preferred Stock: This stock is a combination of common stock and bonds, but with even greater benefits. You get paid higher dividends when compared to common stocks, and also will highly likely receive more compensation if the company goes bankrupt. You can also have the option to convert your preferred stocks to common stocks, but when you hold preferred stocks, you won’t have the right to vote for the company decisions no matter how many preferred stocks you hold.
Class A Stock: This stock is not available for purchase by everyone, only selected people/authorities can purchase Class A stock. Class A stocks is only issued to company founders & key executives. As Class A stock is not available to everyone, holding Class A stock gives you 10 times more voting power compared to when you are holding Class B stock.
Class B Stock: This stock is available entirely for the general public, meaning anyone who are the general public can buy this Class B stock. As Class B stock is a stock generally available to the public, it has lesser voting power compared to Class A stock.
Large-Cap Stock: Companies that usually have over $10 billion of market capitalization are most categorized as Large-Cap stock. As the company is such a huge size, the value of the stocks are more stable, and less likely to have heavy fluctuations as it is already an established company. However, as it is already a big established company, the profits from purchasing the company stocks will result is lesser and slower profits.
Mid-Cap Stock: Companies who usually have $2 billion to $10 billion of market capitalization are categorised as Mid-Cap stock. They have a combination attribute of Large-Cap Stock companies “establishment” and also the attribute of Small-Cap Stock “growth potential”. They will also less likely have heavy fluctuations in the stock prices, as there are also considered somewhat an established company, as they are also able to see higher growth potential in the profits as their business are relatively newer to the market.
Small-Cap Stock: Companies who usually have $300 million to $2 billion of market capitalization are categorised as Small-Cap stock. Small-Cap Stock companies have a huge opportunities for growth, and this can be both a positive and negative impact. There will be a huge increase in profits if you invest in Small-Cap stock, as the company is still growing trendmously, so the price of the stock can also increase very fast, but this also means that as much as the price can increase, that is how much the price can drop too. There could be heavy fluctuations in the stock prices, and you can either lose a lot or profit alot, as this is still a potentially new growing company.
Growth Stock: Growth stocks tend to bring very attractive potential returns which can be promising, but it has increase risk levels compared to other stocks. Successful growth stocks most likely are liked companies which are having a rise in demands from consumers. In this global world, there has been an huge increase in the demand for services and products. As the profits can be valuable, there can be very high competition from competitors, and if there is a disruption in the growth of the stock;s business, everything can fall apart and you can lose potential profits.
Value Stock: Value stocks tend to have lower risk levels compared to Growth stocks, and they tend to be more conservative and long-term type of stock. This stock are usually from companies who are well established and well matured into their industry, which doesn't cause much fluctuations to price, and this can cause you to see decent amount of profits if you are patient and ready for a long-term investment.
Domestic Stock: Domestic stocks are usually considered to be stocks of the companies which are in the United States Of America (USA). Even if the company is very small, or very big, it is still considered to be a domestic stock if the company is in U.S. Domestic stocks usually divides the ownership interest based on the amount of shares which is outstanding for that company. So if Person A owes 4300/10000 shares, Person A owes 43% of the company.
International Stock: International stocks are considered to be stocks of the companies which are operating outside of United States Of America (USA). Buying international stocks can be very beneficial, as there can be other international stocks which can be growing even faster due to their well developed economies. However, international stocks can be affected buy international news, (influatuation, rise in oil, gas prices, and other factors) so it is important to keep a eye on the international news too.
Dividend Stock: When you buy the shares of companies, you can receive additional income due to dividends. Dividends is paid when to the shareholders of the company, and u automatically become a shareholder when you purchase stocks from the company. Paying dividends allows companies to share their profit with their shareholders, as a form of way to show their appreciation to the shareholders for purchasing the stocks from the company.
IPO Stock: IPO stocks are mostly sold by private companies. When private companies want to enable their stocks to be in the public stocks market, they often make an initial public offering (IPO). IPO stocks can be abit risky to invest in, as public companies do not have much data to prove that they will be able to show good results in the stocks market. If you still want to invest in IPO, its best to do your own research on that private company, observe the growth and profit patterns, and do not invest high amount just to play safe. Its better to stick with companies that you are familiar with or have done extensive research on.
Cyclical Stock: Cyclical stocks are stocks of companies who are involved in a high economic fluctuation. When the economic is down, the prices of the shares decrease, and as this companies are involved in a high economic fluctuation, the prices will increase/explode when the economy starts increase and do better. This can allow a huge increase in profits as the prices can rise rapidly. Examples of Cyclical Stock would be; retail , dining, technology and travel companies.
Defensive Stock: Defensive stocks on the other hand are almost the opposite of Cyclical Stock. They do not depend on the economic fluctuations to see profits. Cyclical Stocks perform better when the economic market does well, and Defensive Stock performs better when the economic market does poorly. Defensive stocks do well no matter how bad the economy is, because there is always demand for the services/products offered by the companies, and as a matter of fact, defensive stocks perform better during economic downturns. Examples of Defensive Stock would be; grocery, medical and healthcare companies. This will always be in demand no matter how the economy is.
Safe Stock: As the term says, safe stocks are stocks that are relatively safe to purchase, as they have very low fluctuation in their prices. The prices relatively have smaller and less volatile movements compared to the stock market. Safe stocks are sold by companies that aren’t affected by the economic changes, and dividends are also paid by the company.
Blue Chip Stock: Blue Chip stock is sold by companies that are relatively strong in their market sectors. They are the companies who are leading their market sectors and industries, and also have a very high reputation for their company. However, even if they are very reputable and are leading, they do not provide very high returns, but what they provide is very high stability for their stocks. This is what makes their stocks favorites among investors.
Penny Stock: As the name suggests, Penny stocks are stocks that are worth around a penny. The shares are typically worth around a penny or lesser than that. Penny stocks can be seen as a very risky investment. Most companies selling penny stocks usually have problems with their business, such as financial situations, bankruptcy, and so on. Penny stocks are very high liquidity stocks, have small trading volumes, and also have the potential of being scammed most of the time. It is good to be wary when purchasing Penny stocks, but it is highly recommended to not purchase Penny stocks as it is not safe and is a high liquidity investment.
ESG Stock: ESG Stock is actually an abbreviated term, it is called Environmental, Social, and Governance stock. This stock is a unique stock, as people buy this stock based on the company’s corporate behavior. Rather than focusing entirely on whether a company generates profit and is growing its revenue over time, ESG principles consider other collateral impacts on the environment, company employees, customers, and shareholder rights.
Types Of Stock Trading
Day Trading: This is one of the most common types of stock trading. If done right, you can just sit back and relax and watch profits rolling in daily. This trading involves the process of buying, selling, and then closing the position of the stock on the same day. The aim of this way is to earn profits every single day, even though the profits can be dependent on how much capital you have invested in the shares.
Active Trading: This involves buying and selling securities based on short-term movements to profit from the price movements on a short-term stocks chart. Usually, more trades per month will be placed if you are actively trading. This strategy mostly involves relying heavily on the timing of the market, trying to take advantage of short-term events (market fluctuations, news on the company), which can possibly help to turn into profits in weeks or months.
Momentum Trading: Momentum trading is a strategy that seeks to capitalize on the momentum to enter a trend as it is picking up steam. Simply put, momentum refers to the inertia of a price trend to continue either rising or falling for a particular length of time, usually taking into account both price and volume information. This involves mainly focusing on how is the stock price moving. Observe how much the price of the stock decreases or increases, and then take the necessary decision.
Swing Trading: Swing trading is a strategy that seeks to capture short-term trends. This strategy is used to maximize the gains of the stock within 1–7 days. This is done to capitalize on buying when the price is low and selling when the price shoots up, this can help to maximize profits.
Position Trading: Position trading is a strategy where investors tend to stay in the same trade for weeks to months. They anticipate and wait to see if the trend rises and changes in their favor. They are not worried about short-term fluctuations, as they know that the prices will smoothen out and be in their favor again. The aim of this is to gain the most profits when the price starts to peak after a few months, which is why small fluctuations do not affect them.
Pros Of Stock Trading
Liquidity: Stocks can be considered a liquidity asset, as you can sell and buy stocks whenever you want. They can also be easily converted to cash and also have a huge amount of buyers in the same amount of time. However, some assets such as property can take some time to sell, and there can be only one buyer at a time. Therefore stocks are considered liquidity assets. The liquidity of the stock market is what attracts more investors.
Increase in profits: Stock markets always rise in value over time, even when individual stocks fluctuate daily. Due to the increase in people creating AI bots and also coding programs to monitor the trends even better, it has made things easier for people to see profits in stocks trading due to AI programs and coding. It is always advisable to invest in companies where there has been a gradual increase in earnings and also good growth patterns over time, as this will increase your profits when investing in stocks.
High Returns In Short-Term Trading: One of the biggest advantages of investing in stocks is that it can generate very high returns over a short period of time, compared to other types of investments.
Small Start-Up: It is not necessary to invest in big amounts when investing in stocks. Stocks have a special attribute where it does not require you to invest large amounts just for you to see profits. Other types of investments, such as property and real estate need you to invest a large amount of sum so that you will be able to see profits. You can invest a little amount of sum in stocks, and still be able to see profits.
Smooth Process When Trading Stocks: It is not complicated to trade stocks, you can buy or sell stocks very easily. All you need is the help of a broker, financial planner, or an online app that is recognized for buying and selling stocks. It doesn’t take very long to set up an account, and most apps give u a free demo with “free demo money” inside the account once you have successfully signed up. You can use the “demo Money” to practice buying and selling stocks until you are ready to invest your own money in your account.
Cons Of Stock Trading
High Risks: You have to do your own research when you are about to invest in stocks, and choose the stock which suits you the most. As there are many different types of stock available in the market, you have to be careful about which stock you want to select, different types of stock have their own pros and cons.
Stocks Trading Takes Time & Effort: You have to understand how trading stocks work, and also do your own research about it. Professional traders and investors might have more experience in trading stocks, they might also have sophisticated tools, financial model, and their own computer coding graphs, which might help them see more profits with just an automated running system. However, this takes years of practice and knowledge, and it cannot be learned over a day. Experience is key. However, there are online brokers and professional traders who help you trade stocks using their own automated system so that you both can see profits on each end. Be careful and choose your online broker carefully as some may be scams.
Stocks Trading Can Be A Volatile Investment: Stock markets will always be volatile due to many factors, sometimes it might rise up and reach it’s the peak, and sometimes might drop and reach the summit. The best way is not to panic, as things will not always remain the same. Do not panic sell when the price plummets, as the price would always return back to normal or peak in the future. The best way is to be patient and not panic.
Myth Vs Truth On Stock Trading
Myth: The price of stocks will rise up again if it drops.
Truth: This is not necessarily true, as stocks are not like cryptocurrency, stocks are actually based on the progression of a company, so if a company is not doing well and the prices of the shares drop, and if the company continues to do even worst in the upcoming weeks — months, the price of the shares might even drop more and not rise up again,
Myth: The price of stocks will drop once it reaches its peak.
Truth: This is also not necessarily true, as stocks are not like cryptocurrency, stocks are actually based on the progression of a company, so if a company is doing very well, the prices of the shares might increase rapidly. If the company has made a huge progression within the upcoming weeks — months, the prices might even peak even more, as when the company is doing better, the shares will always increase in value. If the company can be seen doing well even more in the upcoming months, and there are data and growth graphs to prove that, the price of the shares might increase even more and not drop anymore.
Myth: You need a huge capital to make profits from stock trading
Truth: You do not need a huge capital to make good profits from stock trading. You just have to do proper research and apply proper strategies. You can start investing with as little amount as possible, and by doing your own research and by applying proper strategies, you will be able to see decent profits from the little amount you have invested.
Disclaimer:
The following statements do not constitute investment advice or any other advice on financial services, financial instruments, financial products, or digital assets. They are intended to provide general information. The following statements do not constitute an offer to conclude a contract for the purchase or sale of financial instruments and financial products or an invitation to submit such an offer and to buy or sell any particular digital asset. Cryptocurrencies are subject to high fluctuations in value. A decline in value or a complete loss are possible at any time. The loss of access to data and passwords can also lead to a complete loss.
