A Beginners Guide to Investing & Trading in Stocks

Key Takeaways: 

• Investing in Stocks and Stock trading can propel your wealth to new highs 
• Learn how to balance your portfolio and successfully trade and invest in stocks 

What Are Stocks? 

Getting started with trading stocks is on the list of every aspiring trader, from retail to those who now run trillions of dollars. Why are stocks so popular and how can you trade them? And is there a difference between trading and investing in stocks? Let’s find out.  

Stocks are a mainstay for every well-balanced portfolio, even more so after the Covid-19 pandemic swept the globe. Since March 2020, the global stock market has seen extraordinary growth that has been the result of skyrocketing demand for stocks. 

Stocks are simply ownership in a company. In the context of financial markets, these companies are publicly traded, meaning you can scoop up their stock from a broker. Further, once you buy a stock, you essentially become an owner, or a shareholder, in that company.  

The way you purchase a stock is by buying shares of it. A share, on that note, is the fraction of a stock that represents ownership. 

With TradeOr, you can get exposure to dozens of stocks, from the biggest tech names like Apple, to European companies like Volkswagen. 

Why Invest In Stocks?  

Investing in stocks is an effective way to diversify your portfolio as you balance your risk and grow your account. In fact, holding stocks has far outperformed holding cash not only in the past year but in the past century. Let’s give an example.  

If you had kept $100 in cash from 1913 to 2019, they would be worth $3.87. In other words, they would have lost over 96% of their purchasing power. The decline in value of national currency is a money feature neglected by many who are not familiar with the nature of cash.  

On the other hand, $100 invested in the S&P500 not a century ago, but about 50 years ago, would now be worth over $28,000. Moreover, since the inception of the S&P500 index in the 1920s, it has returned an average of 10% a year. 

With this in mind, it’s clear that investing in stocks is the way to preserve and grow your wealth. 

Investing In Stocks vs Trading Stocks

And while investing in stocks generally means you hold these stocks for years, with trading this is not so. The main difference between investing in stocks and trading stocks is the length of the holding period. In other words, investing is your pathway to long term, moderate, sustainable returns.  

Trading stocks, on the flip side, is done in the short term. This said, a trader might hold a stock for a day or two, usually not more than a week.  

An investor like Warren Buffett, for example, is focused on future growth prospects of a company. Buffett’s most profitable bets have been on stocks owned for decades. A trader like Paul Tudor Jones, on the other hand, is focused on the stock’s immediate move.  

How To Profit From Stocks  

There are several ways you can profit from stocks. First, you need to have your goal in front. Decide if you want to pursue long-term gains, i.e. investing, or short-term, i.e. trading. Of course, you can do both at any given time, depending on the opportunities presented in the market.  

Then, once you have your goal defined, you have to buy the stock and expect its price to rise. Simply put, one way to profit from stocks is to buy and wait for your trade to turn a profit.  

The second way is to sell a stock if you think it will go down in value. This type of trade is called short selling, meaning you profit from price declines.  

At TradeOr, you can do both: buy and sell stocks as often as you like. Moreover, you can use leverage to magnify your returns. Keep in mind that you need to have a robust trading strategy including stop loss orders and take profit orders.  

What Drives Stock Prices?  

The traditional market theory says stocks are mainly driven by supply and demand. In reality, however, stocks move up or down based on a number of factors, including market moods and emotions, news, rumors, reports and more.  

News and reports: Company news is a major driver that can fuel a stock move in either direction. Important and keenly-watched reports such as the earnings report will certainly affect the share price. If the report is positive and indicates growth, demand will increase, and the price will rise. And if the report is weak and indicates a slowdown, demand will decrease, and the price will fall.  

Projections and forecasts: Analyst expectations play a big role in how the market evaluates current share price of a company. In more detail, if a rating agency upgrades their projections of a stock, the market could pile into it and lift its price. On the other hand, a downgrade report of an analyst could drive the price lower due to expectations of weak performance.  

Economic trends and developments: Economic news, broadly, can influence how the market sees a certain stock perform. For example, an interest rate increase may first hit the technology sector due to its heightened sensitivity to rate changes. Economic restrictions could knock down stocks closely-tied to the economy like banks and travel-and-leisure companies. 

Market moods and emotions: Market moods are also part of the mix that can move stock prices. Investor sentiment may be swayed by uncertain outlook, economic predictions, or general feelings of euphoria or fear. In turn, these emotions are likely to be reflected in the valuation of stocks across the board.  

Developing An Investment Strategy  

Before you go into a buying spree and splash out your hard-earned money on stocks, do one thing: develop an investment strategy. There are lots of ways that may lead you to profitable stock trading or investing. Some of them include: 

Value investing: this type of investing targets companies that are trading below their “intrinsic” value, or fair value. Value investing focuses on long-term valuation as it suggests the present worth of a company is undervalued. Warren Buffett is arguably the most popular and successful value investor right now.  

Growth investing: This strategy is focused on the future appreciation of a company. Technology stocks, on that note, are considered growth stocks. They are expected to continue growing at a faster pace, relative to the broader market. Growth stocks generally offer higher returns, but also involve higher risk and volatility.  

Small-cap investing: This approach to stocks focuses on companies valued at significantly lower levels than the average size of a publicly-traded company. A company worth $1 billion would be an example of a small-cap stock. While they offer potentially higher returns, they are considered more unstable. 

Socially responsible investing (SRI): This strategy aims to invest in companies that are eco-friendly and focused on preserving the environment and helping society. To this end, SRI investing avoids stocks of companies involved in the oil industry and tobacco. 

Stock analysis basics  

In order to be successful in stock investing and stock trading, you need to have proper knowledge into stock analysis. In other words, always do your own research by reading into the company’s fundamentals, statements, and all publicly available information about the stock.  

Fundamental analysis could refer to financial data including:  

Price-to-earnings (P/E) ratio: This is the ratio of a company’s share price relative to its earnings per share. It is mostly used to compare how valuations of different stocks are aligned to each other.  

Revenue & profit: A company’s revenue is the entire amount of money it had received for the sale of its goods or services for a certain period of time, usually a quarter. Profit, on the other hand, is the money left over after the company paid all expenses. Revenue and profit are used to measure how the company performs quarter on quarter. 

Return on equity (ROE): This type of data measures the ratio of a company’s net income to the amount of equity.  

These three, along with other important data, can be found in the quarterly earnings reports of publicly traded companies. 

Technical analysis is the other way to analyze a stock. It comprises several technical methods of reading the chart in order to make a trading decision. They include: 

Identifying trends: This strategy helps you spot and take advantage of price trends. If you see a bullish trend, the stock price might accelerate further. And if the trend is bearish, the stock price might continue moving lower.  

Support and resistance levels: Once a trend is exhausted, price will reach a support level or a resistance level. Support levels are those inflection points where a downtrend reverses. And resistance levels are those where an uptrend reverses. 

Chart formations: There are also chart formations such as Head and Shoulders, Ascending Triangle, and Pennants, which are used as patterns to predict moves of stock prices. 

How To Trade Stocks On TradeOr  

Trading stocks on TradeOr is simple and straightforward with our comprehensive TradeOr platform. All you need to do is sign up for an account and fund it with any amount you like. Then, head over to our Markets section where you can see our stocks listed for trading.  

Simply choose a stock you would like to buy or sell. Enter the amount of funds you want to buy or sell with, and make sure to set up stop loss and take profit orders. Click on Open position and that’s it, you’ve invested in a stock.  

Risks of investing in stocks   

Given that stocks offer attractive returns, both in the short-term and the long-term, you have to be aware they also pose certain risks. Some of these risks are as follows: 

Stock-specific risks: Any risk, internal to the company, could present a threat to its valuation. The stock price might be pressured by weak performance, or leadership troubles. 

Market risks: Economic developments that can cast a shadow over the stock market valuation could weigh on any single stock.  

Liquidity risks: In times of thin liquidity, a stock may experience a sudden drop, followed by a quick recovery. In addition, when there is not enough liquidity, a trader may not be able to sell their shares.  

Leverage risks: Using leverage can have a tremendous impact on your returns. Using it unwisely can lead to a quick wipe-out of your funds. On the flip side, proper leverage management can give you attractive returns.  

 

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