What Is Stock Trading?
Stocks are one of the most popular securities in the financial market and one of a variety of ways in which you can trade with Tradu. Our complete guide to stock trading explains what stock trading is, the different types of stock trading, how to trade plus lots more, arming you with everything you need to begin your stock trading journey.
Anchor menu as below:
- What is stock trading?
- What is the stock market?
- The history of stock trading
- Key stock trading terminology
- Types of stocks
- What is the difference between stocks and shares?
- How does stock trading work?
- What drives stock prices?
- What are the types of stock trading strategies?
- Pros of stock trading
- Cons of stock trading
- How to trade stocks
- Start your stock trading journey with Tradu
- Stock trading FAQs
What is stock trading?
Trading stocks essentially means the buying and selling of shares belonging to a company that's listed on the stock exchange. Many registered companies list their business on the stock exchange to increase their funding. This is achieved through the selling of their stock.
The value of a stock is directly related to how well the company is doing. When a trader buys individual shares, or stock, they effectively own a portion of equity in that company. Trading stock involves speculating on price movements, usually in the short term, in the hope of making a profit if the value moves in the right direction.
Typically, as the value of shares increases and capital rises, a company uses the funds to grow and therefore further inflate their stock value. This means that traders can usually expect to make a profit on the shares, or stock, that they hold.
However, there are instances in which a company's stock decreases in value, resulting in traders suffering a loss.
What is the stock market?
The stock market is the term that describes the marketplace in which traders buy and sell company stock. Companies who wish to allow their shares to be bought and sold by the public list themselves on the stock market in their country. Stock markets feature indexes which are lists of the top companies with the highest market share, with examples including the UK's FTSE 100 and the Dow Jones in the US.
A stock exchange is the physical or digital space in which buyers and sellers are brought together. Two of the largest stock exchanges in the world are the New York Stock Exchange and the London Stock Exchange.[RH1]
The history of stock trading
The idea of trading can be traced back to Europe in the 1400s, when Antwerp was the pinnacle of global trade and merchants bought items to sell on for a lucrative profit. But it wasn't until 1611, in Amsterdam, that stock trading as we know it actually began.
The late 1700s and early 1800s saw the formation of formal stock exchanges, including in London and New York, and with that came regulations to prevent fraudulent trading.
During the 20th century, the number of companies listed on the regulated stock markets increased dramatically and stock trading became more widespread.
There have been several significant stock-market crashes between 1929 and the present day, with the most recent financial crash in 2020. Global markets suffered huge downturns but, although each produced varying effects and different degrees of severity, the stock market has always ultimately recovered.
Key stock trading terminology
There are various terms that are used when describing certain features, movements and trades in the stock market. As well as the ones covered in more detail on this page, here are some other common words and phrases that you'll encounter:
- Bear market: A falling stock market is referred to as a bear market. This downward trend can be often seen during economic uncertainties, conflicts or political shake-ups.
- Bull market: The opposite of a bear market, the term 'bull market' is used to describe an upward trend in stock values.
- Broker: A stockbroker is someone who acts as the middle person, or company, between a trader and an exchange. They execute and manage clients' trades.
- Dividend: Dividends are paid by companies who make a profit to those who own shares. They're usually paid on an annual or quarterly basis.
- Equities: This is simply another term for stocks and shares, or assets, that are traded on the stock market.
- Limit order: This refers to an order to buy or sell a stock or share at a certain price. It allows a stock trader to only buy or sell when the price is right. This can either be when a stock value falls below or goes above a certain price, depending on the trade.
- Market capitalisation: The value of a company's shares is called its market capitalisation. It's useful for stock traders to know this information to establish the value and total market share of a company.
- Moving average: This is a type of indicator, or technical analysis, that's used in stock trading to establish trends in the value of a stock. A stock trader can look at the moving average of a stock over a particular time period to get a good gauge of its overall direction.
- Stop order: This is an order to buy or sell a stock when it reaches a certain value and is used to limit a trader's losses.
Take a look at our trading glossary for explanations of terms relating to forex, commodities, crypto and much more.
Types of stocks
As well as being categorised by industry or sector, stocks are usually classified as common stock or preferred stock.
Common stock
This gives a trader or investor ownership of part of a company but there's no absolute guarantee of getting paid dividends. Common stocks give greater access to higher capital but, at the same time, the risk of loss can be greater.
Preferred stock
The less popular of the two, preferred stock gives shareholders access to dividends before common stock holders. Although this provides voting rights, there is less opportunity for access to higher capital. However, it's also less risky in the sense that, if a company is dissolved, preferred stock holders are looked after better than those with common stock.
Other ways to categorise stocks are:
- Large-cap, mid-cap and small-cap stocks - This simply refers to the company's share in the market (market capitalisation). Large-cap stocks are potentially a more secure option but smaller stock can offer greater returns, albeit more of a risk.
- Domestic and international stocks - Stocks can be classified depending on their location and where they're traded.
- Growth and value stocks - This category relates to how fast a company is growing. Growth stocks are riskier but give potential for a higher yield, whereas value stocks usually refer to successful companies that have a fairly long history.
- IPO stocks - These are stocks of a company that has only recently opened a public offering.
- Dividend and non-dividend stocks - While some companies pay their shareholders dividends, not all do and it is not a legal requirement.
- Cyclical and non-cyclical/defensive stocks - Some stocks are subject to cyclical demands and are easily affected during economic swings. Others, however, remain fairly stable regardless.
- Blue chip stocks - These stocks belong to business leaders, often international companies with outstanding reputations.
- Penny stocks - At the other end of the scale, these companies are of low value and therefore sell their shares for a minimum.
For a more in-depth look at types of stocks, see our detailed guide.
What is the difference between stocks and shares?
While many people, experienced traders included, use the terms stocks and shares interchangeably, there is a slight difference between the two.
'Stocks' refers to equities of any company while 'shares' relates directly to those of a particular company. A trader might say "the stock prices are up across the entire market", then, or "Apple shares are going up in value".
How does stock trading work?
The aim of clients when trading stock is to make a profit in the short term, based on changes in the price, or value, of a stock or share. In a nutshell, to make money, traders ideally need to buy at a low price and sell for a high price.
The price of a stock is determined by supply and demand. High demand will increase the value of a given stock, as will limited supply. Low demand, however, is likely to create high supply and will therefore decrease the price.
What is a trade in stocks?
In simple terms, when trading stock, the trader decides what stock they want to buy and how much. They inform their stockbroker, who places the order on the stock exchange and the trader is sold the specified stock at the current value. The trader will pay close attention to the market and decide if and when to sell, to make a profit.
It's important to know that companies have a bid/ask spread which determines the value between the lowest accepted price from a seller and the highest price that a buyer is willing to pay. A trader pays the ask price while the seller gets the bid price in return. The broker, therefore, profits from the difference between the two.
What drives stock prices?
While there can be a variety of factors that influence stock prices, as a stock trader it's important to be aware of the following:
- Fundamental factors: These include how well (or not) a company is performing and its profitability.
- Technical factors: These are aspects such as the history of the stock and trader sentiment.
Stock price influences can also be broken down as follows:
- Supply and demand: When a stock is in demand, there is likely to be less available so this will push up the value. Conversely, if demand is low or supply is high, it will have the opposite effect.
- Market sentiment: How a stock trader feels and behaves has a direct influence on the market. This could be in relation to the specific stock, the company or the market as a whole.
- Inflation/economic factors: These can easily influence the price of stock and the market in general.
For more insight, check out our guide to what drives stock prices.
What are the types of stock trading strategies?
Stocks can be traded in different ways, with the three main ones being:
- Day trading: As the name suggests, this involves trading stocks on the same day with the aim of making a profit in the short term. This type of trading can involve high risk and traders usually use a variety of trading strategies. You can read more about trading tools and analysis in our guide.
- Position trading: In this type of stock trading, a position is held for a longer period than in day trading. A trader follows trends and patterns and holds a position for days, weeks or even longer. In position trading, the direction of the market is the important factor when determining when to enter or exit a trade.
- Swing trading: This form of trading differs slightly in that a stock trader waits for a break in a trend before placing a trade. Traders look to establish the next direction of movement to profit on swing trades and they're normally held for more than a day.
For a more detailed exploration, take a look at our stock trading strategies guide.
Pros of stock trading
Whilst each type of stock trading has its own pros, stock trading in general has its advantages:
- Convenience: With online trading platforms easily accessible across the world, stock trading is more convenient than ever before.
- Liquidity: Stock can typically be bought and sold relatively easily, depending on the supply and demand, whereas other assets, such as property, are seen as being less liquid.
- Potential high returns: Depending on the success of the trade and trader's experience, it is possible to make high gains on stock trading.
- Quick return on investment: Unlike traditional investments, stock trading can yield fairly fast returns through short-term positions.
- Leverage: Using leverage to trade means being able to place a larger trade with a smaller deposit and potentially increase profits.
- Derivatives: Trading derivatives involves buying or selling a contract that speculates on the price movement of an underlying asset. With derivatives, such as CFDs, a trader doesn't own the actual asset or stock. These can be traded over the counter (OTC) or via an exchange (the most common option).
- Options to buy or sell: With stock trading, a trader can go long (buy) or short (sell) to make a profit, based on the price movement prediction.
Cons of stock trading
- Risk: As with all trading, stock trading comes with a level of risk, the extent of which depends on the level of trader experience, the amount traded and market trends. Essentially, it can be fairly easy to make a loss.
- Volatile markets: No matter how seemingly secure a stock, all markets are open to volatility due to uncontrollable and often unforeseeable events. Sudden movements can create new trends and result in losses.
- Requires knowledge and experience: It's difficult to make large gains unless you're a seasoned trader. Getting to grips with stock trading requires time and motivation to learn. Take a look at our learning centre and discover helpful resources and tools.
- Leverage: While this can be an advantage, using leverage can also work against a trader by magnifying losses.
How to trade stocks
Now that you know exactly what a stock trade is, we'll explore how to begin trading stocks:
- Choose your stock: This means doing some research to determine what might be the best stock options for you. Make sure to keep on top of news and market insights.
- Choose your trading type: From your research, establish whether you want to go long or short (whether you think the price will rise or fall) and the type of stock trading method that you want to use. It's also useful to know whether you want to trade in the short or longer term, though this could depend on market trends.
- Plan your strategy: Ensure that you manage risk accordingly and have a plan in place for trade entry and exit positions. Technical indicators and analysis can help to determine a suitable strategy but it's important to stick to it to limit the chances of loss.
- Choose the size of your position: Decide on the initial value of your trade, taking care to establish any stop orders or limit orders to minimise risk.
- Close the trade: If your stop orders or limit orders haven't kicked in, close the trade as per your original strategy.
If you want to find out more, our guide on how to trade stocks has a wealth of information.
Start your stock trading journey with Tradu
It's easy to start trading stocks and shares with Tradu:
- Open a trading account: Sign up for a live trading account with Tradu.
- Get learning: Check out our market, trading and platform guides to help to build your knowledge.
- Create a strategy: Choose from our range of stocks and shares and decide on your trading plan.
- Execute your trade: With real-time updates, it's easy to establish the best time to execute a trade.
- Diversify: Once you're familiar with stock trading, try your hand at trading a variety of assets such as forex, crypto and commodities with your Tradu account.
Stock trading FAQs
Can I trade at any time of day?
Most traders trade stocks on the UK market between 8am and 4.30pm Monday to Friday.
However, it's important to understand that out-of-hours trading poses more risk due to low liquidity and low volume of active traders, plus high volatility.
Can I trade stocks from anywhere?
Yes, stock trading can take place from anywhere in the world as long as you have access to an online trading platform.
Can I trade international stocks?
It's possible to trade stocks and shares from other countries; many traders find it a great way to diversify their portfolio. Take a look at which stocks you can trade with Tradu.
Where can I find information on the stock market and current trends?
We have a wealth of resources in our learning section including our free online live classroom and the latest market insights. These are updated regularly, making it easy for you to stay in the know with current news, trends and analysis.
Do I need to use technical and fundamental analysis to trade stocks?
Many traders find that they're more successful when they use technical or fundamental analysis as part of their strategy. Charts and patterns are often used to identify potential trends, while company evaluations can help to determine a stock value. Take a look at our in-depth guides to learn more about these stock trading techniques.
With Tradu you can trade crypto via CFDs.