A Beginners Guide to Stock Trading

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The stock markets are some of the most exciting and volatile capital markets, providing numerous opportunities to generate profitable trades. When investors refer to the stock market, they are generally describing an index like the Dow Industrials, the DAX or the Nikkei.  While indices are very popular ways to trade stocks, many investors prefer individual stocks or sectors. Individual stocks include companies like Apple or Facebook. To successfully trade stocks or indices, you need a sound strategy and need to employ prudent risk management. Before you pull the trigger on your first trade, make sure you test out your strategy using a demonstration account.

What is the Stock Market?

The stock market is an auction style market of stocks. Some view the stock market as groups of stocks such as indices while others see it as a place where they can purchase individual shares. Indices are created for several reasons. The Dow Industrials are 30 of the largest stocks traded in the United States while the Nasdaq 100 is the top 100-stocks that are traded on the Nasdaq exchange.  Some indices are based on the sector. For example, financial companies are traded together using a financial sector index.

How to You Trade the Stock Market?

There are several strategies that you can use.  The most important concept is to understand that when you invest in stocks or indices, you are taking a risk. Risk means that you can lose money. If you are unwilling to lose any money then you should not invest in stocks. The benefit of trading in stocks is that you can make more than if you’re investing in something that was risk-free. There are relatively investments. For example, a CD at a bank is almost completely risk-free. The rate that you receive will be lower than the rate that you will receive if you invest in stocks.  Even the standard buy and hold strategy using stocks will provide you with returns that are much better than the risk-free rate that you would receive.

To trade stocks, you need to open a brokerage account. Your broker will provide you with access to different stocks and indices. You might purchase share or contracts for differences which allow you to trade shares or indices without owning the underlying instrument.

How Do You Create a Strategy?

Before you make your first trade, you need to design a trading strategy that allows you to generate positive returns consistently. Betting on a hunch or placing a trade without thinking about where you will take profit is a risky endeavor. What you should do is determine in advance how much you are willing to risk, and how much you want to make based on the risk you are willing to take. For example, if you want to make $300 dollars, you need to be willing to lose $100. This does not mean that you need to bet $100 on every trade, but you need to develop a strategy that will allow you to achieve your reward to risk ratio.

Summary

The stock market is made up of individual stocks. Groups of these individual stocks create indices. You can trade stocks by opening an account with your broker. Before you risk your capital, you need to create a trading strategy that will meet your risk to reward ratio.