How to Trade Stocks and Equities – A Beginner’s Guide

Updated September 22, 2022 GuidesStocks
trading stock

The global stock market is one of the largest indicators of wealth for the average retail investor. Here’s how you can start stock trading.

According to World Bank data, the global stock market grew from USD$1.15 trillion in 1975 to USD$93.96 trillion by 2020, [1]  making it one of the biggest drivers of wealth for the average investors.

In this article, we will take a look at the fundamentals of stock trading.

What is a stock?

A stock – also known as equity – is a security which represents the ownership in the issuing company [2].

Units of stocks are called “shares”, and those who own them (shareholders) are entitled to a fraction of the company’s assets and profits, in proportion to how much stock they own.

Shareholders may also receive dividends, which are regular payments declared by the issuing company. However, not all stocks offer dividends. Note that in common parlance, the terms stocks, shares and equities are used interchangeably.

How to buy stocks?

stock and trades

Because a stock is a security, it can be bought and sold. This is primarily achieved through a stock exchange.

Alternatively, stocks and shares may also be traded over-the-counter (OTC), through dealer-broker networks, as opposed to a centralised stock exchange.

Members of the public who wish to buy CFDs on stocks and shares can do so via online brokerage platform such as Vantage.

Online brokerages offer speed and convenience – investors can sign up for an account and start purchasing shares even with a small capital.

Additionally, online brokerages offer much lower fees compared to engaging with a stockbroker. 

Why trade stocks?

Price volatility in the stock market is always present, as prices of different stocks and shares constantly move up and down over time.

This inherently creates opportunities for investors to make trades that could potentially benefit from market movements. The greater the volatility (i.e., greater price movement), the higher the potential profits or losses.

Another reason to trade stocks is flexibility. By adopting the correct trading strategies, a savvy investor can create opportunities regardless of the market condition. For instance, shorting the price of a stock during a market downturn could be profitable in a short period of time.

Furthermore, because stocks are underpinned by a business, shareholders of successful companies can derive lasting value.

Stocks, therefore, are well-suited to both short-term and long-term strategies, making them a popular asset class.

Stocks – investing vs trading

Due to their versatility, investors can approach stocks in many different ways.

Some prefer to buy and hold stocks, aiming for capital appreciation when share price increases over time. Meanwhile others may choose to buy and sell shares in quick succession to potentially capitalise on inherent volatility.

Generally speaking, we can categorise both of these strategies into investing vs trading, although there is no rigid definition for each.

Stock investingStock trading
Describes a long term, buy-and-hold strategyBuy and sell stocks and shares in quick succession
Aims to profit from long-term share price gainAims to make profits from short-term price movements
Requires patience and disciplineRequires knowledge of advanced trading strategies and tools (for example, shorting, leverage, etc.)
Suitable for those who prefer passive investingSuitable for those who prefer to trade actively

As summarised above, stock investing and stock trading are two very different investment strategies.

Additionally, there is no need to limit yourself to one of these two strategies. You can include stocks for long-term investing alongside stocks that you trade frequently, in a combination that suits your experience, preferences, timeline and financial circumstances.

3 ways to trade stocks

Direct buying and selling

At its most basic, a stock trader can simply buy shares of a company or companies directly through an online brokerage.

On a later date, when the price of the share has risen to a satisfactory level, the shares can be sold on the market in exchange for profit.

The trader can then capitalise any gains, or re-invest the money by buying more shares at a favourable price.

Stock traders can exert more control over their trades by knowing how to apply market orders and limit orders. [3]

In a market order, trades are executed immediately at the current market price, allowing for speedy completion of transactions.

In a limit order, trades are only executed when the maximum price at which you are willing to buy (or minimum price at which you are willing to sell) is reached. If not, the trade is not fulfilled.

Using Contracts for Difference (CFDs)

Stock trading can be performed using CFDs, which is an agreement to exchange the difference between the price of a stock (or basket of stocks).

With CFDs, a trader may choose to open a short or long position, enabling them to create opportunities from both ups and downs in the stock market. (This is provided, of course, that the price moves according to the trader’s speculation).

Additionally, CFDs may be traded on margin, which facilitates stock trading with lower initial capital. In contrast with direct buying and selling where you can only buy or sell as many shares as your budget allows, CFD is a leveraged product that allows you to amplify your trading exposure

However, it’s important to note that trading on margin amplifies both profit and loss, and traders may face margin calls (which carry the risk of liquidation) during unfavourable conditions. Therefore, CFD trading potentially exposes you with higher risk of loss due to leverage. CFDs are merely a form of financial derivatives – there is no direct ownership of the underlying stocks or shares involved.

With options and futures

trade on stock market

Stock options and futures are another type of financial derivatives that can also be used to trade stocks and shares.

An option is a contract in which you have the right (but not the obligation) to buy or sell a stock or share at a fixed price within a specified time period.

Traders may choose to buy a call (long) or put (short), so as to capitalise on share price spikes and drops. They may also choose to sell (write) an option instead.

In exchange for the right to buy or sell the asset, the buyer of an option pays a premium (think of it as a down payment) to the seller.

It is not necessary for options to be executed – traders may simply let the option expire. When that happens, the buyer’s loss is equal to the premium, which becomes the seller’s gain.

Meanwhile, stock futures mandate the obligation to buy or sell a specified number of shares at a specific price at a stipulated date in the future.

Unlike options, a futures contract cannot be allowed to expire – the buyer and seller must trade the asset by the delivery date (or sell the contract before that, or roll over the contract to a new futures contract).

Futures are used by institutional investors to lock in commodity prices. For example, an airline may buy a futures contract to hedge against future increases in fuel prices. Similarly, a coffee bean farmer may sell a futures contract to guarantee the floor price for her harvest.

However, retail investors can use futures to speculate on the price movements of underlying stocks and shares. Here’s how it works.

A trader buys a stock futures contract with confidence that the price of the underlying share will go up. If the share price does indeed increase, the trader can sell the futures contract.

However, if the share price decreases, the trader is still obligated to buy the shares at the price stipulated in the futures contract, which is now higher.

Note, also, that futures are traded on margin, which amplifies gains and losses. Coupled with the fact that futures contracts are settled daily, and both the buyer and seller have maximum liability, stock trading using futures carries a high degree of risk. [4]

References

  1. “Market Capitalization Of Listed Domestic Companies – The World Bank”, https://data.worldbank.org/indicator/CM.MKT.LCAP.CD?end=2020&start=1975&view=chart . Accessed 29 Aug 2022.
  2. “Stocks – Investopedia”. https://www.investopedia.com/terms/s/stock.asp . Accessed 29 Aug 2022.
  3. “Market Order Vs. Limit Order: What’s The Difference? – Investopedia”. https://www.investopedia.com/ask/answers/100314/whats-difference-between-market-order-and-limit-order.asp . Accessed 29 Aug 2022.
  4. “Options Vs. Futures: What’s The Difference? – Investopedia”. https://www.investopedia.com/ask/answers/difference-between-options-and-futures/ . Accessed 29 Aug 2022.

Disclaimer
Vantage does not represent or warrant that the material provided here is accurate, current, or complete, and therefore should not be relied upon as such. The information provided here, whether from a third party or not, is not to be considered as a recommendation; or an offer to buy or sell; or the solicitation of an offer to buy or sell any financial instruments; or to participate in any specific trading strategy. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. We advise any readers of this content to seek their own advice. Past performance is not an indication of future results whereas reference to examples and/or charts is solely made for illustration and/or educational purposes. Without the approval of Vantage, reproduction or redistribution of this information is not permitted.

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