What is stock trading? Learn the basics

Trading Education

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Over the past few years, stock trading has become much more accessible. In the past you had to be rich, or a stock broker, to access the market. Now there are apps that make it easy for anyone to trade from their phone.

Commission-free trading and brokerages that let you get started with as little as $1 have made stock trading much more accessible to regular joes – aka ‘retail investors’.

With more and more people dabbling, you might be wondering ‘what is stock trading’ and ‘is it for me?’

Let’s talk through the basics.

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Definition of stock trading

Let’s start by answering the question ‘what is stock trading?’

At its most simple, stock trading is buying and selling shares of publicly traded companies.

This takes place on American stock exchanges like the New York Stock Exchange (NYSA) and Nasdaq, as well as international ones such as the London Stock Exchange, Toronto Stock Exchange (TSX) and Shanghai Stock Exchange.

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Types of stock trading

There are two main types of stock trading: active and passive. While passive traders see stocks as an investment, and keep them in their portfolio for years without touching them, active traders aim to make money by buying and selling at the right moment.

This could be months if you’re a swing trader, or seconds if you’re a scalper. We’ll talk more about those strategies later.

As you can tell, active trading involves a more ‘hands-on’ approach. While passive traders can basically forget about their stocks, active traders need to have a strategy for making money.

They need to do a lot of research to make sure they’re buying and selling at the best possible time. This involves keeping an eye on the market, reading financial news and checking charts in case there are any patterns.

Lots of active traders keep track of this in a trading journal. This is where they record everything about a trade – from the time they enter and exit a position, to what sort of emotional and market-based factors influenced the decision.

It’s an important way to reflect on past trades and really hone your strategy. Find out more about how active traders use journals.

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Stock market basics

Understanding the stock market

The stock market is where traders buy and sell stocks. The market itself isn’t one specific place, but is made up of different exchanges from around the world – which are specific places. For example the New York Stock Exchange is based on Wall Street.

Each stock is listed on a specific exchange. Exchanges track the supply and demand of their stock, and set the price based on that. Exchanges all have different opening hours, based on local time. So if you suddenly get the urge to buy stock that’s listed on NASDAQ at 3am, you’ll need to wait for the market to open.

Brokers represent traders in the market. For most of us, that will be online stock brokers like Thinkorswim, Robinhood and eToro. Brokers had to go to specific exchanges to conduct trades in the past, but these days it’s all done virtually.

Major stock exchanges

There are 60 major stock exchanges spread around the world. They all range in size and trading volume, ranging from the New York Stock Exchange (worth trillions of dollars) to small local exchanges.

These are some of the largest stock exchanges based on market cap, and the ones that you’re likely to use as an active trader:

New York Stock Exchange (USA)
NASDAQ (USA)
Shanghai Stock Exchange (China)
Euronext (Europe)
London Stock Exchange (UK)
Hong Kong Stock Exchange (Hong Kong)
Toronto Stock Exchange (Canada)
Shenzhen Stock Exchange (China)
Tokyo Stock Exchange (Japan)
Deutsche Bӧrse (Germany)

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How to trade stocks

Back in the day before online brokers, investors used to pay advisers to buy and sell stocks for them. These days you can do it yourself using a mobile app. While it’s easy enough to buy and sell, there are a few basics you should know before you get started.

Orders and order strategies used by stock traders

There are different types of orders. The right one will depend on your investing style and strategy.

The main ones to know about are:

Market orders: these buy or sell stocks at the current market price
Limit orders: this type of order specifies the price that the stock will be purchased/sold for. If the limit is too high or too low, it might not get filled
Stop orders: these orders are triggered as soon as a stock rises or falls below a certain level. You can use them to prevent big losses, or to make sure you get the right amount of profit.

Understanding market fluctuations

The price of stocks go up and down based on supply and demand – just like any other product. If lots of investors want to buy stock in a company, the price goes up because there’s not enough supply for everyone.

On the flipside, prices drop if not enough investors are interested in a particular stock.

Market fluctuations can happen for a number of reasons. For example, people might be more interested in buying stock if a company launches an innovative new product. And people might want to get rid of stock if the company hits headlines after a controversy.

The market as a whole can dip or rise depending on things like inflation or the health of the economy. It’s normal for the market to fluctuate by around 5-10%. Passive traders hold their positions for years to ride out these waves, while active traders take advantage of fluctuations to make money.

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Professional trading strategies

Stock traders use a number of common strategies to make money. These are some of the most popular ways to trade stock.

Day trading and position trading

Day trading is an active trading strategy. It involves entering and exiting a position within the same day. It doesn’t matter how long you hold your stock for – as long as you exit the position before the market closes.

Position trading is a passive trading strategy. Investors doing this hold on to their stock for a longer time – months, years or even decades.

Swing trading and scalping

Swing trading is an active trading strategy that sits somewhere between day trading and position trading. This strategy involves holding stock for a few days or a few months.

Scalping is another active trading strategy. It’s a more extreme version of day trading, where traders sell stock in minutes – sometimes seconds. This takes advantage of tiny fluctuations in the market.

Exchange-traded funds (ETFs) and mutual funds

Rather than buying a single stock, ETFs and mutual funds are a group (or ‘basket’) of stocks. They can be grouped by sector and commodity type, or track a range of diverse stocks across industries. This type of pooled security can ride out small fluctuations in a way that single stocks can’t, because dips in one stock are counteracted by increases in others.

Exchange-traded funds (ETFs) can be bought or sold on stock exchanges, just like regular stock.

Mutual funds can be bought through investment companies or brokerages.

Risk management strategies for professional traders

The stock market is unpredictable. Even if you do all of your research, things may not go the way that you expect. That’s why professional stock traders have risk management strategies. This means that, even if their stocks do start to drop in price, they have an exit plan to minimize losses.

Some of the most popular risk management strategies are:

Position sizing: this involves deciding how much you should invest in a particular stock, based on your portfolio size and your trading plan
R and R-multiple: this formula looks at reward vs. risk and can help you to understand if a trade is too risky for your own tolerance. Find out more about R and R-Multiple
Stop loss orders: this triggers a sale when the stock in question drops below a set price, making sure you don’t lose any more money than you’re willing to
Diversification: investing in a range of different stocks, ETFs, mutual funds and other securities like forex and crypto can reduce the risk of losing all of your money. It’s the trading equivalent of not putting all of your eggs in one basket.

Having a strong trading mindset helps with all this too!

Become a better stock trader with TradeZella

Once you’ve done your research and have a strategy on which stocks to buy, the next thing to do is to start keeping a trading journal.

While some people prefer to do it with a spreadsheet, the best way to do it is with software like TradeZella. As well as having space to record all of the key information about your trades, we also have lots of unique features to help you to analyze patterns and learn from past mistakes and trading win rates.

Our platform even has broker integration – so basic details about the stocks you’ve bought will be imported automatically into the software. Giving you more time to focus on the more reflective side of journaling.

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FAQs

What is the best stock trading platform?

Every trader is different, so the best stock trading platform will depend on your own needs and strategy. Obviously some are better than others. Read our thoughts on the best software for trading.

What is option trading in stock?

Options trading is a little more complicated than standard stock trading. You’re essentially buying the right to buy – or sell – stock at a set price, at a later date. There’s a lot more to it than that, and you can dive down deeper in our ‘what is options trading?’ article.

What do stock traders do?

Stock traders buy and sell stock with the goal of making a profit. There are lots of different ways of doing this, and every trader has their own strategy that they follow. Successful traders use journaling tools to keep track of what works and what doesn’t so that they can learn from their past mistakes and wins.

Can you trade stock with $100?

Yes. Many online stock brokers allow you to start trading with as little as $1. No matter how much (or how little) money you’re using to trade, it’s important to manage risk to maximize your profits. One way to do that is with position sizing. You can also keep an eye on how much risk you’re taking in your TradeZella trading journal.

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