Stock Trading Guide
This guide explains how stock trading works and the popular methods used to trade stocks today.
All reviews, research, news and assessments of any kind on The Tokenist are compiled using a strict editorial review process by our editorial team. Neither our writers nor our editors receive direct compensation of any kind to publish information on tokenist.com. Our company, Tokenist Media LLC, is community supported and may receive a small commission when you purchase products or services through links on our website. Click here for a full list of our partners and an in-depth explanation on how we get paid.
Do you want to be a trader or an investor? 🤔
For those who are just starting out, it may not be obvious, but there’s a big difference between “playing the stock market” and investing in a company through the stock market.
There are typically two types of investors: Those who trade (short-term) and those who invest (long-term). Where you want to go depends on the risks you are willing to take on and how you like to make money. Stocks can unexpectedly break through the roof, like in the case of Robinhood, or they can drop below ground, but you need to be wary of that.
This guide aims to introduce you to the basics of stock trading. Here’s a brief overview of the main sections we’ll cover in this article:
- What is Stock Trading?
- Different Ways To Trade Stocks
- Stock Trading vs. Forex (Currency) Trading
- Stock Trading vs. Cryptocurrency Trading
- So, Which Trader Will You Be?
- How to Trade Stocks
- How to Survive Risk and Stock Trading
- Wrapping Up
What is Stock Trading? 📘
When referring to a trader, you may think of someone who buys and sells stocks daily for any company that is on the market whether it is Coca-Cola or VMware, whose stocks are on the growth. These are individuals who are very savvy about the market and want to make money off of the daily price fluctuations on Wall Street.
These are short-term traders who want to make a quick buck by the hour. They hardly ever sit on a stock, and if they do, it is not for much more than a day.
If you want to save something for retirement or invest in a company that you believe will return a huge profit someday, then you are an investor akin to Warren Buffett. The stock market master himself is a long-term investor, and he has made quite a bit of money through his savvy trading skills as well.
Different Ways To Trade Stocks 🛣️
There are few different types of trading based on frequency, trends, purchase and sell activity, as well as what you like to trade in.
Active Trading 🏃♂️
There are passive traders who want to invest it and forget it. These are not active traders.
When you are actively trading, you are participating in at least 10 trades or more every 30 days, and you are watching the market consistently. You want to take advantage of short-term fluctuations in order to get a higher profit.
You may get a stock tip that a company’s stock is going to fluctuate down, but they have a good projection for future earnings. If you have been following the trend, you likely purchase this stock and watch it go up, earning your money back and then some.
Day Trading 📆
If you like to play hot potato with stocks, then you are constantly buying and selling stocks each day to turn a higher profit. This is different from active trading because you may be buying and selling within the same stock, but ideally you close at a higher profit each day.
Usually, this trading requires the use of sophisticated technology and tools. For that, there are a number of top day trading software that day traders routinely rely upon.
You don’t really care about the companies you invest in, so long as you make a profit that day. The aim of the day trader is to find the day trading platforms with leading brokers to make more money by the hour or day based on daily price fluctuations and trends.
Stock Trading vs. Forex (Currency) Trading ⚔️
You may think of trading in very traditional terms, which means you buy a stock in a company. You are making an investment in that business. You become a shareholder and follow the trends of that company.
Other traders work with currencies, which means they trade on the foreign exchange or “Forex.” The two are traded on Wall Street, but they are very different.
- Stock trading: You trade in company shares. The liquidity depends on what company you invest in and the market. There is very low leverage with stock trading.
- Forex: You are exchanging a country’s cash for profit. When it comes to Forex trading, liquidity is very high and ever-present. There is very high leverage when trading in currencies.
Another incredibly important aspect when it comes to the difference between stock and forex trading is the factors that impact each market. With forex, there are large, macroeconomic factors that consistently result in the fluctuation of currencies. And similarly, the way interest rates affect stocks is crucial for investors.
🏦 Interested in Forex? See our top Forex brokers.
Pros and Cons of Stock Trading ⚖️
- Wide range of trends to watch
- Short-selling restrictions
- Liquidity is not as important as managing risk
- The highest leverage is also not important
- Business hours trading
- Ownership Stake in a Company
- Subject to Higher Risk
- Time-Consuming Investment
- Emotional roller coaster
Pros and Cons of Forex Trading 💱
- Only 18 currency pairs to watch
- No short selling restrictions
- Very high liquidity
- Very high leverage
- 24-hour trades
- Subject to periods of extreme volatility
- Small, independent retail forex participants face competitive challenges
In addition, they are regulated differently. Stock traders must follow the rules and regulations set forth by the Securities and Exchange. However, forex trading falls under the Commodities Futures Trading Commission guidelines and regulations.
The difference in leverage is also huge. You get about a 50 to 1 leverage with forex trading. This means that it can be incredibly lucrative, but it involves a lot of risk. However, it means you only need to have 2 percent of the value of the foreign currency that they are trading available in your brokerage account.
With stock trading, you have about a 2 to 1 leverage, which is common amongst all stock brokers. This means you need to only have about 50 percent of the value of the stocks that you are trading available as cash in your brokerage account.
To determine which is better, you have to think about how you want to trade and what your style is. Do you have a high tolerance for risk? Then forex trading might be for you.
While it is easier to trade because there are only 18 common pairs to trade in, you also have to consider that the forex never stops trading. You could be up at odd hours tracking a trend on a currency to make a particular trade.
Stock Trading vs. Cryptocurrency Trading ⚔️
So where does cryptocurrency fit into all of this? Today’s cryptocurrencies hold about a $300 billion market cap, and there are current projections for the market to reach $10 trillion in the next 20 years. There are also 150 or more cryptocurrencies, and there are new ones coming out every day.
With some experts saying that Bitcoin is better than gold, cryptocurrencies have attracted all types of traders to try their hand in this new market. However, cryptocurrency trading is unlike the traditional stock trading that you have learned about in movies or through textbooks.
Now that we have got the basics covered let’s get into the juicy details that make all the difference:
Long-Term vs. Short-Term Payouts 💲
The traditional stock exchange takes a while to pay out in most cases. There are also substantial amounts of paperwork, fees, and percentages that must be paid in order to trade on the stock market.
Some believe that the issue with traditional stock exchange is inaccessibility, for example buying a stock of one of the largest companies on the London stock exchange can prove time-consuming.
When you get through all of this work, you will likely have to sit on investments and hope that they continue to return a profit. They also fluctuate depending on company policies, news, political trends, and signs of a recession. You also have to invest a little bit more to get a larger return.
Cryptocurrency is much simpler than all of that. You only need as little as $50 to invest in cryptocurrencies, and it does not require much paperwork. You simply need to make an account on a cryptocurrency exchange online and start to invest in the crypto that you feel is on a rising trend.
Really anyone can start investing in cryptocurrencies, even if you don’t fall in the typical crypto-enthusiast demographic. Most of the people with full-time jobs share the belief that getting into crypto takes too much time and effort without adding “learn about emerging financial technology that may take over the world to it.” Here is an example of a 40-year-old woman who broke that barrier, written by Madeleine Morris.
In one way, that’s very simple. In another, the market is very volatile.
This means you could invest low and stay low for long periods of time before there is any movement, or your return could skyrocket. There are many who sold their Bitcoin prior to 2013 who wish they could time travel to stop themselves. Bitcoin is now worth over thousands of dollars per “coin”.
Trading in Business Hours vs. 24/7 Trading ⌚
Traditional exchanges typically follow business hours. Wall Street opens at 9:30 am Monday through Friday and closes at 4:00 PM (ET). You also cannot trade on weekends or holidays. Though trading after hours is possible, it can also be complicated.
This means that you have to be careful with your last trade of the week as it could all change come open the following Monday. Understanding when to sell stocks is absolutely crucial—as several factors, including the stock market’s operating hours, can be a factor.
That is not the case with cryptocurrencies. These exchanges operate 24/7 online, and you can instantly purchase or sell your crypto as you see fit.
This means that you can make a profit as soon as you learn of a trend, but it also means that you will likely be online a lot more and may even gain a fear of missing out.
These markets can be incredibly volatile as well, so it’s best not to invest too much in beginner cryptocurrencies.
📈 Looking for specific strategies? Learn about CANSLIM.
So, Which Trader Will You Be? 🤔
If you have already started trading, then you may know that you simply want to invest in the stock market. You don’t need any other types of risk.
Still, trading stocks certainly carries its own risk. To help guard against this, many traders leverage the top stock analysis software to help identify trades and make smart trades.
In today’s world of modern technology, access to stock trading has become easier and easier. In the past, stock trades had to be placed over the phone, using brokers as costly middlemen.
Now, stocks can be traded through that small machine in your pocket called a smartphone 📱, through several of the most popular investment apps. Isn’t technology wonderful?
The below guide also gives you some more insight into what it takes to simply trade stocks and become an investor.
How to Trade Stocks 💭
It’s best to start out with the basics. This guide provides you with the best logistics for trading stocks at the beginner level.
Step 1: Open a Brokerage Account 👤
You need to have a brokerage account with funds set up before you begin any trading. This is an account specifically made to hold onto your investments.
If you don’t have an account, you can instantly create one with many of the world’s leading stockbrokers. However, each brokerage account comes with costs so pay attention to trading fees.
Some common online brokers with apps include:
DIY stock trading
Pioneer of commission-free stock trading
TS Select: $2,000
TS GO: $0
Active options and penny stock trading
Powerful tools for professionals
Minimum initial deposit
TS Select: $2,000
TS GO: $0
DIY stock trading
Active options and penny stock trading
Pioneer of commission-free stock trading
Powerful tools for professionals
Step 2: Set Your Stock Trading Budget 💰
Whether you have a talent for trading or you don’t know what you’re doing, it’s best to only allocate up to 10% of your funds to your stock trading budget. You should also only invest the money that you can afford to lose, and you don’t want to use money that you need for future expenses, such as college tuition or house payments.
You should also have a health emergency fund and be allocating at least 10% of your income to a retirement savings account to reduce your risk completely.
Step 3: How to Use Market Orders and Limit Orders 📈
After setting up a brokerage account and getting your budget in order, you can log into your online broker’s site or log in on your phone to start placing trades.
There are several options for different order types. This relates to how your trade is placed. There are two most common types of trades:
- Market orders: This means that you want to buy a stock immediately at the best price available in real-time.
- Limit order: This buys or sells the stock only at a specific price that you set. When you place a buy order, the limit price will be the most you are willing to pay, and the order only goes through if the stock prices meets your pricing requirement. In this way, limit orders can offer valuable protection.
Step 4: Learn Through a Virtual Stock Trading Game Account 🎮
If you want a no pressure way to learn about stock trading, there are plenty of apps and virtual tools out there to help you simulate what stock trading looks like for every type of stock, currency, and trade order. TD Ameritrade, Interactive Brokers, and the apps mentioned above are all good places to start if you want to practice without spending real money.
💡 You can do virtual stock trading with Interactive Brokers. See how to get started with the broker in our comprehensive Interactive Brokers review.
Step 5: Set Your Benchmark and Measure Returns Against It 📏
Whether you are an active trader or a long-term investor, you want to measure your returns carefully. The bottom line is that you pick stocks that will turn a profit based on your benchmark index.
For example, you could use the Standard & Poor’s 500 index or the Nasdaq’s composite index, which is best for technology stocks. These indexes have all types of similar companies in size, geography, and industry.
Measuring allows you to see when you are outperforming the index, which is good, or it can see when you are struggling or going in the red. You may decide to invest in an ETC based on a low-cost index.
Step 6: Keep Your Perspective (to Keep Your Sanity) 💪
You may have a unique outlook on stocks, which you should keep even as you start to learn of trends. One of the worst mistakes is to simply give in to every stock tip.
If you want to invest in a certain type of technology, you should dig in and learn all that you can about companies in that market. This allows you to be a savvy niche investor, which can lead to big returns if you know what to look for.
In addition, you should always learn about new indexes and exchanges if you want to spot opportunities and have some additional room in your portfolio.
How to Survive Risk and Stock Trading 💸
In the words of the eminently wise trader Nassim Nicholas Taleb:
I will use statistics and inductive methods to make aggressive bets, but I will not use them to manage my risks and exposure. All the surviving traders I know seem to have done the same. They make sure the cost of being wrong is limited.
Being that the case, how does one limit his or her risk?
Whatever trader you decide to be, there are some tips that can help you navigate risk and avoid some costly mistakes.
Build Your Position Gradually to Lower Risk ⚡
You do not need to take a super high position on a stock tip. You can build up gradually through position trading or buy in thirds to reduce investor exposure and avoid price volatility problems.
Ignore the “Hot Tips” Altogether 🚨
You may join a forum thinking you are going to get some hot tips or you follow a blog that always updates with the latest trends. However, these people may just be selling you a lemon to pump up a stock.
These are typically shady pump-and-dump traders that do not care whether the tip is real or not. They may just want to pump penny stocks. If it seems risky and too good to be true, then it probably is. However, if you are interested in penny stocks they can become a completely viable part of your portfolio all you need to do is find a presentable penny stock broker.
Keep Your Records Straight for the IRS 📝
When you decide to collect on your earnings, the IRS will want their share. So if you are trading with a traditional brokerage account (aka no tax exemptions), then you will need to fill out different forms and file differently. However, you can get some tax breaks for poorly performing investments through various tax-loss harvesting strategies.
Pick Your Broker Wisely 🦉
There are a ton of online platforms available right now, and they are all competing for your business. Some provide pretty great incentives such as low to no trading fees or other discounts. However, you also want to look out for brokers that will teach you about trading, which means they have an education and support center.
🔔 Want to get started with a broker? Check out our list of top stock brokers for beginners.
Wrapping Up 🏁
Investors who are new to the stock market need to think about what type of trader they want to be and how they want to make money. If you have the time and funds to participate, this could be a very beneficial step forward in your life that leads to great returns.
However, it’s best to play it safe and learn about the stock market first before jumping in with your hard-earned cash. If you decide to become a trader, the best way to start is to find a stock you like and build your position gradually.
You can also use free virtual stock trading games to practice before investing any real money. Ultimately, you’ll become a better trader as you learn more and join a broker with tons of educational activities.