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Lesson 4: Stock Trading

Lesson 4: Stock Trading

You might be interested in stock trading if you want to speculate on the price movement without owning the asset and to leverage your position. Discover how to trade stocks with our guide.

Stock trading can be complex, involving a variety of components and requiring knowledge. If you do have the money and want to learn to trade, online brokerages have made it possible to trade stocks quickly from your computer or smartphone.
If you’re ready to get started, here are three steps to follow:
  1. Decide which stock to trade-in. You can trade via leveraged products such as Contract for Differences (CFDs).
  2. Decide whether you want to go 'long' or 'short'. You can use our market screener tool to choose from over 2,000 CFD markets on international stocks and stock funds.
  3. Open a live trading account with CAPEX: Fill in our simple application form and create a CFD trading account to start trading in minutes.

For more info about how to trade stocks, you can discover everything you need to know in this guide.

What is stock trading?

Trading involves following the short-term price fluctuations of different stocks closely and then trying to buy low and sell high or vice versa to capitalize on price changes.

This short to medium-term approach is what sets stock traders apart from traditional stock market investors who tend to be in it for the long haul.

Investors buy shares outright in the hope that they will increase in price and can be sold later for a profit. They uphold the traditional mantra of buying low and selling high – known as going long. Investors will take positions over a longer period, attempting to profit from share price changes as well as dividend payments.

While this means that they might need more initial capital to get started when compared to trading, their losses would be capped at this initial outlay. That said, investors should be aware that they might receive back less than they initially invested.

Traders, on the other hand, might be seeking to capitalize on short-term ups and downs. Rather than investing in the shares, traders speculate on the share’s value. They can speculate on it rising by going long, as well as falling by going short.

Leverage is available when you use this product, which gives you full market exposure for an initial deposit – known as margin – to open your position. But bear in mind that leverage can increase both your profits and your losses as they will be based on the full exposure of the trade, not just the margin requirement needed to open it. This means that losses, as well as profits, could far exceed your margin.

While trading individual stocks can bring quick gains for those who time the market correctly, it also carries the danger of substantial losses. A single company's fortunes can rise more quickly than the market at large, but they can just as easily fall.

Trading can be seen as riskier than investing, due to the use of leverage. But, investing also carries risk – and there is no guarantee that your investments would increase in value, so you could receive back less than you initially invested.

Before deciding to trade in shares, you should take steps to manage your risk. For example, stop-losses enable you to define your exit points for trades that move against you, while limit orders will close a trade after the market moves by a certain amount in your favour.

Consider using the educational resources we offer like CAPEX Academy or a demo trading account.

We’ve got courses at CAPEX Academy that take you through risk management and how to mitigate your exposure to risk in the financial markets.

Our demo account is a proper place for you to learn more about leveraged trading, and you’ll be able to get an intimate understanding of how CFDs work – as well as what it’s like to trade with leverage – before risking real capital. For this reason, a demo account with us is a great tool for investors who are looking to make a transition to leveraged trading.

When you create a CFD account with us, you’ll gain access to 0 commission:

  • Individual stock trading - ‘Buy’ (go long) or ‘sell’ (go short) 2,000 international shares to speculate on their price rising or falling
  • Fractional, unleveraged stock trading - Trade over 50 famous U.S-listed shares without having to worry about any commissions and rollover fees
  • Thematic trading - gain exposure to the movements of a specific trend or ‘theme’ such as meme stocks, social media stocks, EV stocks, and many other ThematiX
  • Basket trading - take a position on a group of stocks simultaneously, grouped together into one index or ETF.

Stock trading examples

To help you understand how to trade stocks, we have compiled two examples of CFD trades and their outcomes.

Stock trading example
Source: CAPEX WebTrader

Lucid trading example: buying Lucid or going long

Let’s assume that Lucid Motors shares is trading at a sell/buy price of 17.30/17.40 USD. You want to buy 100 CFD (units) because you think the price of LCID will go up. Lucid Motors has a 1:5 leverage or a margin rate of 20%, which means that you must deposit only 20% of the position’s value as position margin.

In this example, your CFD position margin will be $3.480 (20% x (100 x $17.400 buy price)).

Outcome A: a profitable trade

If your prediction was correct, and the price of Lucid Motors shares surges over the next hours or days, then you have made a profitable trade. If the sell/buy price is 22.20/22.30 USD when you decide to close your position by selling at 22.20 (the new sell price).

The price has moved $4.80 (22.20 – 17.40) in your favor. Multiply this by the size of your position (100 contracts) to calculate your gross profit which is $480.

If the position was closed during the day, there will not be any swap charges and the net profit is $480.

If the position was closed after a few days, there will be swap charges according to the overnight rollover specification.

Outcome B: a losing trade

If your prediction for the price of Lucid Motors was wrong, the LCID CFD trade will result in a loss. Let’s assume that the price of Lucid Motors drops over the next hour to a sell/buy price of $14.70/14.80. Because you want to limit the loss in the eventuality that the price continues to drop, you can sell at $14.70 (the new sell price) to close the position.

The price has moved $2.70 (17.40 - 14.70) against you. Multiply this by the size of your position (1 units) to calculate your loss, which is $270.

Google trading example: selling Google or going short

Let's assume Google is trading at a sell/buy price of 2248/2250 USD, and you want to sell 1.5 CFDs (units) because you think the price will go down. Google has a 1:2 leverage or a margin rate of 20%, which means that you only must deposit 20% of the position’s value as position margin.

In this Google trading example, your CFD position margin will be $2248 (20% x (1.5 units x $2248 sell price)). Remember that if the price moves against you, it is possible to lose more than your initial position margin of $674.4.

Outcome A: a profitable trade

Your prediction was correct, and the price falls later to a sell/buy price of 1960/1962 USD. You decide to close your trade by buying back at $1962 (the new buy price).

The price has moved $286 (2248 - 1962) in your favor. Multiply this by the size of your position (1.5 units) to calculate your profit, which is $429 gross.

If the position was closed after more than 1 day, the overnight swap will be added to the profit according to the overnight rollover specification.

Outcome B: a losing trade

Unfortunately, your prediction was wrong, and the price of Google rises over the next hour to a sell/buy price of 2360/2362 USD. You feel the price is likely to continue up, so to limit your potential loss you decide to buy at $2362 (the new buy price) to close the position.

The price has moved 114$ (2362 - 2248) against you. Multiply this by the size of your position (0.5 units) to calculate your loss, which is $171.

Stock Trading Styles

There is a range of styles used to accomplish a stock trading strategy, each with appropriate market environments and risks inherent in the strategy.

Position trading

Position trading means taking a longer-term position to ride a trend by entering on a pullback to key support, waiting to see if that support holds, and then going long soon after the longer-term trend bounces back up from support and resumes. This style is associated

with longer-term trends (so pay attention to the relevant long-term fundamentals).

Swing Trading

Swing trading involves entering just after a trend reverses briefly, then resumes. You enter just as price is pushing or “swinging” past its former resistance, which indicates that the crypto trend has found new strength. Successful swing trading relies on the interpretation of the length and duration of each swing, as these define important support and resistance levels.

Day Trading

Day trading involves taking positions and exiting on the same day. The aim of a trader while adopting such a trade is to book profits amid intraday price movements in a stock of his choice. For an intraday trade, investors often rely on technical indicators to figure out entry and exit points.

Scalping

Scalping is a method of trading where the trader typically makes multiple trades each day, trying to profit off small price movements. Although there is risk involved, a stock trader takes care of the margin requirement and other important rules to avoid bad trading experiences. Scalpers analyze the stock, past trends, and volumes and choose an entry and exit point within minutes.

High-Frequency Trading (HFT)

HFT is an algorithmic trading strategy used by quant traders. This involves developing algorithms and trading robots that help quickly enter and exit a crypto asset. Developing such bots needs an understanding of complex market concepts and a strong knowledge of mathematics and computer science. Therefore, it is more suited for advanced traders than beginners.

Stock Trading Strategies

There are many techniques traders use to speculate on the price fluctuations in the stock markets. A stock trader should devise a powerful strategy backed by research, with well-laid plans for when to enter and exit their positions.

Trend Trading

A trend-following strategy is based on the expectation that the direction of price will continue in its current form and the trend will not reverse. This means that if you are trading an uptrend, you could continue to hold your long position and watch stock price increase in value, while you could choose to sell your asset if the trend is going downward. Trend traders do not have a fixed view of where the market should go or in which direction.

Range trading

A trading range occurs when a stock trades between consistent high and low prices for a period. Stock traders use various technical analysis approaches to identify major support and resistance levels before entering the market: sell near resistance and buy near support.

Breakout Trading

The hypothesis behind breakout trading is quite simple. If support and resistance levels keep the price contained in a range, the break of that range might indicate a larger move. A breakout trader may enter a long or short position once the price has moved outside of the defined support or resistance area. These levels and the chart patterns that provide the basis for the breakouts might be interpreted differently by different traders. If the price breaks outside of a defined range but quickly reverses, it may be considered a fakeout, or false breakout.

News Trading

News can be specific to a particular stock, or it can affect an entire industry or the markets. Much of the news that moves the markets is scheduled, such as earnings reports and economic updates. Periodic or recurring news includes the scheduled releases of news that moves the markets, including interest rate announcements by the Federal Reserve, economic data releases, and quarterly earnings reports from companies. Unexpected or one-time news such as a terrorist attack, a sudden geopolitical flare-up, or the threat of debt default by an indebted nation. As a rule of thumb, unexpected news is more likely to be bad than good.

How to trade stocks

If you're trying your hand at stock trading for the first time, know that most investors are best served by keeping things simple and investing in a diversified mix of low-cost index funds to achieve — and this is key — long-term outperformance.

That said, the logistics of trading stocks come down to five steps:

1. Open a trading account

Stock trading requires funding a brokerage account — a specific type of account designed to give everyone the chance to invest in the companies they follow and are interested in without owning the shares - just by trading the price movements. You can open one with CAPEX in a few minutes. But don’t worry, opening an account doesn’t mean you’re investing your money quite yet. It just gives you the option to do so once you’re ready.

We’ve got a truly market-leading share offering for traders – with over 2,000 international shares and ETFs and a host of global indices.

With us, you’ll also have access to fractional shares. This lets you take a position on over 50 leading U.S-listed shares without having to worry about any fees for rolling your transaction from one day to the next. Also, with our 1:1 leverage policy, you can manage your portfolio in a more balanced and transparent way.

So, if you want to take a position on shares, you’ve come to the right place. We offer CFDs to retail traders who are looking to seize their next opportunity.

2. Learn to use market orders and limit orders

Once you have your brokerage account and budget in place, you can use your online broker's website or trading platform to place your stock trades. You'll be presented with several options for order types, which dictate how your trade goes through. Here are the two most common types:

Market order

A market order is an order to buy or sell a stock at the market's current best available price. A market order typically ensures an execution, but it does not guarantee a specified price. Market orders are optimal when the primary goal is to execute the trade immediately. A market order is appropriate when you think a stock is priced right, when you are sure you want a fill on your order, or when you want an immediate execution.

Limit order

A limit order is an order to buy or sell a stock with a restriction on the maximum price to be paid or the minimum price to be received (the "limit price"). If the order is filled, it will only be at the specified limit price or better. However, there is no assurance of execution. A limit order may be appropriate when you think you can buy at a price lower than--or sell at a price higher than--the current quote.

Stop order

A stop order is an order to buy or sell a stock at the market price once the stock has traded at or through a specified price (the "stop price"). If the stock reaches the stop price, the order becomes a market order and is filled at the next available market price. If the stock fails to reach the stop price, the order is not executed.

A stop order may be appropriate in these scenarios:

  • When a stock you own has risen and you want to attempt to protect your gain should it begin to fall
  • When you want to buy a stock as it breaks out above a certain level, believing that it will continue to rise

3. Discover what moves the price of shares

Before it goes public through an IPO, a company’s shares will have a set price range – often determined by the underwriter of the IPO (normally a large bank). This range will be set according to the anticipated interest in the listing, as well as the company’s fundamentals – including its revenues, its products, and its existing popularity.

Once the IPO has been completed, fluctuations in the share price are caused by changes in the supply of and demand for the stock. If supply is higher than demand, the share price could fall; if demand is higher than supply, the share price could rise.

In the long term, there is a range of reasons that the demand for a share can fluctuate over time. These reasons include:

Earnings reports

Companies usually release interim reports on their financial performance once every quarter and a full report once a year. These reports can influence a company’s share price as traders and investors use figures including revenue, profit, and earnings per share (EPS) as part of their fundamental analysis.

Macroeconomic data

The state of the economy a company operates in will affect its growth. Data releases such as gross domestic product (GDP) and retail sales can have a considerable influence on company share prices – strong data can cause them to rise, while weak data can cause them to fall.

Market sentiment

Share price movements are not always based on fundamental analysis. The view that the public, as well as market participants, have on a particular stock can cause demand to fluctuate. This is how some speculative bubbles are formed.

Interest rates

If interest rates are low, the stock market might see increased activity – despite the previous factors mentioned here. That’s because more people could turn to stocks and shares to achieve greater returns than they might otherwise be able to if they saved their money in a bank account.

4. Pick a stock or basket of stocks

We’ve got over 2,000 international stocks, ThematiX, and ETFs for you to choose from.

Discover our range of stocks

When you’re choosing a stock, it’s important that you carry out your own due diligence on a company. You should use both fundamental and technical analysis when assessing a company’s financials and potential future share price performance.

Fundamental analysis

Fundamental analysis is based on a company’s financial metrics, including its net revenue, earnings calls, or profit and loss statements.

Consider looking for stocks with a low P/E, for example, greater than zero (shows the company is profitable) but less than five. Also, consider looking at stocks where the Forward P/E is lower than the current P/E. This shows earnings are expected to increase, and if they do the stock is a better buy at the current price.

IPO date should be more than a year ago; preference is given to stocks that have been publicly traded for 10 years or more.

Look for prices over $2 per share, no penny stocks. Also, take into consideration the average volume (over 300,000 shares) and operating margin (over 10%).

If dividend stocks are on your radar, look for a yield over 5%, but a pay-out ratio below 100%.

Screening for stocks based on the filters above will produce a list of trade candidates. Usually all are not worthy of investment though.

Technical analysis

Technical analysis is concerned with chart patterns, technical indicators, and historical price action.

View charts of the stocks produced by the screeners above (fundamentals). The next criteria for a opening a long position is:

  • Only open a buy position at the major long-term support area. Traders want to go long at cheap prices (compared to historical values), not expensive prices. Investment trades don’t require a stop loss, but you should have a price in mind where you get out if conditions don’t improve for the stock. An investment doesn’t mean you hold it forever if it doesn’t do what you expect. Have a low tolerance for stocks that keep dropping.

Also, have an exit plan for how you will exit a profitable or losing trade. Define how and why you will exit. Since we used to support to get into the trade, you may consider exiting just below a long-term resistance level. Once you are out of your trade, don’t worry about what the stock does after. Take the money and trade other stocks, going through the same process again, as discussed above.

This brings us to one final guideline on how to pick stocks:

  • If buying at the support line planning to exit just below the resistance line, the upside potential should outweigh the downside risk. In many cases, market strategists find the ideal risk/reward ratio for their investments to be approximately 1:3, or three units of expected return for every one unit of additional risk. Traders can manage risk/reward more directly using stop-loss and take-profit orders.

5. Choose your timeframe and open your position

Timeframes are important considerations when you’re deciding how to take a position on stocks.

Each Japanese candle presents the price action over a specific period, or to use traders’ jargon, a time frame. Most trading platforms’ charting modules allow you to view candles representing time frames ranging anywhere from a minute to a month.

The trend, meaning the overall price direction, that you’ll see on any chart depends greatly on your time frame. The longer the chart’s time frame, the more established and reliable the key price levels and other support/resistance indicators.

For whatever time frame you trade from, remember to always check:

  • At least one longer time frame to get a sense of the bigger overall trend within which you’re trading. Ideally, you want to trade in the direction of that larger trend although there will often be tradable counter moves within the longer-term trend. For example, those day trading stocks would check weekly charts for the major trend.
  • At least one shorter time frame to check the minor trends and support/resistance levels nested within your trading time frame so you know where the trend may pause or reverse and be a possible exit point to take profits or cut losses. For example, those day trading stock would look at four-hour and one-hour charts.

The 10 timeframes available on our award-winning platform enable a comprehensive detailed analysis of all minor price movements. More than 80 technical indicators and analytical tools, including graphic objects, provide detailed analysis of quote dynamics.

You also gain access to Trading Central, which delivers analysis and recommendations from real financial experts. Additionally, you get precious market intel from TipRanks: Daily Analyst Ratings, Bloggers' Opinions, Insiders' Hot Stocks, Hedge Fund Activities, and News Sentiment.

When you trade with CFDs at CAPEX.com, you’ll find that the spreads are tighter and there is no commission for opening and closing trades, but you’ll incur rollover charges for positions maintained overnight. We also offer actional shares that give you instant access to trade CFDs on shares on the largest U.S-listed companies with no leverage and no swap fees on long positions, so you don’t have to worry about rolling your long position from one day to the next.

Stock trading CAPEX.com
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Stock market trading: the other things to know

Here are some other things to know about stock market trading, before you get started.

Why trade shares?

People trade shares as a way to gain exposure to global economic health and growth, as well as an individual company. Your decision about whether you want to speculate on the future value of the asset without taking ownership of it. This is commonly used for more short-term strategies.

How does the stock market work?

The stock market works by facilitating the buying and selling of different companies’ shares between institutional and retail investors. Companies are in control of the number of shares that they’d like to be released – and the level of interest that a company’s shares draw in has a large impact on the share price.

How and why do companies go public?

The ‘traditional’ way to go public is through an IPO, in which an underwriter will sponsor a company’s public listing, setting a target share price. In this IPO process, a company’s financials will be heavily scrutinized before the listing, which helps to eliminate certain risks for institutional and retail investors because they’re able to make a more informed decision.

How do I find a stock trading opportunity?

Every trader will have a different preference for the share opportunities they choose. For example, some people prefer the lower risk and potentially high reward opportunities that blue-chip stocks bring. Others might prefer the volatility of penny stocks. You should carry out analysis – both technical and fundamental – when you’re trying to find a company to take a position on.

What’s a good stock trading strategy for beginners?

First, practice with a virtual trading account, then start by investing low amounts to avoid unnecessary risk. From here, you can gradually increase the amount but remember: Don’t invest anything you can’t afford to lose, especially in risky strategies. Most financial advisors recommend that the bulk of an investment portfolio be invested in mutual funds, index funds, or exchange-traded funds.

What’s the difference between stock trading and investing?

Trading stocks means that you’re speculating on a share’s price movements with derivatives like CFDs – without taking direct ownership. CFDs are leveraged products, which means that you won’t need to commit the full value of the position. But bear in mind that leverage can increase both your profits and your losses.

>> Learn more about stock speculation

Investors buy shares outright in the hope that they will increase in price and can be sold at a later date for a profit. They uphold the traditional mantra of buying low and selling high – known as going long. Investors will take positions over a longer period of time, attempting to profit from share price changes as well as dividend payments.

While this means that they might need more initial capital to get started when compared to trading, their losses would be capped at this initial outlay. That said, investors should be aware that they might receive back less than they initially invested.

>> Learn how to invest in stocks

What are the risks of trading stocks?

The risks of trading stocks are significantly different from buying, due to leverage – which can increase both your profits and your losses. That’s because your profit or loss will be calculated using the full value of your position, rather than the margin required to open it.

What is liquidity and why does it matter in stock trading?

Liquidity determines how easily something can be bought and sold. High liquidity makes it easier to quickly buy or sell, low liquidity makes buying and selling quickly more difficult. In share trading, you might want to pick shares with high liquidity if you’re planning on opening and closing a lot of positions in a short period of time.

In a market with high liquidity, you might find that bid-ask spreads are tighter – which would help to bring your total costs down when trading online. On the other hand, in a market with low liquidity, spreads could widen and increase the cost of your trade.

What is execution and why does it matter when trading stocks?

Execution is the ease with which your trades are placed and filled. Our execution has been built to ensure that your trades are filled how you want, when you want – every time.

What is the spread in stock trading?

The spread is the difference between the buy and sell prices quoted for a stock. Like many financial markets, when you open a position, you will be presented with two prices. If you want to open a long position, you trade at the buy price, which is slightly above the market price. If you want to open a short position, you trade at the sell price – slightly below the market price.

What is leverage in stock trading?

Leverage is the means of gaining exposure to substantial amounts of cryptocurrency without having to pay the full value of your trade upfront. Instead, you put down a small deposit, known as a margin. When you close a leveraged position, your profit or loss is based on the full size of the trade.

What is the margin in stock trading?

Margin is a key part of leveraged trading. It is the term used to describe the initial deposit you put up to open and maintain a leveraged position. When you are trading shares on margin, remember that your margin requirement will change depending on your broker, and how large your trade size is.

Margin is usually expressed as a percentage of the full position. A trade on Tesla shares, for instance, might require 20% of the total value of the position to be paid for it to be opened. So instead of depositing $750, you’d only need to deposit $150.

What time can I start trading?

Normal trading hours on the New York Stock Exchange and the Nasdaq are 9:30 a.m. to 4 p.m. Eastern time on non-holiday weekdays. However, there are also premarket and after-hours sessions — not all brokers allow you to trade during these extended-market hours, but many do.

>> Stock market trading hours

Can you trade stocks with $100?

Yes, most of the online brokers for beginners, including CAPEX.com won’t have minimums or fees, so with them, you’ll be set to invest $100. Some brokers also allow you to trade fractional shares, which means you can buy a portion of a share if you can’t afford the full share price.

What are good stocks for beginners to trade?

There are no right stocks to trade for beginners because each is different, providing a range of benefits and risks to the trader. The best stocks for you will also depend on your trading goals, attitude to risk, and interests more generally.

La información presentada aquí está preparada por CAPEX.com y no pretende constituir un asesoramiento de inversión. La información aquí se proporciona como una comunicación general de marketing con propósitos solo de información, y como tal, no se han preparado de acuerdo con los requisitos legales diseñados para promover la independencia de un estudio de inversión, y no está sujeto a ninguna prohibición para hacer frente con antelación a la diseminación de los análisis de inversión.

Los usuarios / lectores no deben confiar únicamente en la información presentada aquí y deben hacer su propia investigación / análisis leyendo también la investigación subyacente real. El contenido adjunto es genérico y no tiene en cuenta las circunstancias personales, la experiencia de inversión o la situación financiera actual.

Por lo tanto, Key Way Investments Ltd no aceptará ninguna responsabilidad por las pérdidas de los comerciantes debido al uso y el contenido de la información presentada en este documento. Rentabilidades y predicciones pasadas no garantizan resultados futuros.
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