The word “trade” is derived from the Latin “trahere,” which means to draw or pull. Trading is the act of buying and selling products or stocks in an attempt to make a profit. It can be done for personal gain, as part of your job, or as a business. Trade is sometimes compared with gambling because it involves risk; however, there are many strategies and tactics that traders use to mitigate these risks and turn trading into a profitable endeavour.
In the financial markets, a trade often involves stocks, shares, or other securities being traded from one investor to another. Trading can also involve commodities such as oil and gold being bought and sold by traders on the open market for future delivery dates.
In this article, we will discuss some basic concepts that you need to know about trading before starting your own account if you intend on doing so.
The first concept we need to discuss is what are stocks and shares? A stock represents a piece of ownership in a company. When you buy a stock, you become a shareholder in that company and own a tiny fraction of it.
Shares, on the other hand, represent the number of units or portions of a particular security that are being traded. For example, if Company A has 100 outstanding shares and you purchase five of them, then you are said to hold 5% “shares” of Company A.
While most people think about buying stocks when they think about trading, there are actually many different types of investments that can be made in the markets. Stocks, bonds, options, futures contracts, and currencies can all be traded by investors depending on their risk tolerance and investment goals.
Another important concept to understand is what is a margin? A margin is the amount of money that you are required to put up as collateral for a trade. This is essentially your “risk capital” and represents the funds that you could lose if the trade goes against you.
For example, if you purchase shares of Company A using a margin account with a $2000 initial margin requirement, then you are pledging $2000 of your own money to hold those shares. If the stock price falls below $2000, then you will be forced to sell your shares at a loss in order to cover your losses.
One final concept we need to discuss before getting into trading strategies is the stop-loss order. A stop-loss order is an order placed with a broker to sell a security if it falls below a certain price. This can be used as a risk management technique to help protect your investments from large losses. The provider easyMarkets is a one example of a broker that provides a free guaranteed stop loss, which is a useful benefit to look out for if you want extra risk management safeguards when trading.
For example, let’s say you buy shares of Company A at $50 and place a stop-loss order at $45. If the stock price falls below $45, then your broker will automatically sell your shares for you at whatever the current market price is.
Now that we have covered some basic trading concepts, let’s move on to some trading strategies.
If you are just starting out in trading, it is important to stick to simple strategies that have lower risk exposure. One such strategy is called “buying and holding.” This involves buying shares of a company and holding onto them for the long term with the hope that the stock price will go up over time.
Another common strategy is known as “swing trading.” Swing traders buy stocks that they believe are undervalued and sell them when they feel that the stock has reached its fair value. This type of trading typically involves more short-term investments than buying and holding and can be used to generate profits from both rising and falling markets.
If you are looking to take on more risk, you could try day trading. Day traders buy and sell stocks with the hope of generating profits from small price movements in both directions. Day traders typically hold onto their stocks for a few hours or even minutes and rely on short-term momentum to generate returns.
The basic concepts of trading can be confusing if you have never done it before. With the help of this article, hopefully, that confusion will now start to become clear and make sense.