What is stock trading?
Stock trading involves buying and selling shares in companies in an effort to make money on daily changes in price. Traders watch the short-term price fluctuations of these stocks closely and then try to buy low and sell high. This short-term approach is what sets stock traders apart from traditional stock market investors who tend to be in it for the long haul.
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 isn’t for the faint of heart,” says Nathaniel Moore, a certified financial planner and a certified kingdom advisor at AGAPE Planning Partners in Fresno, California. “Don’t take the risk and invest money if you need it.”
If you do have the money and want to learn trading, online brokerages have made it possible to trade stocks quickly from your computer or smartphone.
But before you dive in, you should make sure you know how the stock market works, the best apps for trading stocks, and how to manage your risk.
» Learn more: Stock Trading vs. Investing: What’s the Difference?
Types of stock trading
There are two main types of stock trading:
Active trading is what an investor who places 10 or more trades per month does. Typically, they use a strategy that relies heavily on timing the market, trying to take advantage of short-term events (at the company level or based on market fluctuations) to turn a profit in the coming weeks or months.
Day trading is the strategy employed by investors who play hot potato with stocks — buying, selling and closing their positions of the same stock in a single trading day, caring little about the inner workings of the underlying businesses. (Position refers to the amount of a particular stock or fund you own.) The aim of the day trader is to make a few bucks in the next few minutes, hours or days based on daily price fluctuations.
» Read more: How to day trade
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.