Stock market trading has been popular for more than a hundred years, rising in popularity amongst all of the world’s different financial markets. Equities trading involves stocks and shareholders.
Those are two words that might be familiar to most people, however, to be a successful trader in the stock market, one needs to be more than familiar with the terminology of stocks. As we will see, a strong level of familiarity and understanding of the trading process will always be important. In the stock market, long positions represent the possession rights of a particular percentage of a firm or business.
According to Ask Traders, these stocks can be classified as common or preferred, and the accumulation of buyers and sellers of stocks is generally what drives trends in prices. But before we go into an in-depth explanation of all of the stock trading types, investors must first understand that stocks are generally categorized based on the country of origin.
If a company originated from the United Kingdom, the company’s stock would most likely be listed on the London Stock Exchange (LSE). Of course, there are many different stock exchanges across different global regions, with high-volume trading activities present on exchanges such as the New York Stock Exchange or the Shanghai Stock Exchange. Next, let’s dive into common and preferred stock types.
Have you received those envelopes that contained your dividend payment? If so, it is most likely that your dividends came from a common stock. This stock represents the partial ownership of a company, and the dividend is the share of the profit. Investors in this type of stock get only one vote. This kind of stock is for people looking for long-term investment returns as they have the potential for high long-term gains, unlike preferred stock. Dividends are lower on a relative basis, and the stock price experiences more volatility.
Preferred stock, however, has higher fixed returns because share prices don’t experience the same volatility as common stock. In the case of bankruptcy, shareholders can still receive a part of the investment. Shareholders of these types of stocks don’t usually have voting rights. Share prices are simply the center point of the demand and supply of the shares of the company. However, there are regulations to monitor the whole process so that certain individuals don’t manipulate market trends.
First, you need a plan. Why am I intending to trade or invest, and when do I intend to cash out? Second, set an investment goal. It simply involves defining what exactly you want from your stock investment. Third, you either invest via a stockbroker or open a brokerage account on your own. Next, buy your stock via your stockbroker or online brokerage account. In this phase, it would be smart to consult a professional who deals with stocks on a daily basis, someone like an investment banker. Many don’t know but actually, all the big stock deals go through investment banks. This is only one of many functions investment banks fulfill, and if you are interested in learning more about investment banking check out this Wall Street Prep guide.
If you are investing via a stockbroker, you can get advice on what you can invest in (based on your individual goals and needs). However, with an online brokerage, you are on your own. In this case, investors usually want to look at stock revenue, market trends, product lines, management teams, etc. After you have decided which shares you want to buy, it’d time to decide how many shares to buy. You can start small, and add to your portfolio as you go. Choose your order type: market or limit order. For a market order, you buy the stock at the best available market price. In contrast, a limit order specifies the price at which you intend to buy the stock. Therefore, your purchase order isn’t done until the stock hits that price marker.
Global stock markets
For stock investors, there are several stock markets around the world that can execute live trades. Among the many available options, here are a few choices that are considered to be major regional stock exchanges.
- New York Stock Exchange (NYSE)
- NASDAQ Composite
- London Stock Exchange (LSE)
- Hong Kong Stock Exchange
- Japan Exchange Group Stock Exchange
- Frankfurt Stock Exchange
- Shanghai Stock Market
- Euronext Stock Exchange
When investors place trades with a traditional stockbroker, there isn’t much focus on trading execution because that is handled by the brokerage. Instead, investors tend to be more focused on trading outcomes. It is important to consider finances when investing in the stock market, as you don’t want to be having financial issues due to trading. These are secondary markets where current shareholders carry out transactions with stock market buyers. When a trade occurs, it is between a shareholder and a buyer (and not the company and the buyer).
Pros of stock trading
- Market Research – the knowledge of the stock market is very accessible. If you are interested in learning, the stock market is a great place to learn a lot because any information can be a lifesaver.
- Accessible Investment – with the introduction of online brokerage firms, it has become very possible to trade right from your bedroom. Although, there is a risk associated with doing it yourself.
- Long term reward – Depending on the kind of investment you invest in, the rewards could be very high over a long period of time. This usually happens with common stocks.
Cons of stock trading
- Marketplace volatility – prices can skyrocket or drop at any time. These price swings can be good if you are on the right side of the market, and they can be bad when you’re on the wrong side of the market.
- Lean learning curve – even though there is a vast amount of knowledge and resources, it is important to know that it is very easy to get confused with the plethora of information that one might need to become a successful trader.
- Potential for loss – investors can lose it all if investment results in bankruptcy or if the stock is affected by other negative financial information.
Since the introduction of electronic investment platforms, various markets have become more efficient and open. Additionally, the stock exchange can be a primary market when a company intends to issue and sell its shares for the first time in public. This process is called an Initial Public Offering (IPO) and it helps raise capital from investors. There is also the OTC market, where OTC means over-the-counter. Here investors can purchase or sell stocks from a decentralized marketplace. These transactions are done electronically or through a trading platform (but not via the stock exchange), which are usually for reserved stock shares that are not listed on the stock exchange.