If you want to learn all about trading you’ve come to the right place. Welcome to our Trading 101 series! Here we will teach you everything you need to get started in the world of trading. We will start off with the absolute basics and move on from there, so if you are a complete beginner or just want to learn more, don’t worry, we’ve got you covered.
Trading in the financial markets is not too different from what you do everyday as a consumer, the principles are no different. Trading is simply the exchange of money for goods. Say you want a snack (the demand), so you buy a banana from a market stall (the supply), here you trade your money for something you want. And if people were wanting more bananas (perhaps because of a news article about their health benefit), the stall owner would increase the price to match the price the consumer is willing to pay, this is called market price.
You can buy and sell much more than fruit in financial markets, including stocks, commodities, currency pairs or other instruments. When you buy a share, you are buying a small part of that company. Someone who has bought a stock is a shareholder and is fundamentally investing in that company’s future for as long as they hold stock.
When you put in a buy order you then hold a position until you close it through a sell order. In these markets, someone who trades shares is buying a share because they think the company has potential, they then sell this if the company gains value to take home the difference as profit. You can also do the opposite by selling at a high price and buying at a lower price to generate gain in a falling market, this is selling short.
As you have to buy and sell stocks through an exchange, you must use a broker, which is a person who is licensed to trade stocks through an exchange. Many brokers nowadays are smart computers that buy and sell orders for people around the world at a million per second. Be aware that most brokers take a commission on orders so check thoroughly which brokers are reputable and fit with your budget and trading style – we recommend some here.
What changes the market price?
A change in the reputation of a company alters how the public value it and therefore change the price of a share. This can happen for a variety of reasons: a company may be performing well, paying out good dividends or recent news may affect the company’s value. The better the public views a company, the more people there are who want to buy shares, increasing the demand and pushing up the price of those shares. Trading takes advantage of this change in share price.
Why do companies sell stocks?
The first time a company offers shares in the stock market, they are going public, this is called an initial public offering (IPO). Companies will do this to raise capital from public investors whilst simultaneously offering an exit strategy for founders and early investors.
When a company is doing well, they can choose to share some of their profit with their stakeholders as a dividend. Trading with income stocks will give you little rewards that depend on the company’s success and can be another profitable way to gain capital from holding stocks. This is basically a little thankyou to those who believed the company had potential and invested in them. However, not all companies choose to do this, growth stocks are those held in companies who choose to re-invest their profits instead of sharing them with stakeholders.
So now you know the basics and can think about what trading style you’ll use! If you want to learn more we offer a variety of online courses and workshops which you can check out here. Or if you’re ready to give it a go risk free, our app has games, quizzes and much more so you can practice trading without the worry of losing money.