There has been an exponential rise in the number of people interested in stock market trading in the past few decades. Stocks are now seen as financial instruments that can be used to build wealth. The image of stock trading has changed from ‘toys of rich’ to average man’s “tool for building wealth.”
Before a person starts investing in stocks it is necessary for him to possess some basic knowledge about trading, how to choose a stock, different types of trading, market structure etc.
Types of Investors/Traders
A person can be a long term investor or a short term trader.
Long Term Investors
Long-term investors invest with the aim of appreciating money and earning dividends. They will choose stocks that have the potential to offer long-term returns. These are the buy-and-hold types of investors who invest to finance some long-term goals.
Short Term Investors
Short term investors, on the other hand, can be further classified as:
- Position Traders — These people watch for fundamental changes in stock and hold their stocks from 5 days to 6 months. It is used by people who use stock trading to supplement their regular income.
- Swing Traders — These traders hold their stocks for more than a day but less than 5 days. They wait for sufficient price moments of the stock to claim reasonable profit. They need to spend some time on researching stocks daily.
- Day Traders — For day trading, it is important that a person has knowledge about limiting risks and maximizing profit. Traders buy and sell stocks within a short time span, sometimes even within minutes. They need to constantly monitor and analyze the market conditions and hence it is usually taken as a full time profession.
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Important Terms in the Stock Market for Beginners
Stock trading uses specific terminologies and a beginner must have the knowledge of these terms to make understanding of the market events easy. Some of these terms are:
- All or none order — Orders that must be either completely filled or not filled at all.
- Arbitrage — Making profit out of the difference in the price at the same time of the same stock in two different markets.
- Ask/ Offer price — The minimum price at which a person is willing to sell the security. Basis point – It is a hundredth of a percentage point.
- Bear market — When the market has declined substantially over a period of time, it is called a bear market or downward trend.
- Beta — Greek letter which represents the relation between the stock price and market movements.
- Bid price — The highest price a buyer is willing to pay for a stock.
- Bull market — When the market is in upward trend or has gained substantially over a period of time, it is a bull market.
- Fundamental Analysis – A method used by investor to analyze a company’s financials as an indicator of its growth before deciding to invest in it.
- Portfolio – A collection of investments in different securities of an individual investor or an institution.
- Risk tolerance – The capability of an investor to handle declines in the portfolio.
- Spread – The difference between the bid price and the asking price of a stock.
Before you start trading, a person must clearly note down their trading plan and decide on the type of investor they want to be. He must also be clear about his risk bearing capacity and have knowledge to analyze the market conditions. It is always better to start with small amount, small quantity trades to understand the trading environment and then proceed to bigger quantities. Last but not the least, set realistic goals and have patience; remember that ‘Rome was not built in a day’.