May 18, 2022

Introduction to Stock Trading

Introduction to Stock Trading
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Many, if not most, are turning toward Stock Trading as an alternative source of income. What attracts them the most is the quick money-making. Stock trading is as old as the age of enlightenment, the 17th century, to put it roughly. The idea of hedging the funds, spreading the risk while making a profit is still persistent today. The digital age has intertwined different countries into one huge marketplace. As compared to the traditional stock market that had traders and brokers going back and forth physically, the digital stock market has broken every barrier for traders with its user-friendly platform.

As a trader, you should be aware of specific terms used in a stock market and choose them according to your risk appetite before trading.

 

So What are Stocks?

When a company wishes to expand or upgrade its operations, it requires funds to acquire new assets. This is done by sharing the ownership with the general public at a certain value. Depending upon the performance, the value of each stock fluctuates. Therefore, when this company makes a profit, it is obligated to share it with the stockholders.

However, in the event of misfortune that should befall onto this company, then while filing bankruptcy, it is under obligation to pay off depending upon the types of owners. Even though new companies exist by entering the market as IPO or Initial Public Offering, stocks are the oldest crowdfunding type.

 

Classification of Stocks:

There are various types of stocks available for investors. These stocks differ depending on the purpose they are meant for.

  1. Classification based on market valuation: Depending upon the market capitalization, stocks are either classified as Large, Mid, or Small.
  • Large-Cap Stocks: Stocks with a market value of $10 billion or more are known as large-cap stocks. These stocks are less volatile, and their market price moves very slightly. These are safe stocks.
  • Mid-Cap Stocks: Mid-Cap Stocks have a market capitalization of $2 billion to $10 billion. They are relatively more volatile than Large Cap Stocks.
  • Small-Cap Stocks: Stocks with a market value of $300 million to $2 billion are known as small-cap stocks. These are relatively new businesses with a high amount of risk.

 

  1. Stocks are also classified according to their classes:

The amount of votes a share’s owner can cast determines the stock’s class. It’s an unusual type of classification within a company’s common stock. Stocks are divided into two categories, although any corporation can divide them into more depending on the number of votes.

  • Class A Stocks: These shareholders can vote multiple times. The company’s board of directors determines the number of votes per shareowner.
  • Class B Stocks: These shareholders have fewer voting rights than Class A shareholders. For example, if Class A shareholders can vote five times, Class B shareholders may only be able to vote twice.

 

  1. Classification based on ownership of stocks:
  • Common Stocks: The majority of equities traded on exchanges are common stocks. When you buy these stocks, you gain ownership of the company. The shareholder receives voting rights and a proportional share of the firm’s assets if the company is wound up. Nonetheless, their responsibility is limited to the amount they invested in the company.
  • Preferred Stocks: When it comes to dividend distribution, preferred shares are preferred if the company dissolves. Preferential shareholders receive dividends first, followed by regular stockholders. When a corporation is dissolved, the preferred shareholders receive the asset first. The remnants are then distributed to the common stockholders. However, they do not have any voting rights in the corporation and are not its owners.

 

  1. Stocks classified according to sectors:

There are many sector-wise stocks available. Stock trading diversifies into Energy Sectors, Infrastructure Sector, Industrial sectors and so forth. In addition, companies are classified according to their core business competence. For example, under Financial Sectors, J.P. Morgan, Citi Bank, Bank of America, and so forth are listed.

 

  1. Stocks classified as per geographical locations:
  • Domestic: As the name suggests, these stocks are listed and are traded in that particular country. These stocks are traded in different exchanges throughout the country.
  • International: Companies that are based outside the country. For example, UK-based stocks are traded on Wall Street.

We have discussed a few types of stocks which are generally used for investment. These stocks can be classified based on their dividend payment, investment method, fundamentals, risk type, and the business cycle. We will cover them in the future.

 

Strategies Used by Traders:

Everyone is different, and everyone has different needs. This theory is also applicable while investing in the stock market. Each trader will approach the market based on their needs. The government encourages its citizens to invest in the stock market to save money while filing income tax in some countries. For example, in the United States, there is no tax on capital gain, but in the United Kingdom, there is a tax on capital gains. Some traders want passive income, so they get on the trading platform or let their broker start trading on their behalf.

Every trader, while stock trading, will continuously diversify their portfolio as they know very well that there is no sure shot sector that will always remain green. Depending upon their end financial goals, they will also allocate their funds in different sectors. For example, a trader wants to make a quick buck; then, they will invest a certain amount of their capital in high-risk stocks and the rest in low-risk stocks.

Some traders do “Day” or “Intra Day” trading daily to make a profit; they carry out stock trading. At the same time, some traders will invest in a stock and hold it for an extended period before making a profit.

Various brokers are offering free stock trading applications. It is good to install and start trading on a demo application as it uses virtual money to trade in real-time. You don’t own those stocks. But, it is a demo, and if you make a loss, it won’t hurt your finances. This is a great way to hone your skill and make ample use of the experts who will guide you while trading.