Money & Business
published by Barnes & Noble
master the fundamentals by teaching yourself to:
Get ready for the opening bell.
Stock trading isn’t for the weak of stomach: it’s a fast-paced, risky, and exciting approach to making money in the markets. Before you place your first order,
• Understand the difference between stock investing and stock trading • Evaluate various trading styles and decide which (if any) is right for you • Utilize popular trading strategies, including basic technical analysis
Stock Trading vs. Stock Investing
Before you can decide whether stock trading is right for you, it’s important to understand the differences between stock trading and stock investing.
Fundamental Analysis vs. Technical Analysis
Stock investors use a technique called fundamental analysis to assess a company’s financial health, including its profitability and debt, to try to predict and profit from the long-term trend in the company’s share price. Investors buy stocks that they believe will increase in value gradually over time: most investors own stocks for at least a year, and some hold on to the same stocks for several decades. Stock trading is the process of trading—buying and then selling—a stock within a brief time period, which ranges from a few seconds to a few months at the most. The main aim of stock trading is to profit from short-term trends in share prices, regardless of a stock’s long-term prospects. To predict short-term trends in stock prices, traders use a technique called technical analysis in which they assess the recent price movement through close examination of stock price charts.
Critics of stock trading often dismiss technical analysis as a misguided and useless approach to investing. Their main argument against technical analysis is based on the efficient market hypothesis, which states that stock prices constantly change to reflect all the available information that might affect a stock’s share price. According to the efficient market hypothesis, a stock’s recent price or volume trends don’t matter, because a stock’s price depends only on the relevant information about the stock that’s available at the present moment. Proponents of technical analysis refute the efficient market hypothesis, claiming that the market is not perfectly efficient. For instance, they point out that people often buy and sell stocks based on hype or emotions, rather than on the “information” that should determine the stock’s share price. Because traders think that the market is not perfectly efficient, they believe that they can identify and profit from trends in share price and volume alone. Whether or not they’re right remains up for debate—no one has proven that technical analysis really works.
Traders and investors don’t buy and sell stocks directly on stock exchanges. Instead, they use brokers.
Full-Service and Discount Brokers
Stock investors tend to buy and sell stocks through either full-service brokers or discount brokers. • Full-service brokers: Major investment banks and brokerage houses, such as Merrill Lynch and Morgan Stanley. Since they are generally the slowest way to execute (fill) stock orders and charge the highest commissions ($50–150 per trade), full-service brokers are generally not suited for stock trading. Discount brokers: Smaller brokerage houses that offer fewer services, but charge much lower commissions ($7–50 per trade), than full-service brokers. Beginner traders often use discount brokers to trade, which can work fine as long as you’re making only a few trades per month. If you begin to trade more often, you’ll probably pay less in commissions by working with a direct-access broker (see below). You’ll also most likely benefit from the more robust trading-related services that direct-access brokers provide.
Why Traders and Investors Buy Stocks
Stock traders and stock investors share the same goal— to make money. Even so, the...