Stock trading explained: How to trade stocks

Stock trading is the process of buying and selling company shares listed on a stock exchange. The aim is to potentially benefit from price fluctuations, however, of course, all investment or trading contains risk of losses. 

What does it mean to trade a stock? Traders aim to buy shares at low prices, hold them for a certain period of time and then sell them at higher prices. That differentiates stock trading from stock investing, which involves buying and holding shares for the long term.

When trading stocks you have the option to purchase real shares or trade derivatives of the underlying asset, such as stock contracts for difference (CFDs) to speculate on the price movements of the shares. 

In this guide, we look at how to trade stocks and some of the stock trading strategies you could use.

What is stock trading?

Are you interested in how to start trading stocks? Let’s start with the basics. Stocks represent ownership in a company that’s publicly listed on a stock exchange. Companies typically ‘go public’ – that is, list their stock on an exchange – to raise more capital than they can receive from their private owners or through bank financing. 

A company will typically start to sell its shares on an exchange through an initial public offering (IPO) on a primary market, taking it from private ownership to a combination of privately and publicly owned shares. Once the shares start trading on a secondary market, which is a stock market exchange, their price fluctuates based on investor assessment of the stock’s value throughout the trading session.

The capital a company raises from stock investors is typically used to expand the business, whether organically or through mergers and acquisitions (M&A).

Difference between stocks and shares

Have you wondered about the difference between stocks and shares? The term ‘stock’ refers to the overall public ownership of a company traded on an exchange, while a ‘share’ refers to the individual units of a stock that investors can buy and sell. 

As an investor, you might ‘own stock’ in Amazon (AMZN) but hold 10 Amazon shares in your portfolio. When talking about price movements, stocks and shares terms are used interchangeably. 

Different types of stocks

Stocks tend to be loosely grouped based on certain characteristics. Some stock traders use these categories to inform their trading strategies, focusing on stocks in certain groups.

How do stock exchanges work?

When it comes to real share trading (which means actually owning the stock you are trading), most shares in public companies are traded on stock exchanges, which are integral parts of the stock market. How does trading stocks work on exchanges? These institutions bring together existing shareholders looking to sell their shares in a company and buyers who want to own them. 

What is trading stocks? Each company stock has a bid-ask spread – the difference between the lowest price a seller will accept and the highest price a buyer will pay. When trades are executed, the seller receives the bid price in exchange for their shares while the buyer pays the ask price to receive the shares.

Some exchanges have physical locations with trading floors where buyers and sellers can meet, but most stock trading is now done on electronic trading platforms.

Some examples of the world’s major stock exchanges include:

• New York Stock Exchange (NYSE)

• National Association of Securities Dealers Automated Quotations system (NASDAQ)

• Shanghai Stock Exchange (SSE)

• Euronext

• London Stock Exchange (LSE)

• Japan Exchange Group

• Hong Kong Stock Exchange (HKEX)

What moves stock prices?

There are several factors that could move share prices throughout a trading session and over time. These include fundamentals specific to the company such as revenues and profits, as well as external factors, like the macroeconomic climate and geopolitical concerns.

Earnings reports

The main indicator of a company’s performance is a financial report, which is typically issued on a quarterly or half yearly basis. These reports show how much money a company is bringing in from sales and other activities, and how much profit is being generated. 

Earnings reports show a company’s cash flow. If the firm pays dividends, it also shows how much they will be worth. The release of a company’s earnings report can often drive a sharp rise or fall in the share price if it exceeds or falls short of analysts’ expectations.

Economics

The overall performance of the main economy where a company operates has a strong influence on share price movement. Strong economic growth tends to pull most share prices higher, while a recession might pull them down even if individual companies continue to show strong financial performance.

Politics

Government policies and political events such as elections and international conflict have a strong influence on stock markets. In particular, companies that are affected by policies on international trade can see their share prices react strongly, such as when the US and China engaged in a trade war, imposing import tariffs on each other.

Supply and demand

Demand and supply trends influence a company’s financial performance – if suddenly there is more or less demand for its products and services or supply volumes change. Demand for a company’s stock can also vary based on demographics. 

For example, the Covid-19 pandemic lockdowns saw new investors enter the stock market for the first time and drive up demand for certain stocks, which have become known as meme stocks.

Institutional demand and ownership can also affect prices, for example, when a big institutional investor is selling off a stock, or when a stock has been added to an exchange-traded fund (ETF).   

Trader sentiment

Sentiment among market participants has a strong influence on share prices. Stocks can often trade far higher or lower than a company’s fundamentals would suggest, because of subjectivity among traders and investors. Participants can buy or sell off stocks based on news, announcements from a company’s competitors, data releases and other events. 

What is a stock trading strategy?

Stock trading strategy is your preferred approach to trading assets. It is important to have a clear strategy when deciding on your stock market trading before you put your money at risk. 

Types of stock trading strategies 

There are many different stock trading strategies you can use depending on your preferred approach to the market and how long you want to keep positions open.

News trading strategy

This strategy is based on responding to news announcements and events. It requires an understanding of market expectations and reacting quickly once news is released. A trader will need to assess whether a news event has already been priced into a stock and trade it accordingly. 

A common trading strategy is to ‘buy the rumour, sell the news’, such as when an announcement has already been anticipated by the market and factored into the share price ahead of time.

End-of-day trading strategy

Some traders are most active at the end of a trading session, when liquidity often increases and it becomes clearer how a share price could move at market close. This strategy can be less time consuming than others, as it focuses on a small part of the trading day. 

Swing trading strategy

Swing trading aims to take advantage of share price swings by buying stocks before they swing higher and selling them before they swing lower. 

Swing traders use technical analysis indicators to provide buy and sell signals based on when a price trend is likely to change direction. This requires more monitoring of price charts and an understanding of momentum indicators.

Day trading strategy

Day traders focus on opening and closing positions on the same day to take advantage of stock price fluctuations during a trading session. 

Day traders often open more than one position during a session but close them before the end of the day so that they have none open overnight that could be affected by volatility in after-hours trading.

Trend trading strategy

Trend trading involves using technical analysis tools to determine price trends and trading stocks in line with the direction of a trend.

Trend traders need to have well-defined systems to identify and follow price trends and respond quickly when trends change. Traders can reduce the risks of trend reversals by using trailing stop-loss orders.

Position trading strategy

Position trading is a strategy whereby traders hold positions open for months or years to speculate on long-term price trends. This strategy places more emphasis on analysis of a stock’s fundamentals rather than technical analysis.

Risk-management tools when trading stocks

It’s important to understand how to use risk-management tools like limit-orders, take-profit orders and stop losses to enter positions at the price you want, sell them at a certain level to lock in potential profits, or if the assets you trade fall by a specific amount to avoid further losses.

You may consider diversifying your portfolio so that no single position accounts for a large portion of it to avoid the risk of losing a large part of your money if a particular stock falls.  

You could also learn how to use technical analysis tools on price charts. This could help you identify price trends and trading ranges, generating ideas for when to open and close positions.   

Keeping a trading diary to understand your successes and failures could also help you learn to trade stocks better in the future.

Different ways to trade stocks: retail trader edition

In addition to real share trading, traders also have other options to consider like trading derivative products of stocks, such as futures or options contracts and CFDs to take positions on stock prices without owning the actual shares. 

Derivative products allow exposure to stock markets without owning the underlying asset. In case of stock CFDs, traders can also use leverage, which means both their profits and losses can be magnified. 

Real stocks

Real stocks simply means that you are buying shares of an underlying company. You can do so by opening an account on a share-dealing platform.

Owning underlying stocks is suitable for both long-term investing and short-term trading. Some brokers offer fractional shares, which means that you can buy a fraction of a company’s share if the total price is too expensive for you. 

CFD trading

Contracts for difference (CFDs) allow traders to use margin to potentially maximise their funds into larger positions and speculate on share price movements without owning the underlying stock. Note that CFDs are leveraged products, which means both profits and losses can be magnified. Keep in mind that buying shares without leverage also carries risk.

How to trade stock CFDs

How does trading stocks work using CFDs? A CFD is a derivative product. A broker typically agrees to pay a trader the difference in the value of a security between an opening and closing price. Traders can open long positions, speculating that the price will rise, or short positions, speculating that the price will fall. 

You can sign up for an account with a CFD provider like Capital.com to speculate on company stock price fluctuations. Rather than requiring a specific stock trading account, you can trade stock CFDs along with CFDs on commodities, indices and forex in the same trading account.

CFD trading is considered a short-term approach. Traders open and close positions within time frames ranging from a day to a week, but this does not necessarily mean they have to be short-term. Less commonly, CFDs can be held for months at a time, but this incurs additional fees such as overnight fees due to the leverage borrowed.

To trade stock CFDs, follow these steps:

1.  Create a CFD trading account.
2. Choose the stocks you want to take positions on.
3. Use your trading strategy to identify potential trades.
4. Open your first trade and consider using risk management tools such as stop orders and limit orders as well as take-profit orders.  
5. Monitor your trade using technical and fundamental analysis tools. 
6. Close your position based on your trading strategy.

If you are looking to learn how to trade stock CFDs for beginners, you could start by opening a demo account on Capital.com so that you can get a feel for the process without putting your money at risk. 

Once you are ready to start trading with real money, open a live account and deposit the funds you want to trade with. 

Pros and cons of trading stock CFDs

Trading stocks using CFDs comes with several advantages. Unlike buying and selling stocks outright, which requires the share price to go up for you to make a profit, CFDs give you the opportunity to speculate on share prices in both directions. You can trade in both falling and rising markets due to the ability to short-sell CFD products. 

CFDs can therefore be used to hedge against existing portfolio holdings. For instance, if you hold a portfolio of shares in a particular sector but expect it to experience a short, sharp dip, you can use CFDs to short-sell your existing shares, hedging against this possibility. 

If your expectations are wrong, you have the added bonus of being able to offset any losses incurred with CFDs against the capital gains charged on the increase of your portfolio.

CFDs can be traded on margin. This means a trader only needs to put down a fraction of the value of their trade, borrowing the remaining capital from their broker. This allows for more accessibility and greater exposure. Note that CFDs are leveraged products, which means both profits and losses can be magnified.

The 5% margin offered by Capital.com means that you only need to deposit 5% of the value of the trade you want to open, and the rest is covered. For example, if you want to place a trade for $1,000 worth of CFDs, with a 5% margin you will only need $50 of initial capital to open the trade.

However, you should be aware that trading CFDs carries risks, as leverage can amplify the size of any loss if the stock price moves against your position, as well as maximising gains if the price moves in the same direction. It is important to do your own research and understand how leverage works before you start trading.

Why trade stock CFDs with Capital.com?

Advanced AI technology at its core: A personalised news feed provides users with unique content depending on their preferences. The neural network analyses in-app behaviour and suggests videos and articles that fit your trading strategy. 

Trading on margin: Thanks to margin trading, Capital.com provides you with the opportunity to trade stock CFDs and other top-traded commodities CFDs, even with a limited amount of funds in your account. Keep in mind that CFDs are leveraged products, which means both profits and losses can be magnified. 

Trading the difference: By trading stock CFDs, you don’t buy the underlying asset itself. You only speculate on the rise or fall of the stock price. A CFD trader can go short or long, and apply trading scenarios that align with their objectives. CFD trading is similar to traditional trading in terms of its associated strategies. However, CFD trading is short term in nature, due to overnight charges.

All-round trading analysis: The browser-based platform allows traders to shape their own market analysis and make forecasts with sleek technical indicators. Capital.com provides live market updates and various chart formats, available on desktop, iOS and Android.

Sign up at Capital.com and use our web platform or download the trading app to trade CFDs on the go. It will take you just three minutes to get started and access the world’s most traded markets.

Stock market trading hours

What hours of the day can you trade stocks? Stock trading hours vary depending on the exchange a stock is listed on. 

Each stock market has set trading hours. For instance, if you want to trade shares in Barclays (BARC) on the London Stock Exchange (LSE) you could do so between 08:15 to 16:30 (GMT) Monday to Friday. The LSE does not close for lunch, but most Asian stock markets do. 

Most stock exchanges operate Monday to Friday, however, Middle Eastern stock exchanges tend to run Sunday to Thursday, as Friday and Saturday are weekend days in the region.

During out of hours trading it is possible to place an order for a trade, but as market makers do not participate, it requires a large amount of liquidity for it to be executed. Here is a table of the opening times of some of the world’s biggest stock exchanges.

At Capital.com, stock CFDs are available for trading in line with the trading hours of the underlying stock on a stock exchange where it’s listed. Exceptions occur for stocks with extended trading hours.

You can always check the trading hours for the stock you want to trade on its market page at our website or on the platform. For example, Tesla CFDs are traded Monday to Thursday 08:10 - 00:00, and Friday 08:10 - 21:00 (UTC).

When is the best time of day to trade stocks? Often it is in the opening and closing stock market trading hours, as traders react to overnight news when markets open and settle their day trades towards the close, resulting in increased liquidity and price volatility. Remember that high volatility increases the risk associated with trading. 

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