What Is Stock Trading?

Stock trading involves buying and selling shares in public companies — called stocks — to try to make money on price changes.

Stock Trading: An Overview

Stock traders watch the short-term price changes of stocks closely, and then they try to buy low and sell high. This short-term approach sets stock traders apart from traditional stock market investors, who are in it for the long haul.

Trading stocks can bring quick gains for those who time the market correctly. But it also carries the danger of big losses. A single company’s fortunes can rise more quickly than the market, but they can just as easily fall.

“Trading isn’t for the faint of heart,” says Nathaniel Moore, a certified financial planner at AGAPE Planning Partners in Fresno, California.

That means you may not want to risk trading with money you can’t afford to lose. Most investors are best served by putting their portfolio in long-term, well-diversified investments.

But if you have extra cash and you want to want to learn how to start trading, online brokerages have made it possible to trade stocks quickly from your computer or through mobile apps.

Types of stock trading

There are two types of stock trading: active trading and day trading.

Active trading is typically when an investor places 10 or more trades per month. They often use strategies that rely heavily on timing the market. They try to take advantage of short-term events (at the company or in the market) to turn a short-term profit.

Day trading means playing hot potato with stocks — buying and selling the same stock in a single trading day. Day traders care little about the inner workings of the businesses. They try to make a few bucks in the next few minutes, hours or days based on daily price swings.

Stock Trading Risks

It is important to note that stock trading involves risks, and investors should be prepared to lose money. Stock prices are subject to fluctuations caused by various market factors, including macroeconomic conditions, geopolitics, and global events. This is known as market risk or systematic risk because it affects the entire stock market.

Individual stocks also can lose money due to sector- or company-specific news and events, such as an earnings miss vs. analysts’forecasts or impending bankruptcy. As such, this is called specific risk (or unsystematic risk). This can result in significant losses if the market moves against a trader’s position.

To manage these risks, investors should conduct thorough research and analysis, develop a well-defined trading plan, set risk management measures such as stop-loss orders, and stay disciplined in executing their strategy. Additionally, when you trade stocks, you should avoid investing more money than you can afford to lose and consider diversifying your portfolio to reduce overall risk.