Learn the basics of trading stocks, the risks involved and how to get started.
How to trade Stocks?
Dealing desks at investment banks and brokers offer clients with services to trade stocks over the counter. Broker-dealers are known as "sell-side" by selling services to clients who range from retail and high net worth to corporate and institutional – the buyers of this service would be typically called "buy-side".
All broker-dealers execute trades on behalf of clients but some offer advisory and discretionary management services. Execution-only brokers, however, can only implement and process trades for clients but not offer advice on income and wealth generation.
Execution-only is most popular amongst corporate, high net worth and institutional clients as they have already undertaken due diligence and research. Retail clients also have access to execution-only brokers by trading electronically or by phone.
Risks of trading Stocks
Like all investment products, stocks carry plenty of risks. Stocks unlike bonds are not guaranteed to return anything to the investor while bond coupon payments are. That means that although there's possibility of high returns with stocks, there is a possibility of losing money.
Stock market volatility with frequent price swings mean you can lose substantial value in a short period. If you are trading on margin, this could mean margin calls and the forced liquidation of stocks at significant losses. Trading stocks also costs money in the form of brokerage commissions and account management fees too.
Furthermore, since common stock represents ownership of a business, stockholders are the last to get paid, like all other owners. It's also wise to diversify your portfolio by investing in several companies across sectors so that losses in one stock offset gains in another. For most investors, a combination of stocks and bonds is the best situation.
By diversifying your investments and taking positions in both stocks and bonds, you protect yourself from substantial losses while leaving some opportunity for above-average returns from your stocks investments. At the same time, by implementing an equity option strategy, you're hedging yourself from unwarranted downside price movements by executing a trade at a later date for a predetermined price you agree with your broker.
With an investment product, it's sensible to employ an investment strategy that is right for you. One may consider the following factors when developing an investment strategy: a budget or allowance on how much money he/she can afford to trade, research and analysis and selecting a broker-dealer who fits his/her requirements. Staying on top of financial news and social media will further help keep informed.
Risk-profiling stocks by placing your own value is a sensible approach to investing in stocks – in that way, you've carried out the necessary due diligence in understanding your upside and downside risks. That's effective stock-picking as you're using a systematic form of analysis to conclude that a particular stock will make a good investment before adding to your portfolio. Remember though, stock-picking is guesswork at best as there is never a fool proof way to determine what a stock's price will do in the future. However, it's always better to do your homework on a stock rather than impulsively leaving your finger on the buy trigger.
At the same time, keep in mind an investment timeframe or horizon for your positions – either play for the long haul and pick stocks you believe will return attractive returns over 12 months or play short haul by trading a handful of companies on an intra-day basis. At the same time, emotional attachment to a stock can be dangerous as you may not be able to cut your losses at the right time. By keeping a diary of your daily trades and implementing risk management tools such as price-alerts, stop losses and stop orders which help to reduce losses, you can significantly reduce the unwanted stress that come with investing in financial markets.
Define your investment universe
When defining your investment universe, a sound approach is to categorically segment your selection of stocks to trade. You can trade US or European stocks from large caps to mid-caps or have a heavy emerging market bias. You may wish to trade by sector, selecting a number of companies within one industry that you've been closely monitoring. That's a sound approach if you're trading on fundamentals as the events and news surrounding the country or sector can influence movements in prices in your favour.
With the advent of social media in recent years, online trading communities have popped up to help traders profit from open-source financial information supplied by network members. Social trading as it is commonly known, allows you to view live feeds of trading activity on a network while you follow or shadow a trader that interests you. Through social trading, you're able to replicate and even enhance the successful and proven strategies of fellow members in the community, ensuring that you are maximising your gains and mitigating your losses.
Why trade Stocks with Saxo Capital Markets?
- Access 19,000 global Stocks across 36 exchanges
- Active Trader price plans available, with commission fees from £5*
- Ability to hold multiple currency sub accounts
- Free Stock transfers**
* To qualify for the Active Trader Pricing Plan, you need to execute at least 100 trades per calendar month on Stocks, ETFs and Single Stock CFDs.
**Transfer fees from previous suppliers may still apply.
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