How does Online trading Works?

The are legends that say that Joseph Kennedy sold all the stock he had the day before ‘Black Thursday’ which signed the beginning of the catastrophic 1929 stock market crash. In that year lots of investors suffered huge losses in the market crash which than became one of the symbols of the Great Depression.

If this is part of the history of humanity a question is legit: what made Kennedy sell? Again the legend tell us that he had a stock tip from a shoeshine boy. Well, we don’t know if this is true but what it is true that in 1920s the stock market was only reachable by the rich and powerful. Kennedy thought that if a shoeshine boy could actually own stock than something must have gone very bad. Things have changed significantly since than and now lots of ‘common’ people do actually own stock. And even if they do not own stock they trade on financial assets via online brokers with CFDs, Forex, Spread Betting and so on.

So if you have a computer, an internet connection and between £50 and £200 in your bank you can start trading online and even potentially making money simply by following some famous Social Traders. The barriers to entry are down: you don’t have to have a personal broker or a huge fortune to invest as the market has become much more accessible. In this article we will take a deeper look at what are the different types of online trading accounts and also how to pick an online brokerage and start making trades immediately without the risk of being scammed.

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What are Stocks and Markets?

Before we jump to explore the world of online trading, let’s take a quick look at the basics of the stock market. Just so we are all on the same line:

What is a share?

A share of a stock is basically a small piece of a corporation. People who are buying stock are basically investing in the future of a company and are called shareholders. As long as they keep their shares they will be part of the fortune or misfortune of a company. The cost of a share it will change daily and it depends from the economic conditions, the financial performance of the company and also the investors’ attitudes vs the company strategy, management and so on. You can only buy shares of a company that has offers its stock for public sale.

What is an IPO (initial public offering)?

The first time a company will offer its stock for public sale it is called an initial public offering or IPO. In slang it is also known as ‘a company gone public’.

What are the dividends?

If a company will make a profit it can share that money with its stockholders by issuing a dividend. The company however can also decide to re-invest the profit into the company by making improvements to the business or grow the employee base. Stocks that do issue frequent dividends are normally called income stocks while stocks in companies that tend to reinvest their profits are known as growth stocks.

How can brokers buy and sell stocks?

online trading 4 - How Online Trading Works
Brokers are allow to buy or sell stocks through an exchange and in order to do so they are charging a commission. But who are the brokers? Brokers are simply people that are licensed to trade stocks through the exchange. A broker doesn’t have to be physically on the trading floor as they can also do trades by phone or electronically.

What is a stock exchange?

An exchange is simply a warehouse where people do buy and sell stocks. Either a person or a computer has to match each buy order to a sell order or the other way around. Some stock exchange works similarly to auctions on an actual trading floor while others match buyers to sellers electronically. Some famous stock Exchanges are:

  • The New York Stock Exchange – where trades stocks auction-style on a trading floor
  • The NASDAQ – which is an electronic stock exchange
  • The Tokyo Stock Exchange – the Japanese stock exchange

Similarly to all businesses the stock market do operates with supply/demand. When you buy a stock you will hope that some other trader will want to own a share of that company as well. If the stock’s popularity do increase than traders will compete and the sale price will increase. Normally a rising share price is the result of a company increasing in value and potential that are also known as its fundamentals. In reality tough we know that stock prices are changing for lots of different reasons which sometimes can be very difficult to predict.

What is an online broker?

When you buy or sell stocks via internet you are using an online broker that in short replace the human broker. You would still use your capital but the main difference is that instead of talking and planning with someone your investments, you decide which stocks to buy and sell and you action the trades yourself. Obviously some online brokerages do offer advice from live brokers or they provide you with third parties information to help you in your trade. Not all the companies tough offer that service so if you do require a broker to help you with your trades you will need to pick a firm that do guarantee this service.

So in short stock trading which was once only available in Wall Street is now easy and affordable to everyone thanks to the online brokerages. Today trades are executed in a fraction of a second with online trading platforms.

How to choose which stock to buy?

There are two main strategies regarding how to choose stocks to buy. The first one which is known as fundamental analysis is based on company’s financial reports and public statements which give indications of the health of the business. By looking at balance sheets, income statements and quarterly earnings traders do get the information they need to understand how healthy is that business. Nowadays all those information are widely available online so this makes things easier.

The second way of investing is known as technical analysis. Traders who follow this theory believe that swings in stock prices patters do follow common patters that can be learned and predicted. The technical analysis is not accepted as the fundamental analysis but the majority of traders normally use a combination of the two strategies when deciding which stock to buy. Normally it is a much safer strategy to pick a company with strong fundamentals and than occasionally trade on a technical indicator rather than relying only on technical indicators.

It is important that before you start to buy or sell any stocks that you have done your homework. You can use financial websites like Yahoo! Finance and check how solid is the company and the trend. Normally on stock sites you will also get ratings from professional analysts on given stocks: they do indicate a trader to buy, hold or sell a stock.

How to choose an online broker?

As mentioned before to be able to start trading online you need to pick an online broker. It is important to choose a brokerage partner carefully as in the long run this will directly affect your bottom line. Similarly to when looking for the company you would need to do some homework and understand the online broker pricing, the services that they do offer, the added values (ie. training and education) their reputation and so on. TopTradingPlatforms.co.uk helps you by comparing all the most trusted brokers criteria. Generally it is important to consider the costs of each service the brokerage provides and also the level of support that they are giving. It is important also to look at the trading platforms they are offering and the quality of those.

As a beginning trader it might be a good idea to start with a broker that can provide good educational support and that do not charge for training material. Also it would be an added value if you can open a demo account so that you can familiarise with their tools without risking any capital. As your skills will improve you might want to make sure that your broker does provide you with the advanced features you will need to go to the next level.

Thanks to the competition you can use lots of discount online broker services. Those services will allow you to buy and sell not only stocks but also options, mutual funds and so on. You don’t need a large money to start as you can start trading for as little as £100 thanks to the leverage.

How to practice your trading skills?

To learn how to trade you need education. You will need to read news and financial websites consistently and listen to podcasts and investing courses. You can also join a local investment club where you will be able to confront your theories with more experienced traders. Reading is surely important but you need to do some field experience too: you can practise without risk with an online stock simulator and demo accounts to work on your strategies and learn from your mistakes without risking capital.

What are the tips for beginning investors?

Trading on stock might be difficult for beginning traders but with the right approach you and a gradual strategy you can expect to see very good returns. Here are few tips to help you guide you in the process:

Do not invest money you cannot afford to lose. It is important to go step by step and to start slow. One you have made gains from 1 or 2 stocks than you can start reinvesting into other stocks and funds.  

Diversify your investments. Sometimes you might think that stocks are easy money but they are unreliable source of income. You need to spread the risks so that potential losses in a given sector might be cancelled out by gains in another.

Don’t trade if you don’t have time to research. You need to consider stock trading like a part-time job. You need to practise or your skills will suffer: you need to have time to read the latest news and financial reports on the companies you are involved with. If you do not have time is better to invest in index fund or handover the investment to a qualified professional.

Make a plan. Emotions and panic are the enemy of stock trading. Before you buy a stock make a plan and determine in what circumstances you might sell it. For example if you decide that you won’t risk more than 20% of your investment than you have to stick with it. Scheduling limit orders is important as you need to take the emotion out of your finances. Have a plan and stick with the plan.

Don’t buy high. You might be tempted to follow a stock trading upwards at an extreme pace but you need to be careful. Buying high will have huge risks and you might just need to wait for an opportunity to get a lower entry point.

Don’t give in to fear. Most beginners stock traders start their day with the fear of losing the money invested. Even if you see things going against you don’t panic as stock trading is a long-term investment and it does require patience and consistency.