How Does Stock Trading Work?
Day after day, the price carousel turns on the international stock exchanges. The latest economic data are priced into prices, quarterly reports from companies, political developments, devastating environmental disasters – there is never a standstill, there is always movement.
Large investors are turning over billions of dollars, small investors are trying to cherry-pick the market, while mutual funds and pension funds are looking for a safe haven for their money. For all the appeal of trading stocks, it must never be forgotten that money is not just won; losses are also part of the daily routine.
More than 99 percent of all market participants lose money when trading stocks
Anyone who wants to trade stocks in order to increase their money by making smart investment decisions should be aware that more than 99 percent of all market participants make losses – and a large proportion of the losers are not uneducated dilettantes who don’t know what they are doing. Often they are graduated medical doctors, lawyers, judges, mathematicians, physicists and economists who are not able to achieve a stable positive performance over a long period of time.
- If you want to win on the stock market, you do not only need a large portion of luck, it is much more important to have the right trading strategy with which it has been possible to demonstrably generate profits over a longer period of time in the past.
- Furthermore, it requires strict discipline to stick to the strategy when going through a losing phase.
- And no matter how successful a strategy may be over a long period of time, losing phases are always part of it.
- To survive them, the strategy must have well thought-out money and risk management rules that protect against a total loss.
Trading as an investor with a stock portfolio
An investor holds on to stock positions for at least twelve months, although longer periods are not uncommon. He has no interest in the short-term fluctuations of the market; instead, his focus is on the big picture. As a rule, many successful investors primarily use fundamental analysis to make their investment decisions. Current data from the economy is examined, figures for individual companies are evaluated, core factors are analyzed, industries and sectors are examined, and forecasts are made. Of particular interest to an investor is the future growth potential of a company in relation to its current stock market valuation. The basic idea of fundamental analysis is that the real value of a company will sooner or later be reflected in its share prices. Therefore, the investor tries to find companies that are fundamentally undervalued and are trading on the stock market at, say, $20 per share, even though their intrinsic value is $30. Sooner or later, according to the basic idea of fundamental analysis, market efficiency will eliminate the undervaluation, which would have given the investor a profit of 10 dollars per share.
Trading stocks as a trader
A trader usually has extremely limited interest in the fundamental data of a stock. He doesn’t care whether the company produces televisions, electronic components, fertilizer or lawn mowers. He usually holds positions for only a few days or weeks and tries to make profits from short-term movements. A trader’s primary forecasting tool is technical analysis. Charts graphically represent the development of prices over a defined period of time and make it possible to find patterns that can be traded profitably. Market indicators act as a further aid, providing information on whether the market is currently in a trend movement or in a consolidation, whether it is overbought or oversold. If you are an active trader who trades stocks, you need a cheap broker that executes orders quickly and without delay. Since traditional brokers cannot provide this, online brokers are usually the only way for traders to trade stocks reasonably.
