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Online Trading Guide To The Stock Markets

NYSE Traders buying and selling US stocksThis article will provide you with a step-by-step guide on how you can acquire knowledge in the basics of trading and investing in stocks and shares online. Before we begin, you must first realize that successful stock trading requires a great amount of skill and a strong determination to "win". Knowing this, it is of utmost importance that trading or investing be approached with a similar respect and intestinal fortitude as a medical student studying to become a top surgeon. To succeed in this business, it will require your utmost dedication, time and most of all your burning desire to be a successful trader/investor.

What Are Stocks & How Do You Trade Them?

This article on Why Companies issue Stock & Why people Invest In Them will give you a basic idea on the purpose of stocks and where you can trade them online. The stock markets in the United States are undoubtedly one of the best in the world in terms of liquidity and regulatory governance. The US markets also give the astute trader some very outstanding potential for quick and substantial profits. Read Major Stock Markets and Major Stock Indices for a basic summary on what every investor should know about the US markets. Once you are more experienced trading the markets, you can delve deeper into them by studying Larry Harris' excellent book on the Microstructure of Markets called Trading and Exchanges. The content of this book reads like a textbook out of an MBA course but it is outstanding in its level of practical detail and real-life insight into today's modern capital markets.

Fundamental Investing or Technical Trading?

Most traders/investors settle on which approach they are more comfortable with quite early on in their investing/trading career. Fundamental investing essentially concentrates on the company's core business and how it is performing. More importantly, fundamental investing looks at what are the company's prospects going forward. The understanding of the concepts of "forward looking" or "forward guidance" is key to stock trading because the value of a stock is based on how the company is going to perform in the future and not on what it has done in the past. As you can see, fundamental analysis can be quite subjective.

Trading using technical analysis, on the other hand, seeks to take the subjectivity of "forward guidance" out of the equation by solely concentrating on the price action and volume of stock traded. The basis is that all material information regarding a company is factored into the stock price. Experienced technical analysts can often detect the buying or selling by informed players or the "smart money", solely by analyzing the price action. A novice trader should however be forewarned as the Technical Analysis arena of late has gotten very packed with all sorts of analytical tools which often leads to "analysis paralysis". It is therefore critical for a new investor to seek to be an informed technical investor rather than jumping at the latest technical analysis mumbo-jumbo. The article "Does Technical Analysis Really Work?" will give you a better insight.

Many successful traders adopt a combination of fundamental and technical analysis to guide their trading decisions. The understanding of how fundamental news, when released to the public, affects the stock price technically is priceless. The old saying of "Buy the rumor and sell the news" is very apt to this discussion as an experienced technical trader can detect the buying or selling that may be based on whispers or rumblings in the market, which he may or may not have heard or be privy to. He can later close out his position for a profit when the material fundamental news is released and the stock price jumps or tanks as a result.

Some good reads for fundamental analysis are the classics Beating The Street by market legend Peter Lynch and The Warren Buffett Way by Robert Hagstrom. As for technical analysis books, two of the best include Trading For A Living by Dr. Alexander Elder and Martin Pring's Introduction to Technical Analysis.

Swing or Day Trading Stocks?

The next factor to consider is the time-frame that you are going to hold-on to a stock position. Some people prefer quick gains for a smaller profit while others hold on longer for greater returns. Those who open and close a position within the same trading day are often referred to as daytraders. Daytraders try to make a few cents profit on each position but in order to make a decent profit worth their while, they have to take on a larger size position than a swing trader would normally have to. Daytraders and traders from proprietary trading shops like SwiftTrade and Bright Trading, normally have access to higher intraday margin for intraday trades. What this means is that these daytraders are given enormous leverage to take on huge intraday positions. This type of trading is very speculative and it very much depends on real-time access to fast news, fast market order-entry system and a keen ear to the whispers on the trading floor.

Swing Traders, on the other hand, usually employ fundamental and technical methods to time their entries. While fundamentals-based traders buy when a stock is trading below perceived valuations and sell when the valuations get too rich, technical traders, on the other hand, look for technical setups based on chart price patterns and volume data. Swing traders, in general, have a potential for a much higher gain than daytraders but they are also putting their portfolio at greater risk due to overnight geopolitical and other market moving events. Here are some tips on Choosing a Stock for Swing Trading and a discussion on Stop-Loss Placement.

Continue to Part 2 - How To Trade & Invest in Stocks and Shares.

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