- 1 Technical Analysis
- 2 Fundamental Analysis
- 3 Financial Instruments
- 4 Money Management
- 5 Strategies
- 6 Trading Psychology
- 7 What is trading?
- 8 What are stock market
- 9 What is a broker dealer
- 10 Types of Trading in Stock Market
- 11 The stock exchange and stock indices
- 12 What are Indicators in the Stock Market?
- 13 Leading indicators in the stock market:
What is trading?
Trading is a profession that involves studying financial markets through various forms of analysis, such as technical and fundamental analysis, in order to invest in different financial instruments with the goal of generating a profit. Traders, also known as market traders, can work independently, within an investment fund, bank or other financial institution. They are classified as scalpers, day traders, or swing traders based on the duration of their trades and strategies, whether they are intraday, intra-weekly, or intra-monthly. In contrast, investors focus on long-term trades. It is important to note that trading is not a game of chance, but rather a form of investing that relies heavily on mathematical and statistical techniques. With dedication and practice, one can make a living from this profession. Remember, patience and practice are key to success.
What are stock market
The stock market is a marketplace for securities, where buyers and sellers negotiate the trading of financial instruments, such as stocks, bonds, contracts, and currencies. Stock exchanges vary in size, from smaller exchanges like the Latin American stock exchanges to larger ones such as the New York Stock Exchange, London Stock Exchange, Shanghai Stock Exchange, and Tokyo Stock Exchange. In this application, we will primarily use the New York Stock Exchange and Nasdaq for examples, but the knowledge gained is applicable to any stock exchange globally, including the Hong Kong Stock Exchange, Toronto Stock Exchange, Bombay Stock Exchange, Mexico Stock Exchange, Buenos Aires Stock Exchange, Colombia Stock Exchange, among others.
Stock markets play a vital role in the economy of a country and the global economy as a whole. They are regulated by specialized bodies, such as the Securities and Exchange Commission (SEC) in the case of the New York Stock Exchange, to protect investors, control brokers, prevent fraud and manipulation, regulate the issuance of securities and ensure transparency in operations. Additionally, international standards are set by the International Organisation of Securities Commissions (IOSCO) to ensure consistency and fairness across all stock markets globally.
What is a broker dealer
A broker-dealer is a financial intermediary that connects traders with companies offering stocks on the market. Traders conduct their buying and selling transactions through the broker, who charges a commission for this service. In addition to facilitating trades, broker-dealers also perform due diligence on traders, such as verifying the source of funds and ensuring that the trader has a basic understanding of the stock market and trading. It is important for traders to understand the risks involved in trading and to practice on simulation platforms with fake money before opening a real account with a broker-dealer.
Traders open an account with a broker-dealer and are provided with a trading platform, which can be a software, app, or website, to monitor stock prices and execute buy and sell orders. Nowadays, internet access is required to trade on the stock market, although some brokers still offer phone-based trading. Choosing the right broker-dealer is important, as they vary in terms of commissions, availability in different countries, and types of investments offered. We recommend TD Ameritrade from the US, as they have a free simulation platform with fake money that traders can use to practice their skills before opening a real account.
Types of Trading in Stock Market
Stock market trading can be divided into several different styles, each with its own characteristics and risks. These include:
Scalping: This style of trading involves opening and closing trades very quickly, with trades lasting only a few seconds or minutes. Scalpers usually open several trades in one trading session and aim to make quick profits. However, this technique is not suitable for every trader, as it requires a high level of knowledge, concentration, and a fast trading platform. Scalping is generally done during market openings, as these are the most volatile times. Due to the high-frequency trading of large institutions, scalping can be risky and difficult, requiring a lot of practice and a well-developed strategy.
Day trading: This style of trading involves looking for trades within trends that originate within the day, with trades lasting several minutes or hours, but always closing on the same day they were started. Day trading requires a good mental control, patience, and constant alertness. It is one of the most popular trading styles, but it is not easy and requires a lot of practice and knowledge. Brokers may not allow day trading if a trader does not demonstrate knowledge due to the high risk involved.
Swing trading: This style of trading involves holding trades for days, weeks, or even months. Swing traders take a trend and do not close it until they see signs that it is ending or the trend is running out of steam. Swing trading aims to capture a part of a larger trend of a listed asset. It uses 15 minute, 1 hour, daily or weekly charts and looks for explosive price movements.
Position trading: Also known as “Position Trading” is when trades are open for a longer period of time, from weeks to months, or even years. Position traders focus on the long-term fundamentals of a company and its industry, and hold positions until the underlying fundamentals change. They use fundamental and technical analysis to identify long-term trends and opportunities. This type of trading is less stressful than intraday trading, and it requires less attention and monitoring.
In summary, each type of trading requires a different set of skills, knowledge, and time commitment. It’s important to understand the risks and rewards of each style and choose the one that best suits your personality, risk tolerance, and financial goals.
The stock exchange and stock indices
The New York Stock Exchange (NYSE) and the Nasdaq are two of the most important stock exchanges in the United States, handling a wide variety of stocks. While they share similarities, they also have significant differences. One of the main differences is their physical location. The NYSE is based in a physical location on Wall Street in New York City, while the Nasdaq operates entirely online. The stocks listed on the Nasdaq are considered to be more volatile and tend to move quickly, while those listed on the NYSE are considered to be more established and include companies such as Ford and General Electric.
Trading on the NYSE or Nasdaq is possible through most brokerage firms and can be done through the same virtual platform. If you wish to trade on other exchanges, such as Asian or Latin American exchanges, you will need to find a broker that allows you to do so. It is important to note that the principles of trading apply across all exchanges, regardless of location.
What are Indicators in the Stock Market?
A stock market indicator is a numerical representation that reflects the performance of a specific group of assets, such as stocks, that share common characteristics, such as belonging to the same market or industry, or having similar market capitalization. Indices are composed of a collection of financial instruments and are used to monitor the performance and behavior of the stock market. They provide a summary of how the companies that are part of the index are performing. All stock markets have their own indices.
One of the oldest stock market indices is the Dow Jones Transportation Average, which was created on July 3, 1884 by Charles Dow, the founder of the Wall Street Journal. It currently comprises the 30 most significant industrial companies listed on the New York Stock Exchange (NYSE). Indices such as the Dow Jones Industrial Average (DJIA), S&P 500 and Nasdaq Composite are also widely followed indicators of the stock market performance.
Leading indicators in the stock market:
The stock market is a key indicator of a country’s economic health, and there are several leading indicators that are closely watched by investors and analysts.
In the United States, the Dow Jones Industrial Average, also known as the Dow, is one of the most widely-followed indices. It is made up of 30 major US companies and is considered a barometer of the overall health of the US economy. Another important index in the US is the S&P 500, which is composed of the 500 largest companies listed on the NYSE and Nasdaq. The Nasdaq 100 is also closely watched, made up of the 100 largest non-financial companies on the Nasdaq.
In Europe, the Eurostoxx 50 is the main stock market index, composed of the 50 most important companies in the Eurozone. The DAX 30 in Germany and FTSE 100 in London are also closely watched, representing the 30 and 100 most important companies on their respective exchanges. The CAC 40 in France and IBEX 35 in Spain are also key indicators of the European economy.
In Asia, the Nikkei 225 in Japan, KOSPI in South Korea, and the BSE Sensex 30 and S&P CNX Nifty in India are important indices to watch. The Hang Seng in Hong Kong and SSE 50 and CSI 300 in China also provide insight into the Asian economy.
In Latin America, the IBOVESPA in Brazil, MERVAL in Argentina, Lima General in Peru, IPSA in Chile, IPC in Mexico, and IBC in Venezuela are important indicators of the economic health of the region.
Now that you have a basic understanding of trading, we will start looking at the types of analysis and strategies. As you learn, you will notice which trading style suits you, which one you like, which one you don't like, etc. In this way, you will define your investor profile.