Did you know that the global stock market capitalisation rose to a record $95 trillion in November 2020? This was despite the historic crash in March of the same year. The growth has continued since then, with the total market cap estimated at $122 trillion by November 2021. But it is one of many markets that has suffered from ongoing volatility – it had dropped to $89.92trillion by the end of September this year.
Stock markets are seen as an exciting arena by many, given the constant changes in share prices. This volatility brings multiple trading opportunities. Thinking of trading stocks such as Meta, Amazon, Tesla, Pfizer or Twitter? Here’s a simple introduction to get you started.
Did you know?
In 2022, the fastest growing stock market sectors have been Energy, Healthcare, and Technology.
Why Trade Stocks?
Flexibility
Stock trading offers the flexibility of trading with small or big lots. This lets you decide the funds you want to allocate to the equity portion of your trading portfolio.
Diversification
Adding equities to your portfolio is a good diversification method since the stock markets move independently of most other asset classes.
Liquidity
The stock markets are known to be liquid markets, especially if traded on major exchanges. This means you’ll usually be able to find someone to accept your trade.
Dividends
Some stocks also pay dividends. So, if you own the shares of a dividend-paying company on the ex-div date, you might even earn some passive income.
Did you know?
Common stocks give the owner the right to vote for company decisions, but most shareholders trust the management and rarely exercise this right. Stocks without voting rights are called preferred stocks. The owners of such stocks are the first to receive dividends, taking precedence over claims to dividends on common stocks. Any listed company could offer one or both kinds of stocks.
The Four Types of Stocks Every Trader Needs to Know About
The broad categories of shares on a stock market are:
1. Growth Stocks
These stocks are purchased with long-term growth in mind. These are shares of companies that are expected to grow at a rate that is higher than the market average and, hence, generate positive cash flows for the shareholder.
2. Dividend Stocks
These are stocks that offer regular dividend payouts to shareholders, which is a specific percentage of the earnings of the company.
3. New Issues
When companies list themselves on a stock exchange, they hold an Initial Public Offering (IPO). They sell a portion of the total shares in the company to the public via the IPO to generate funds for the business. This may be a good time to buy the stock, since it tends to be cheaper. But investing in IPOs requires higher due diligence to gauge the performance parametres and judge the growth potential of the business.
4. Defensive Stocks
These are usually stocks belonging to companies in the consumer staples sector. Being non-cyclical, they are not highly impacted even by strong economic trends. They do not see very dramatic fluctuations and rise slowly. So, if you’re looking for a long-term investment, defensive stocks may be a good choice.
Did you know?
The most expensive stock in the world is Warren Buffet’s company, Berkshire Hathaway Inc. It has never had a stock split and has given out dividends only once since it was listed!
What Moves the Stock Markets?
Every market is influenced by demand and supply, and so is the stock market. But multiple other factors also impact stock prices.
Company Performance and News
News releases, such as the announcement of a dividend, a new product launch or recall of a product, and landing a big contract, can all impact the share price. In addition, companies release their financial numbers, such as earnings, revenue and EBITDA, each quarter. If the numbers beat market expectations, the share price tends to rise, and vice versa.
Sector Performance
You might have noticed that most tech stocks rose during the pandemic, or many energy stocks stage an uptrend with a rise in oil prices. This is because the market conditions in a sector will impact all companies operating in that segment. Of course, there can also be times when one stock benefits from bad news about a competitor company.
Macro-Economic Trends
The state of a nation’s economy plays in key role in a company’s performance because it influences the consumer’s purchasing power and sentiment. Major economic news that equity traders should keep their eye on are:
1. Interest rate decisions by the country’s central bank
2. Inflation and deflation
3. GDP numbers
4. Unemployment rate
5. Trade wars
6. Natural or man-made disasters.
Market Sentiment
Have you heard the terms “bull market” and “bear market”? They are associated with overall investor sentiment. When investors are optimistic about a particular stock or company, its share price tends to rise. So, the general direction of the stock market depends to a large degree on the overall market sentiment.
Trading stocks requires making decisions based on the cumulative effects of various factors. This is where tools for technical and fundamental analysis are incredibly useful.
Stock Trading Tips Before You Dive In
Learn Fundamental and Technical Analysis
Popular trading platforms like ADSS’s MT4 platform offer powerful analytic tools and technical indicators. They are easy to use and understand. An economic calendar is a good way to keep track of economic events.
Use Risk Management Measures
Risk management is indispensable in any sort of trading or investing. Stop loss is one effective risk management measure. Here, you set a pre-determined price level at which your position will get automatically closed. This helps limit losses if the market suddenly moves against your position. Take profit works in the same way, closing a position to lock in profits before the trend reverses.
Learn All You Can
Successful traders say that they continue learning throughout their trading journey. So, check for educational resources, consider the opportunities of copy trading, connect with experienced traders and continue to refine your trading strategies. You can also keep an eye on market moves with the ADSS economic calendar, which you can find at the link above.
Key Takeaways
1. The volatility of the stock markets brings trading opportunities, but also brings risks.
2. There are different types of stocks. Choose stocks based on your trading goals and style.
3. Multiple factors influence stock prices. Familiarise yourself with technical and fundamental analysis tools.
4. Due diligence and risk management is key to succeed in stock trading.
Open a live account with ADSS and gain access to global equities and other assets, all from a single place.
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