How to become a stock trader in the stock market

What does a stock trader do?

A stock trader buys and sells company shares via a stock exchange or broker, and can be either an individual or a company. When you trade shares, you’re betting on the price movements of the underlying stock, eg Diageo. To specialise in doing this regularly, either professionally or personally, is to be a stock trader.

Different types of stock trading

The different types of stock trading are characterised by the timeframe, techniques and tools used.

Day trading

This is a type of stock trading in which you’ll open and close positions on shares over the space of hours or minutes, rather than over the long term. Day traders aim to make a profit on short-term fluctuations and volatility in the shares market and to close out their trades by the end of the day – hence the name. This is also sometimes known as intraday trading.

Swing trading

A slightly longer-term approach, swing trading is the practice of speculating on shares over the space of a few days or even a couple of weeks, rather than the hours-long style of day traders.

While short-term traders look at small movements in the market, swing traders are somewhere in between – they need to understand the bigger trends that affect stock pricing, but also the daily fluctuations that will sometimes give way to bigger market moves, which swing traders aim to capitalise on.

Position trading

The most long-term of all the trading styles, position traders will hold positions open on stocks for months at a time. For that reason, this is the most likely style of trading to also garner interest from investors (who buy shares outright, instead of only speculating on them).

Position traders look for big, overarching trends and be plugged into macroeconomic events, instead of short-term volatility. When they buy or sell, it’ll be after extensive market research and at least a few weeks of keeping positions open in order to benefit from the groundswell momentum of the more major share price movements.

Active trading

Active trading is a broad, umbrella term for any shorter-term form of trading. Instead of going long or purchasing stock and then keeping them in your portfolio for the foreseeable future, as an active trader you’ll sell soon after you buy. In this way, it’s the opposite of passive investing and buy-and-hold investing.

Fundamental trading

While timeframe affects what kind of stock trader you are, so do the techniques you use to pick shares. Fundamental traders make use of context – such as bigger market events, company news, macroeconomic headlines and more – to determine what stock to trade or invest in.

This is called fundamental analysis because it takes into account the ‘fundamentals’ of the marketplace as decision-making factors, rather than particulars of the share price itself.

Technical trading

Another form of market study is called technical analysis, which makes use of charting and technical indicators to help you determine specifics about the stock’s price before deciding to open a shares position.

Buy-and-hold trading and investing

Buy-and-hold isn’t just a timeframe, it’s a strategy. Position traders and others into longer-term thinking will purchase or go long on a company’s shares and then simply hold onto them, riding out any and all trends over years at a time.

When it’s used by investors, this technique is also called ‘passive investing’. You can use the buy-and-hold strategy if you have a share dealing account with us.

Discover the top 10 indicators every trader should know

How to trade or invest in stocks with us

1. Decide whether you want to trade or invest
2. Learn more about how to become a stock trader or investor
3. Create an account or practise on a free demo
4. Set your position size and manage your risk
5. Open and monitor your position

With us, you can take trade or invest in shares. If you want to buy and hold your position, you might want to try investing with our share dealing platform. When investing, you’ll put down the full value of the shares upfront and aim to sell them when their value has increased. Your risk is limited – to an extent – as share prices can never fall below zero.

If you’d rather speculate on share price fluctuations over the short to medium term, then you could try either spread betting or CFD trading.

Both spread bets and CFDs are leveraged, which means you’ll put down an upfront deposit (called margin) to open a larger position, with your broker essentially loaning you the rest. This means you need less capital upfront to trade, as the margin is only a fraction of the trade’s full value.

It also makes it riskier than investing, as both profits and losses are calculated on the full position size, not your margin, so both could outweigh your upfront payment significantly. For this reason, a good risk management strategy is key.

What moves share prices?

Share prices are moved by the same rules of commerce that govern all things bought and sold: how much buyers desire it and how available it is. In other words, share prices change largely due to shifts of supply and demand in the market.

If there’s more demand than supply (more buyers than sellers), the price typically goes go up. If there’s more supply than demand (more sellers than buyers), the price generally goes down.

Supply factors that affect share prices

How readily available shares are, and how many there are to go around, also directly determines their price. This is mostly because of what economists call the ‘law of scarcity’ – the more limited a resource is, the more buyers are willing to pay for it. If it’s abundantly available, on the other hand, that’ll keep the price down.

Here are some of the specific supply factors that affect a share’s pricing:

• Number of sellers – when many sellers put their shares on the market at the same time, it can drive their price down. It can also be a sign of impending company troubles if many shareholders are looking to dump their equity as soon as possible, which can drive share prices down further
• Share issues – this is when a company makes new shares available to the public. There’s only a finite amount of these circulated, so the less there are in the marketplace, the higher the price will be
• Share buyback – another way for businesses to limit the number of shares in circulation. Here, the company will buy their own shares back from investors and either redistribute or cancel them later

Demand factors that affect share prices

The most fundamental thing that determines a stock’s pricing isn’t the company’s inherent worth – it’s how in-demand its shares are. People are willing to pay more for stock that’s desirable to themselves and others. This, in turn, drives up the share price.

Here are some of the specific supply factors that affect a stock’s value and price:

• Company news – things like earnings results and company announcements will affect a share’s pricing. Other publicity for the company, both positive and negative, will also move the price
• Industry occurrences – another determinant is how the wider sector that the company falls under is doing. If the industry is doing well or poorly, this will have a knock-on effect for share prices. Likewise, if a competitor is doing particularly well or poorly, it’ll affect peers’ share prices
• Economic outlook – larger economic factors that affect the whole market will also affect share price. For example, in a time of bullishness and lots of buying, share prices tend to rise. During bearish times, environments of high inflation or interest rate hikes, share prices often decline
• Market sentiment – the fourth thing that’ll determine a stock’s price is how investors and traders feel about shares and other asset classes at any given time. This may be linked to hard facts, a trend or even something as fleeting as a current mood in the marketplace

How to maximise your chance of trading success

While nothing in markets is ever certain, there are a few things that you can do to up your chances of making profits as a stock trader:

• Do ample research on any stock you’re thinking of trading or investing in. The more you’ve studied it, the more you’ll be able to predict future movements
• Trade as regularly as you can – both passion and discipline are vital here
• Don’t trade emotionally, but rather apply logical, deliberate decision-making to your work
• If you’re still starting out as a stock trader, begin with smaller trades and a limited amount of funds. Once you’ve gained some experience, you can open larger positions

Find out more about maximising your chances of trading success

Risks of stock trading

Wherever there is the potential for reward, there’s also risk, ie a chance that your trades or investments won’t work out as planned.

The most common ‘risk’ you’ll face is the possibility of making a loss rather than a profit. This can be compounded if you’re speculating on shares using leveraged forms of trading like spread bets and CFDs. This is because losses and profits can far outweigh your initial margin amount.

Learn more about the risks of leverage

However, you cannot have the potential for profits without the chance of losses. With stock trading, then, the key isn’t to try and avoid risks – it’s to plan for them with a good risk management strategy.

You can also up your odds of trading success by researching your chosen stock thoroughly and by practising as much as possible before opening a position. For this reason, we offer our traders access to a free demo account with virtual funds, to finetune their strategy before trading for real.

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How to become a stock trader summed up

• A stock trader is someone who speculates on shares’ prices
• There are different types of stock trading, such as active trading, swing trading and day trading to a buy-and-hold strategy
• With us, you can trade on shares using spread bets or CFDs. You can also invest in them outright with our share dealing platform
• The main factors that affect share’s pricing are supply and demand, although other elements play a role too
• To maximise your chance of stock trading success, ensure that you research the company and practise your trading strategy before opening a position