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What is stock trading?

Stock trading is simply the buying and selling of stocks (also known as “shares”) of a specific company in order to make a profit. Think of stocks as small individual pieces of a company. If you own stocks you own part of that company. Stock values change with each sale, depending on whether more people are buying (because they think its price will rise) or selling (because they think it will fall).

WATCH: How does the stock market work?

Who is most likely to be researching stock trading?

Finder data suggests that men aged 35-44 are most likely to be researching this topic.

How do I start trading on the stock market?

Newbie investor? Never placed a trade before? Don’t worry, it’s never been easier to start trading. You simply choose a stock trading platform, open and fund an account then make your trades. Check out our guide on how to buy stocks online to get started.

Our top picks for online brokers

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Disclaimer

Terms apply. Cryptoassets are highly volatile. Your capital is at risk. Available in the US, CA, UK and AU

Disclaimer: This page is not financial advice or an endorsement of digital assets, providers or services. Digital assets are volatile and risky, and past performance is no guarantee of future results. Potential regulations or policies can affect their availability and services provided. Talk with a financial professional before making a decision. Finder or the author may own cryptocurrency discussed on this page.

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Where do you trade stocks?

Traders buy and sell stocks throughout the trading day on the NYSE and Nasdaq, and other markets around the world. Here are some of the world’s biggest stock markets by market capitalization:

Here is a map of some of the world’s biggest exchanges

7 tips for beginner investors

• Know your risk tolerance. Are you ok with taking big risks with potential losses? Your personal risk tolerance should dictate your investment strategy.
• Do your homework. Research the financial health of companies, review annual reports and follow the news. Get familiar with popular indices like the S&P 500 which give an idea of how the market is performing.
• Buy what you know. Begin investing in industries and businesses you understand or that produce products that you use everyday.
• Diversify. Spread your investments across a range of industries. This is called diversification — a fancy way of saying: don’t put all your eggs in one basket. You can be better protected against losses if one particular industry experiences a sharp downturn.
• Explore blue-chip companies. Blue-chip stocks are America’s biggest, best-established companies. They’re typically a source of reliable returns and minimal risk.
• Consider index funds. Index funds, like ETFs and mutual funds, offer you a way to invest in multiple companies at once rather than in just one company’s stocks. You invest in the shares of the fund instead of all the individual companies themselves that make up the fund.
• Practice new strategies. Play stock trading games to master your craft. Or take an online trading course to advance your knowledge about different trading strategies.

Stock trading strategies you should know

• Stock Trading

  This the most common type of trading is where investors buy and sell company shares through stock markets and then monitor continuous updates on the prices of those shares. The value of a company’s shares changes daily, so shareholders aim to buy shares when they cost less and sell when they cost more to make a profit. You can expect transaction fees for buying and selling.

  Example: Company X is trading at $5 per share on January 1st and you buy 100 shares for a total of $500. By February 1st, the shares are trading at $5.50, so you decide to sell, giving you a 50-cent return on each share for a profit of $50. This also works in the opposite direction: If the stock price was $4.50 when you decide to sell, you’d be losing 50 cents per share for a net loss of $50.

• Options trading

  Options are essentially a bet on how you think a stock will move within a set time. If you purchase a contract of 100 shares, that gives you the right, but not the obligation, to buy or sell a stock at a certain price, called the strike price, within a certain time frame. Here are two options:

  Call. If you believe the price of a stock will go up by the expiry date, you buy a call option contract. This gives you the right to buy shares at the strike price. If the share price is higher than the strike price, either buy the shares at a discount when the contract expires or buy and immediately sell the option for a profit.

  Put. If you think the price of a stock will go down by the expiry date, buy a put option contract. This gives you the right to sell the shares at the strike price. If the share price drops below the strike price, you could buy shares at market price and sell them at the strike price.
  Example: Company Y is trading at $20 per share on January 1st and you can buy a six-month options contract with a strike price of $20 and a premium of $5 per share.

  If you expect the market price of the share to reach $25 — the strike price plus premium — or higher by the expiry date, buy a call option. Since this contract gives you the right to purchase the stock at the strike price, you could either sell the contract for a profit or purchase shares at below market value.
  However, if you expect the market price of the share to drop to $15 — strike price minus premium, or below — by the expiry date, buy a put option. This contract gives you the right to sell shares at the strike price, meaning you could either sell your contract for a profit or purchase the shares at market value and sell them for more than you paid.

• Bond trading

  Bonds are issued by companies or governments to generate cash flow, finance debt, fund investments and more. Bonds have predetermined term lengths and pay interest (also called the coupon rate) at set intervals for the length of the term. Once the bond reaches maturity, it can be cashed for the principal amount.

  Example: Company A is looking to raise money for the development of a new product, so it issues five-year bonds with a $1,000 principal and 5% coupon rate, paid annually. If you purchase 10 bonds for a principal investment of $10,000, you’ll receive a $500 interest payment each year until the bond reaches maturity. After five years, you would have accrued a total of $2,500 of interest on an initial investment of $10,000.

• Forex trading

  Foreign exchange (forex) trading is the process of buying and selling currencies. Unlike the stock market, the forex market is not one central exchange but rather a network of transactions between traders. In this market, buyers purchase one currency in exchange for another. Since exchange rates change throughout the day, traders are able to make money by buying low and selling high, just like the stock market.

  Example: Say the Canadian dollar is trading at $1.35 against the US dollar. Expecting the value of the Canadian dollar to increase, you sell $10,000 USD in exchange for $13,500 CAD. Later that month, the exchange rate drops to $1.30 CAD/USD, meaning that it now costs $1.30 Canadian to buy one USD. If you decide to sell, you would make a profit of $307.

• Futures trading

  Futures are based on buying or selling stocks in the future with an agreement to buy or sell the stock. When you enter into a futures contract, you’re making an agreement to buy or sell an asset at a set price on a certain date.

• Swaps trading

  Swaps are an agreement between two parties to exchange currencies at the spot rate. They are done as over the counter transactions between traders, businesses or financial institutions. In most cases, one cash flow is fixed, while the other is variable, often based on a benchmark interest rate, floating currency exchange rate or index price.

  Example: Company A loaned one of its distributors $1 million over five years with a variable annual interest rate of 1% + 5.25% prime rate. The company believes that the prime rate is going to decrease within the next five years, affecting its interest payments. It wants to enter into a swap on its loan. Company B believes the interest rate will rise, so it pays company A a fixed rate of 7% per year in exchange for the variable cash flow from A’s loan. Company A is happy if prime stays below 6%, whereas company B is happy if prime goes above 6%.

• CFD trading

  CFDs, or contracts for difference, allow advanced traders to profit from the change in price of underlying assets like stocks, stock indices, currencies, commodities and more. Similar to swaps, the underlying asset does not actually change hands. In this type of transaction, the trader buys or sells a contract with a specific number of units of a particular instrument. If you buy a CFD and the price of the underlying asset goes up, you earn money. If you buy a CFD and the price goes down, you lose money.

  Example: Stock XYZ is trading at $5 per share and you buy a CFD of 100 shares. The price of XYZ goes to $5.25 per share and you sell your position, earning you 25 cents per share or $25 in total. However, if the price dropped to $4.75, you would have lost 25 cents per share for a net loss of $25. While you won’t actually be purchasing the underlying assets, brokers may charge a commission on CFDs or require you to buy and sell slightly above or below market price so that they can profit.

• Crypto trading

  Cryptocurrency trading is very similar to stock trading in that it involves buying or selling assets to make a profit. Just like stocks, there are numerous cryptocurrencies allowing you to choose where to invest your money. Once you purchase cryptocurrency on an online exchange, you can either sell it, hold on to it, or buy other assets like stocks, other cryptocurrencies or even goods and services.

• Forwards trading

  Forwards trading is just like futures trading but with more flexibility. While futures contracts include a set number of a specific asset at a predetermined delivery date, forwards contracts allow you to customize the terms. The contract holders make an agreement to buy or sell the asset, aiming to make a profit by predicting price movements.

• Short selling

  Short selling is a bet that a stock price is going to fall. Traders borrow shares and sell them, anticipating they can buy them back later to settle the loan at a lower price and pocket the difference. But if the share price rises instead, they have to buy at the higher price and take a loss.

  Example: Company X is trading at $5 per share on January 1st and you think it will go to $0. You borrow and sell 100 shares for a total of $500. By February 1st, the shares are trading at $1, so you buy 100 shares to close your position for $100, and pocket $400. This also works in the opposite direction: If the stock price rises to $10, repaying the loaned shares costs you $1,000 and you lose $500. If the stock hits $20, you lose $1,500. The most you can gain is $500, but your potential loss is unlimited.

Risks of stock trading

Will you be investing in stock?

Do you plan to buy stocks in 2023?

Just under half (49%) of American adults said they planned on investing in stocks in 2023. For those that didn’t, not have the spare money to invest was the top reason for not investing at 14%.

Bottom line

Investing in the stock market has never been easier. But before you dive in, make sure you compare trading platforms and carefully research the companies you want to invest in. Get familiar with your personal level of risk tolerance and make sure you diversify your portfolio in order to minimize losses. Ready to begin?

Frequently asked questions about stock trading

• How do I buy stocks online without a broker?

  It's simple. Choose an online share trading platform and open an account. Follow the rest of the steps here in our guide on how to buy and sell stocks online.

• Can anyone use online stock trading?

  Yes. As long as you have a bank account, you should be able to sign up for online trading.

• How do I buy and sell stocks?

  Once you've registered for an online trading account, navigate to your dashboard to manage your account. From there, you should be able to look up various stocks and other assets. Once you've found a stock you want to buy, enter the quantity and your bid price and submit your trade.
  Selling stocks is very similar — you'll find your assets in your portfolio and should be able to select a stock to manage your shares. If you want to sell, you can enter the amount and the ask price, then submit the transaction.

• How much does online trading cost?

  Most online trading platforms don't charge a fee for regular stock trading but some will charge fees for commission, so you won't have to pay unless you are making trades. Commission prices can vary, so it's important to compare the fees of trading platforms before signing up with one.

Stock trading glossary

• Portfolio

  A mixture of assets such as stocks, bonds and cash owned by an investor.

• Stock market index

  An index that measures a specific stock market and helps investors compare current and historical prices. Learn how you can invest in index funds here.

• Earnings per share

  A company’s profits divided by the number of shares outstanding. A measure of profitability.

• P/E ratio

  The stock price divided by the earnings per share. This ratio allows investors to compare companies in the same industry to determine if any are undervalued or overvalued.

• Dividend

  Part of a company’s earnings that is paid quarterly or yearly to those who own dividend stock. Dividends are not guaranteed.

• Buying on margin

  This refers to borrowing money to buy stocks. The margin represents the difference between the value of securities in an investor’s account and the amount of the loan. This is a risky strategy because if the value of your investment falls you will still be on the hook for the money you borrowed.

• Initial public offering (IPO)

  This is the first time a company issues shares for sale to the public. IPOs of well-known companies tend to attract a lot of media attention.

• Exchange-traded fund (ETF)

  An ETF is a mix of stocks that tracks an index, sector, or commodity, but can be bought or sold on a stock exchange like a regular stock.

• Mutual fund

  A mutual fund is a diverse collection of stocks that is managed by a portfolio manager whose goal is generally to get better returns than the overall stock market. Mutual funds charge an annual fee (usually a few percentage points of the total amount invested) for this service.

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Written by

Jaclyn Hurst

Associate Publisher, Investments

Jaclyn Hurst was an associate publisher at Finder. She has a Bachelor’s degree in Business from Redeemer University and a University Certificate in Management Foundations from Athabasca University. She’s as passionate about business and finance as she is about the great Canadian outdoors, organic Sumatra coffee and music. See full bio

Co-written by

Ryan Brinks

Editor

Ryan Brinks is a former editor and publisher at Finder, specializing in investments. He holds a journalism degree from University of Wisconsin–River Falls. See full bio