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How Stock Trading Works - and Beginners Stock Investing

Updated on April 29, 2012

How Does Stock Market Works?

How does the stock market works? Many beginners in stock investing wonders how some people seem to know how to consistently make money in the stock market. These people, or stock market traders,are no smarter than you. The surprising thing is that they do not work any harder than you and they are neither lucky than you. The only difference they have with you is that they never seem to worry about having money. Many people seem to miss the big idea in this game. People tend to think that it takes a lot of money to make a lot of money. That is not how the smart stock traders are doing it. These stock traders already have learnt that the trick is to make pennies consistently and combine those pennies to build vast personal fortunes.Trading in shares is a proven wealth builder and can and should benefit all those who trade in shares. It is only fair that each one of us who participates is entitled to a piece of the action.

New York Stock Exchange - One of the World's largest stock exchanges.
New York Stock Exchange - One of the World's largest stock exchanges.

Why Companies Sell Their Shares

Why do companies agree to sell their shares to strangers if those companies are very profitable? Why don’t they sell those shares to their friends and relatives? When a company has viable projects and activities that it believes will make a lot of profit then there is every reason to look for funding. One source of such large funding is to take a loan from a bank. To get a loan from a bank for such huge amounts of money, a company will need to provide sufficient collateral which it may not have. And even if it has enough collateral, there is the risk part of it. To spread the risks as well as generate funding, the company will usually issue shares to the public. When you buy the company’s shares you stand a chance to share in the profits of the company and also you risk sharing the risks if the company makes a loss.

Stock Exchanges

In US, New York Stock Exchange (NYSE) and the NASDAQ are the most important stock exchanges. There are other many stock exchanges in capital cities of many countries worldwide. Trading in the stock exchanges can today be done through the internet in most exchanges. The aim of stock exchanges is to help bring businesses and investors together.

Stock Price

A stock has a price which is as good as its value and it’s called the stock market price. When investors buy and sell the stock, the stock market price will fluctuate based on demand, supply, and performance of the company as well as the performance of the broad stock market from Tokyo to New York.

To invest in stocks, you will need to get yourself a good stock broker. Your stock broker will then provide you with fullest details on how to go about buying or selling the stocks or shares.

Six Stock Market Trading Tips

With that in mind, I would like to share with you six stock market trading tips on how an ordinary person, other than the smart money traders, can benefit from trading in the stock market as strategic investment.

1. How to Trade in Stocks

The first thing one should do is to have some basics of stock trading. You can get yourself a simple basic book like How to Trade in Stocks from a store such as Amazon. This book should answer at least two main questions that beginning traders usually have, namely:

 (1) How does stock price change? 

(2) How does stock price go up? Or, how does stock price go down?

2. Dips and Peaks

Having armed yourself with basics of stock trading, then you should understand what dips and peaks are when you look at a plotting of stock prices. The best measure of a stock’s strength and weakness is by looking at high and higher peaks or low and lower dips. Some traders call them valleys and ridges, or crests and troughs. But still this method of dips and peaks has drawbacks in that you can only compare dips and peaks of the same degree. To visualize dips and peaks of the same degree in real time is not easy and may require you to be a genius. The most difficult problem is in telling whether the dips and peaks have ended so that you can compare them. The moment you look at the dips and peaks in finer details, you will start seeing smaller wiggles in between the larger dips and peaks and identifying which wiggles should be isolated and classified together may turn out to be an impossible intellectual challenge. To solve that dilemma, it will require you to make one major assumption that the movement of stock price is linear. However, in real life the movement of stock market price, which is a vibration of waves that are repetitive in time and amplitude, is not linear.

3. Moving Averages

Almost every stock trader uses a moving average in one way or the other. Moving averages are the real forces that make people make the decisions they take to move the markets. Moving averages are a measure of accumulation of strength or weakness over a period of time due to economic growth reports, manipulation, fear, greed, and news. There are many different stock traders and each trader seems to have his or her preferred moving averages. From the dynamics of the moving averages, dips and peaks in the price line are able to form. In every trading day, the bulls and the bears are continuously in a see-saw of moving averages trying to take advantage of the next dips and peak formed. Now, this is where it gets complex: a day trader will concentrate on day trades dynamics losing sight of the fact that at a distance are weekly traders, monthly traders, quarterly traders and yearly traders each trying to create more dynamics for a profit on the same see-saw that they are sitting on. The key thing here to successful trading is to try and be aware of what the other stock traders are thinking about.

At any one time you will find that there is one moving average that is forming the equilibrium line between winning bulls and winning bears. Take an example: a given stock can display the characteristics that anytime the price is above say the moving averages of a period of 30 days, the bulls win. On the other hand, anytime the price is below the moving averages of a period of 30 days, the bears win. The bad thing is that this does not last forever because the characteristics of the stock changes. These characteristics are what they call standard deviations and which is also called volatility. Another major drawback with the moving averages is due to time lag. Many traders find that even after trading following the moving averages, they make very little profit because the moving average is making them unknowingly buy to open at near the tops of peaks and sell to close at near the bottom of dips.

4. Multiple Timeframe

Moving averages are as good as waves (peaks and dips). If two peaks of different time frames move in the same direction up with one another the resultant net effect is of enhanced peak. This is interference and it is known as constructive interference. When a peak and a dip of different time frame move in one direction with one another the two pulses will try to cancel the effect of each other and the resultant net effect will tend toward zero or an equilibrium state. This tells us that the markets move against the trend of one greater degree only with a struggle. The resistance from the bigger trend will prevent the shorter trend that may be carrying your money from developing full strength or weakness resulting in loses to your investment. It is this struggle between the two oppositely trending degrees that makes visualizing well defined dips and peaks impossible. You may have tried sawing wood up against the grains and you know how it feels – it is difficult and the sliced bundles are not even or clean but they leave a rough surface with many defects.

Over the many years traders have been trading the stock market, they have learnt that one of the most successful trading method is the use of multiple moving averages crossover. The deltas or rates of change in all the averages have to be either positive or negative for uptrend and downtrend respectively. If there is a crossover of the moving averages and change in averages is positive, you buy stocks, and if the change is negative, you sell stocks. This is what multiple time frames are - where you trade using the shorter trend but only if the longer trend supports it.

5. Stop Losses

Successfully controlling your emotions is very important in trading stocks. That can only be done by a stop loss orders that rest ready waiting in your brokers’ trading system. You place the stop loss orders immediately you open your stock position. It is your stop loss orders that will take the emotion out of a decision to close or not to close your stock positions. This control of your emotions is the single most important trick of all tips in successful trading. If you are opening new stock positions today, set that automatic stop loss today and not tomorrow. If you do not place a stop order to get you out of your positions, it is human nature for you to try and impose your will in favor of your open trades hoping that the market will soon come back. It never! Do not listen to anybody or try to favor the direction of you open trades. Your stop loss orders which are based on your trading plan, prices and charts will always tell you what the market is doing.The secret is that your stop loss orders will wait for the market to talk before taking the appropriate action.

Price action on the charts is the way to trade rather than try to imagine that you are seeing certain geometrical shapes in the price action – because if you truly want to see geometrical shapes in the price line, then you will always see very many patterns that will support what you want to see.

6. Your Stock Broker

Get yourself a good stock broker who has low commission fees because a penny saved is a penny earned. A broker who is charging more than $1.0 per 100 shares of stock is expensive. On the other hand, we have brokers who charge a flat rate of say $5.00 per trade regardless of how many shares you trade for that underlying security. These brokers are inexpensive to those who buy very many shares per trade. The other thing is that a good broker should at this time and age be using modern technology and should have the capacity for you to trade or check your stock positions anywhere in the world using simple electronic gadgets like mobile phones.

This explains how the stock market works. The next thing you only need do is to inter-marry all these factors and follow profitable market directions by buying low and selling high thus beating everyone else hands down. The question is: how does one inter-marry this logic to beat the stock market?

I hope you will be able to get yourself a few stock trading tools from a store such as Amazon and that this will open the door to you finding answers to the three main questions many beginning stock traders usually have, namely.

1. How Does Stock Market Work?

2. How Does Stock Price Change?

3. How Does Stock Price Go Up, or, How Does Stock Price Go Down?

If you have liked this article, and you would want this page to keep up and improved, you can help by purchasing some great items from Amazon by following Amazon links and widgets on this page. A free way to help would be to link back to this webpage from your web page, blog, or discussion forums.

The Author’s page is designed to help beginners and average readers make some money as an extra income to supplement what they may be earning elsewhere - details of which you can find in My Page, if you will.


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    • forexpulse profile image


      7 years ago from Califorrina

      Keep working, great job!

    • macro_life profile image


      8 years ago from India

      A very informative hub for beginners. Thank you very much.

    • profile image

      Marissa-eToro Forex 

      8 years ago

      You have broken down stock trading into easy to understand language for beginners. Very helpful information here.

    • Hello, hello, profile image

      Hello, hello, 

      8 years ago from London, UK

      Great hub with great information. I bookmarked this because I have to time more to digest it. Thank you.

    • Paulo Santos profile image

      Paulo Santos 

      8 years ago from London

      that cleared some questions I had.

      Very informative hub!

    • profile image 

      8 years ago

      good intro Ngureco, thank-you


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