How to Understand Stock Trading

Understanding stock trading may seem like learning a foreign language if you rely on cable stock market television programs for your information. Concepts such as corporate earnings surprise, short interest and insider trading activity can have you running for the exit before you even begin to grasp how to trade stocks. The good news is that understanding the stock market and how to trade isn’t as difficult as it may seem. By focusing on your own individual situation and applying some simple concepts, you’ll be on your way to a greater understanding of stock trading in no time.

Step 1

Focus on your personal goals. By avoiding the big terms and instead concentrating on your own financial situation, you’ll begin by learning only those concepts that will help you grow. The National Endowment for Financial Education recommends starting your investment strategy by laying out clear, concise and time-specific reasonable goals. This activity will help you weed out the thousands of investments that aren’t relevant to you.

Step 2

Determine which stocks meet your goals. Company stocks can be divided by size and volatility. Large company domestic stocks are less aggressive historically than medium or small companies. If companies are international, they’re also considered aggressive because of the added fluctuation caused by currency exchange rates. Although investors will trade different types of stocks to diversify a portfolio, more conservative investors will have more large stocks and aggressive investors more small and international stocks.

Step 3

List stocks that meet your goals. If you’re conservative, make a list of large company stocks, if you’re more aggressive, list smaller or international companies. Investment guru Peter Lynch made millions of dollars by focusing on investments he knew well instead of searching for the next hot investment. By focusing on companies you understand, you’ll begin to learn about stock trading more quickly.

Step 4

Find a stock trading game to play online. Many websites offer stock trading games with pretend money. This allows you to experience stock trading without the fear of losing money. Compare games by the tools they provide. Search for a game that represents trades as close to reality as possible so that when you’re ready to begin trading real money, you’ll feel comfortable with trading activity.

Step 5

Buy shares. Use a market order to immediately purchase shares at the prevailing price. Later, practice using limit orders, which only trigger if the stock plummets to a predetermined point below the current trading level. Watch your stocks fluctuate and explore why they move. Notice how earnings, management changes and product cycles affect your favorite companies and use this information to make better trades in the future.

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