How To Trade Stocks in 3 Steps

If you are looking to ensure your financial future, investing is the path to take. Having a solid long-term investment strategy will help you multiply your savings and secure a side income that can grow in the future. In fact, the sooner you start, the easier it will be to get ahead and grow your wealth consistently over time.

There are many polarized notions regarding investing. They span from “this time next year you will become a millionaire if you start investing today” to “never invest, markets are at risk, especially now with the crisis/depression nearing.” Of course, investments can be risky sometimes, but there are numerous methods and strategies to learn so that you can minimize the risk and foresee (to an extent) where that investment might take you.

To do that, you have to take the first step and learn all about the basics of how money is made in the financial markets. After that, it’s all practice.

The stock market is one of the vehicles by which money is made in the financial markets. Stocks can be traded as CFD assets, and also as listed shares in the secondary market. Let us compare both types of stock investing and see what they are all about.

CFD Trading Vs. Trading Stocks

There are distinct differences between stock CFD trading and conventional stock market trading. To have a better overview of both, let’s review them separately first.

CFD Trading: CFDs mean Contracts for Difference. With CFDs, you do not buy and own an asset or instrument you are trading. You are only trading contracts on the stock or asset based on the underlying price changes. When you trade a stock as a CFD, you do not own the stock. However, you are still subject to the price changes as though you did. You aren’t buying a stock – but speculating on where that stock will go.

Trading Stocks: This refers to exchange-based stock trading. With this method of stock trading, you are buying and selling actual shares of a company. For example, if you think one company’s price is about to rise, you could decide to buy its share just before it does, and then once their value increases, you can sell them and gain direct profit.

When it comes to financing the trading of stocks or stock CFDs, there are differences. With CFDs, you can trade on leverage, and you can start small and increase your current position by borrowing capital from your broker with the margin being between 5% and 25%.

With stock trading, you have to come up with the full amount required (i.e. cash-only trading).

For example, if you want to buy $1500 worth of a company’s stock at $30 per share, you would have to buy fifty shares and pay $1,500 immediately (along with some commission charges). But with CFDs, you can trade with a margin of say, 5% and pay only $75. If you were to profit or lose from this trade, it would still be as though you paid the entire $1500 for the trade. So while you can profit in a measure above the $75 investment, losses can be amplified as well – you can actually lose more than your initial capital. However, the cash-only mode of stock trading ensurs that the only gains or losses encountered are in the measure of your investment. They are not amplified, and you cannot lose more than your initial deposit.

Fees are charged for both CFDs and stock trading also differ. For CFD trading, there are spreads for all markets, and most brokers charge a commission. For stock trading, one pays a commission on all trades, and if trading internationally, there might be currency conversion charges.

Furthermore, CFD trading in most countries isn’t subject to stamp duty because you don’t own the asset, but you do pay the capital gains tax.

In stock trading, you are subject to both of these taxes. However, taxations vary significantly from country to country, so make sure you do thorough research with the local authorities before investing.

Learn Technical Analysis

To start trading effectively, you need a carefully-planned strategy that will minimize the risk. To obtain it, you need to learn about the technical analysis of trading.

What is it?

In 17th Century in Europe, Dutch traders adopted technical analysis methods thanks to Joseph de la Vega, who constructed these techniques to predict Dutch markets. Modern-day technical analysis has little to do with 17th-century analysis, but the premise stayed the same.

Technical analysis is a study that uses part performance as its primary precursor in determining future market values. Other insights are taken into account like behavioral economics, market psychology, and quantitative analysis that technical analysts use to create chart patterns and statistical indicators as forms of technical analysis.

Analysts try to predict future market movements and stock price values creating a technical analysis that will help traders get some insight and generate profit for their clients.

It also helps traders to determine entry and exit points for trades with the technical analysis tools mentioned above and uses charts to determine future values. Based on the analysis, traders know when to enter or exit a trade in the optimal time in order to get away with the most profit.

Trends

Trends capture gains of stock through analyzing its momentum in a given direction. Although these are just predictions, they do provide some insight into possible stock pathways.

In addition to trend analysis, traders need to study the risk management and trading psychology as two tools that can enhance the predictability of a trade.

Popular indicators

Popular trading indicators will give you an insight into the action and teach you a lot, especially if you are starting right now. Following these indicators will shape how you interpret trends and the type of trading opportunities you decide to take on in your future investments.

The first indicator are the trend indicators, which help to analyze whether a market moves up, down, or sideways in a given period. An example is the moving average indicator. The commonest periods used are the 50-period and 200-period moving averages. Exponential moving averages (EMAs) are more responsive and therefore preferred over Simple Moving Averages (SMAs). The 50-day EMA looks back at exponential price value movements over specific periods and is used to measure the average intermediate price of a security, while the 200-day EMA is more long term in orientation and serves as a dynamic support and resistance line.

The second popular indicator class are the momentum indicators. They indicate how strong the trend is and if a reversal of a stock will take place after a while. Momentum indicators help determine price tops and bottoms, and they include Relative Strength Index (RSI), Stochastics, MACD and Momentum indicator.

The third indicator class is the volume indicators. They show how the stock’s trade volume changes over time. In essence, they display the volume of trade on the buy side and the sell side of the market. This indicator is applicable when you need to know how strong the move will be when a stock price changes. Volume indicators are On-Balance Volume, Chaikin Money Flow, and Klinger Volume Oscillator.

The fourth indicator class consists of Volatility indicators that predict how the price changes in a specific period. This indicator is practically the one that determines how much money you will make. If stocks have high volatility, it means that their price changes pretty quickly and will have a wider range of movement in a given time. In contrast, low volatility indicates small price moves. It is worth noting that this indicator doesn’t tell you anything about direction, only the range of prices. Then, with the use of the rest of the indicators, you determine whether that stock investment will be favorable or not.

Some Key Indicators

Moving Average Convergence Divergence (MACD)

MACD is a momentum indicator that follows a trend between two moving averages of a security’s price. A trader will need to calculate the MACD by subtracting the 26-period exponential moving average (EMA) from the 12-period EMA. The result is the MACD line.

A nine-day EMA called the “signal line” is plotted on top of the MACD line which functions as a trigger for when you have to buy and sell the stocks. So, when the MACD crosses above its signal line you can buy the security and when it goes below the signal line you know it is time to sell. The most common methods of interpretation for MACD are crossovers, divergences, and rapid rises and falls.

Relative strength index (RSI)

The relative strength index or RSI is another momentum indicator. Used in technical analysis, it helps measure the magnitude of recent price changes. This evaluates whether those changes are made by overbought or oversold stocks or other assets.

In the analysis, RSI is presented as a line graph or an oscillator usually moving between 0 and 100 as two extremities and is placed below the graph that shows the price of a certain asset. This popular momentum oscillator was developed by J. Welles Wilder Jr. and first introduced in his book, “New Concepts in Technical Trading Systems” in 1978.

If you get a value of 30 or below you should note that the stock you are buying has an oversold or undervalued condition whereas a value of 70 or above shows an overbought or overvalued stock that will soon be corrected with a pullback in the price or a trend reversal.

Fundamental Factors That Influence Stocks

The supply and demand on the market is what primarily determines stock prices. However, the forces that move these prices is what you should be watching closely as it largely influences your profit in the end. Although there is no exact equation that will tell you how the price of the stock you traded will move, still, there are some fundamental factors acting as forces that move the prices based on the company’s earnings and profitability. By calculating these factors, you are able to foresee how the stock will move to some extent.

If you were to trade in an efficient market, then you would have stock prices determined primarily by fundamentals which are combined of:

EPS or earning per share

The earnings per share (EPS) is the returns that company makes for each stock listed. Technically, with your purchase of a particular stock, you are guaranteed a proportional share of that company’s future income or earning.

The stock is the price you are paying for any future earnings.
The company may decide to distribute a part of the earnings to its shareholders as dividends and retain the rest for reinvestment. The future stream of income that you invest in is a function of the current level of earnings and the expected rate of growth of the earnings base.

Furthermore, measures based on free cash flow per stock are considered as additional measures of earnings power that are a solid indicator as well. This isn’t the only fundamental factor, though, as measures also depend on the type of company that is being analyzed. As an example, real estate companies use funds from operations or FFO as an industry-specific measure of earnings. Companies can be also valued by their dividends per share.

Additionally, the discount rate as a function of inflation can also be used as a fundamental factor that influences stocks as well as the perceived risk for the stock in question.

PE Ratio

The PE ratio or the Price to Earnings ratio values a company by measuring the current share price in relation to its EPS or earnings per share. This ratio is also referred to as the earnings or price multiple, and investors use it when determining the relative value of one company’s shares compared to other companies within the same industry and type of work. However, when an apples-to-apples comparison isn’t available, or analysts want to compare a certain company against its own historical record, then the PE ratio can effectively determine that too.

As a ratio that relates a share price to the earning per share, the PE ratio can show you if a company’s stock is overvalued or if investors are expecting significant growth in the future. On the other hand, you cannot determine a PE ratio for a company that has no earnings or is losing money because of its equation – the current stock price is divided by the earnings per share (EPS), and since you don’t have a value to put in the denominator, PE in this practice cannot be calculated.

To conclude, the PE ratio is the most widely used tool for stock valuation is needed. Apart from showing you if the stock you want to buy is overvalued or undervalued, this ratio can compare stocks between companies in the same industry and how they are performing. Based on this ratio, you know what the needed dollar amount is that you are expected to invest in order to receive $1 of the company’s earnings. This is why such a ratio is so valued, and it can show you how much other investors are willing to pay per dollar of earnings.

Based on this, if in the equation you get a PE multiple of 20x, that means that investors are willing to pay $20 to get $1 in return for that stock’s earnings. All these earnings comparisons and how much investors are willing to pay today are based on the stock’s past or future profits with the notion that the stock market always repeats itself. A very high PE ratio could mean that a stock is overvalued, while a low PE could mean that the stock is undervalued and its price is lower than its expected earnings.

Debt to Equity Ratio

The Debt to Equity ratio determines the financial leverage of a given business. This is a key ratio mostly used in corporate finance and can be calculated when you divide a company’s total liabilities by the equity of its shareholders. Companies include this metric in their financial statements.

Through its value, you see to what degree the company in question funds its operations on debt or its own funds and whether that business is able to cover its debt in a downturn through the shareholder equity.

It is calculated when you take Assets minus Shareholder Equity, and you get the liabilities of the company. The higher this value, the more risk this stock has for its shareholders. Unlike PE ratio, the DE ratio cannot be compared from company to company within the same industry because of the varying debt value.​

Return on Equity

Return on Equity, or ROE, measures the financial performance of a company. It is calculated by dividing net income by shareholders’ equity, and it measures the company’s profitability in relation to stockholders’ equity.

The equity of the shareholders is equal to the assets minus the debt of the company, which is why ROE is an indicator of the return on net assets. Whether or not the value of ROE is satisfactory is determined by the rest of the companies in the same industry and their ROE values.

Free Cash Flow

FCF of a company is what is left after capital expenditures and operating expenses such as payroll, taxes and rent are covered. The company is free to use this free cash flow however they like. Evaluating this metric often will provide the company with an overview of their cash management while investors with valuable insight into the company’s financials. Based on this, traders can make a better-informed decision.

The Two Most Searched For Shares in the UK

There are many ways to identify which shares in the UK are most searched for and valuable. Traders assess stock’s volume, which has been traded over a specific period.

This metric is used to assess if the stock is popular and give information on whether the trader should go long or short based on the trend of the stock, as popular stocks are more likely to be liquid. With that in mind, there are numerous stocks that are popular on the UK market, out of which we review the following two.

Lloyds share price

During the start of the pandemic, the Lloyds share price took a hit, but with the overall state of the market, that did not come as a surprise. Many other companies in the same sector have experienced similar hits. However, improving conditions are expected to lift Lloyds’ share price in the coming years.

UK’s largest retail bank fell from 39.50p in November to 33p at the end of January. Currently, the price is 40.94p, and because of this increase, analysts and investors are optimistic that in the upcoming year, there will be a stabilization of prices. With that, the ban of the Bank of England’s (BoE’s) Prudential Regulation Authority on paying dividends has been lifted, and they are expected to restore dividend payments.

The last payment pre-pandemic was valued at 3.2p per share. If they pay a similar amount this year, that would be considered a significant increase because right now, their stock prices are almost halved.

BT share price

The current share price of the telecommunication company BT Group is 152.15p. Their stocks took a plunge during the pandemic period and reached a low value of 100p. They haven’t been as low as this since the 2009 financial crisis, which gave the green light to investors to buy BT shares. Now it has been steadily growing to 152.15p, and the company announced a restoration of dividend payments. The company’s stock had almost halved in 2020. The current anticipation of BT’s annual payout is 7.6p per share, which is about a 7.3% dividend yield.

Tying it all together

Learning how to trade and investing in stocks is a way to secure your financial future. Even if you are just starting and you have a small sum of money, to begin with, it is still possible to invest. The critical thing to learn is how to assess a given stock based on what we talked about in this text and choose the investment that matches your short and long-term strategies. Always inform yourself the best you can before investing. Read about the company’s profile, their long-term strategy, and the trend of their stocks.

There are restrictions you might face as a new investor, and you have to find the minimum deposit requirements that apply to you. Should you initially decide to go with a broker, make sure that you know their commission rates and compare it with other brokers to invest most cost-effectively.