How To Learn Stock Trading: A Guide For Beginners

In this guide, you will learn about stock trading and how different factors move the stock market. We will provide a step-by-step guide on how to start trading stocks, explain how to use leverage and describe different order types. Then, we will cover different stock trading strategies, the associated risks and opportunities, and the various costs and fees.

Finally, we will discuss Over-the-Counter (OTC) trading, outlining its pros and cons compared to conventional stock trading and tie everything together to help you decide whether stock trading is right for you.

Key Facts Stock Trading
  • Stock trading focuses on short-term trends, unlike long-term investing based on company fundamentals.
  • Starting involves finding a broker, choosing stocks, practicing on demo accounts, and managing a small portfolio.
  • Market movements are influenced by economic data, corporate news, political events, global incidents, and market sentiment.
  • Strategies include position, momentum, and reversal trading, targeting market trends, rapid movements, or trend reversals.
  • Risks involve market volatility, geopolitical issues, industry shifts, and company-specific challenges; opportunities include capital growth and dividends.
  • Costs include brokerage commissions, spread, platform fees, and margin interest, underscoring the need for cost management.

How to start Stock Trading

Before we get into stock trading, here is how you start trading:

  • Step 1: Sign up with a broker: Find a suitable broker that fits your needs and accommodates your location
  • Step 2: Search for stocks to trade: Look for stocks you find interesting and evaluate them
  • Step 3: Start trading with a demo account or a small capital: Test and refine your trading strategy on a demo account or with small capital
  • Step 4: Manage Portfolio Positions: A good rule of thumb is to limit your portfolio position to 3-5 stocks at a given time

What is Stock Trading?

At its core, stock trading refers to buying or “going long” and selling or “going short” on specific stocks. It occurs when you agree to transact at a specified price with another party (individual or institution) regarding an ownership stake in a publicly listed company. A “stock,” also known as a “share” or “share of stock,” is a financial asset representing ownership of a publicly listed company. Therefore, whenever you buy or sell a stock for any reason (regardless of your intention of holding the company), you are technically trading stocks.

Nevertheless, there is a less technical, more common distinction between ‘trading’ and ‘investing’ in stocks, which refers to the intent behind buying a particular stock.

Stock “Investing”

First, in stock “investing,” while you are technically “trading” by buying and selling a company’s stock, your intention is to hold that stock for an extended period of time (typically years to even decades). As a stock investor, you do not participate in the short-term market volatility or what is commonly referred to as “market noise” in the investing community. 

Instead, you focus on buying and selling on “fundamental” business reasons, such as believing that the stock or the company is undervalued or has significant growth potential. Warren Buffet and Charlie Munger would be considered in this group.

Stock “Trading”

On the other hand, stock “trading” involves buying and selling a company’s shares or stock to capitalize on short-term trends, market volatility, and sentiment. The key here is that, unlike stock investing, you do not intend to hold a particular stock for an extended period of time. Instead, you are looking to take advantage of short-term opportunities which may or may not have anything to do with the company’s fundamentals. 

Under this strategy, you can decide to go “long” (buy shares of the company) when you believe the stock price will go up or go “short” (borrow the company’s share from your broker and buy it back in the future; you make money if you buy it back cheaper than when you bought it) if you think the stock will go down.

What Moves the Stock Market?

At the basic level, the movement of the stock market is driven by demand from buyers and supply from sellers. The stock exchange acts as an intermediary, matching ‘bid’ (buy orders) with ‘ask’ (sell orders) using an automated order book, which is a real-time, continuously updated list of buy and sell orders. A trade occurs when buy and sell orders meet at the same price.

On a macro level, the stock market’s movement can be influenced by a myriad of factors that can seem random and unpredictable. The following are some of the most notable factors to consider:

1. Economic Indicators

First, the stock market can be influenced by both recent and projected economic data, such as the GDP growth (both quarterly and annually), the inflation rate, unemployment data, and interest rates. Any negative surprise, such as GDP falling short of target or unemployment being higher than projected, can translate to a market sell-off. Conversely, positive surprises, as well as optimistic projections such as a much lower unemployment rate or a GDP growth rate above consensus, can drive demand in the market.

2. Corporate News and Earnings

Second, corporate earnings (both quarterly and annually) and news or announcements can move the entire stock market. This is particularly the case for blue chip companies comprising a massive portion of a stock exchange’s index, and any movement (positive or negative) can move the market with it. In addition, corporate disclosures and news such as stock buybacks, management changes, or product announcements can tilt the stock market to move.

3. Fiscal and Political Events

Third, regional and national elections, shifts in government policies, new trade agreements with other countries, and geopolitical tensions can impact the stock market. For example, if the government decides to impose a tariff on a specific product that a company or group of companies produces, it will most likely lower the value of these stocks, potentially creating a ripple effect on other stocks in other industries.

4. Global Events

Fourth, global events such as major conflicts and instability, economic sanctions, natural disasters, and financial crises can move the stock market. This is because market participants (investors and traders) constantly weigh the potential effect of such events on different sectors and countries where a company or group of companies is operating and is a significant source of revenue stream.

5. Market Sentiment

Lastly, and perhaps the most influential over the short term, is the prevailing “sentiment” of market participants as well as possible speculation on particular events. Furthermore, market sentiment can also come from the “net result” of the first four factors we discussed. If the overall market remains positive (the stock market is going up), then we have a “bullish market sentiment.” Conversely, if the general market is negative (the stock market is going down), then we have a “bearish market sentiment.”

If these factors feel overwhelming, that is because it is. In reality, despite considering all of these, you can still end up on the wrong side of the market movement. In stock trading, you can only improve your probability of success by identifying the “likely” direction of the market, but you cannot consistently predict where the market is headed and by how much it will move. 

This is why investors dismiss short-term market movement or volatility as pure “market noise” and instead focus on what they deem to matter the most in a company’s long-term success—its fundamentals. On the other hand, traders believe that despite how random and unpredictable the market moves, there is always an “order in chaos” and employ sentiment or technical analysis to identify possible pivot points or trading opportunities. 

Step-by-Step Guide to Learn Stock Trading

Step 1: Sign up with a suitable broker

First, you need to find a broker who suits your needs and accommodates your location. This step is individualized because you must first identify the stock market you want to trade in and then find a broker who can legally facilitate your trades. 

Here are the three reputable brokers we recommend you check out:

1. eToro

  • Highly intuitive and user-friendly platform, suitable for beginners
  • Offers social trading features, including copy trading (allows users to replicate trades of others)
  • Available in more than 70 countries around the world, and still expanding

2. Freedom24

  • User-friendly platform and offers comprehensive educational resources for beginners
  • Offers access to leading global stock markets (including their stocks, indices, and ETFs)
  • Provides the ability to participate in IPOs before stocks start trading on the exchange

3. XTB

  • One of the most well-known and reputable stock brokers 
  • Well-known for its professional customer service and advanced trading (charting) tools
  • Offers extensive educational materials for traders of all levels (beginners to advance)

Step 2: Search for the stock you want to trade  

Second, after successfully identifying your preferred broker, you can search for your preferred stock or company on the broker’s platform to see the minimum requirements to trade it, along with associated costs and fees.

Step 3: Start small or with a demo account

Third, when you are comfortable with the platform, you can start practicing with demo/virtual trading or trade live with a small amount you can afford to lose as a “test” of your trading strategy/approach. Here’s a process of trading live (trade placement): 

  1. Decision Making – Choosing the stock you want to trade, the quantity, and price
  2. Order Type Selection – Decide the specific order type (see the order types section below)
  3. Order Placement – Submitting your order request with your brokerage
  4. Order Execution – The broker processes your order and fills it
  5. Confirmation – You receive details of your executed trade

Advice: Always record and journal your trades to identify potential points of improvement.

Step 4: Manage Portfolio Positions

Lastly, you will now have to manage your portfolio, particularly if you have multiple positions at a given time. If you are just starting, a good rule of thumb is to limit your total position to three to five maximum stocks at any given time. 

This will allow you to carefully monitor key price levels and shifting industry and market sentiments. Furthermore, be mindful of your total exposure (what percentage of your total capital is invested in the market) — high exposure may limit your flexibility for potential trade opportunities.

Leverage 101: How Does Leverage Work in Stock Trading?

Leverage is the act of “borrowing” investable capital from your broker to magnify your trade. Sooner or later, you may encounter this term either as a marketing tool for stock brokers or as an attractive prospect for increasing your potential profit in multiples (2x, 5x, 10x). 

If you can make twice or three times the profit you are supposed to get by trading “normally,” then why not just jump into using leverage? 

Well, the thing you need to remember about leverage is that it is a double-edged sword. If you are leveraged 5x and the trade goes in your favor, congrats! You just earned 500% of what you are supposed to earn. However, if the trade goes the opposite direction in the same scenario, welp! You just lost 500% more. 

A popular use of leverage is with trading stock CFDs. Stock CFDs (Contract for Difference) are derivatives that allow you to speculate on stock price movements without actually owning the stock. Stock CFD trading is often leveraged, so you can take a larger position with relatively small capital. Thus, using leverage can give you attractive returns but may also wipe out your entire account in a single trade if used improperly. Hence, as a beginner, we do not advise using leverage until you have a proven working trading strategy.

Order Types Explained

1. Market Order

The most basic type of order. When you place a market order, you instantly buy or sell a stock at the best available current price. While execution is almost instantaneous, the final price is not guaranteed, particularly in volatile markets.

2. Limit Order

A limit order allows you to set a specific price for buying or selling a stock. If you’re buying, the order will only execute at your limit price or lower; if you’re selling, the order will only execute at your limit price or higher. 

3. Stop Order (Stop-Loss Order)

This order primarily limits losses or protects profits. Once the stock reaches a certain price, known as the stop price, it becomes a market order. 

4. Good ‘Til Canceled (GTC)

A GTC order remains active until you cancel or the order is executed at your specified price.

5. Day Order

Unlike the GTC, a day order is valid only for the trading day it’s placed. Hence, if the order is not filled by the end of the trading day, it’s automatically canceled.

How much money can you make with stock trading?

Well, it depends on several factors, such as your available capital, experience level, whether you have a proven trading strategy, and, of course, if you are using leverage. Here’s an example:

Sample Calculation:

  • Total Trading Capital: $1,000
  • Allotted Capital Per Trade: 20% or $200
  • Stock ABC’s Price: $10
  • Your total share: 20 shares ($200/$10) 

*So you have 20 shares of ABC stock worth $200 at $10/share.

Scenario 1: Price Goes Up to $11 and you sold

Purchase Cost: $200

Result: 20 shares x $11 = $220

Total Gain: $20 (10% gain)

Scenario 2: Price Goes Down to $9 and hit your cut loss (Loss of 10%)

Purchase Cost: $200

Result: 20 shares x $9 = $180

Total Loss: $20 (10% loss)

Making money quickly through trading is possible, especially if you get extremely lucky. But the opposite is also true. So, instead of focusing on how much money you can potentially make, it is better to focus on building and refining your trading strategy and be a disciplined trader who adheres to proper risk management. Remember that consistency and discipline can be very profitable while ensuring you will not wipe your account on just a few trades.

The minimum and maximum amount of shares you can trade

The minimum and maximum amount of shares you can trade varies widely from each stock market and the “board lot” of the stock you want to trade. To illustrate this, here’s an example:

Market PriceSpreadLot Size
$5 to 9.990.0100100
$10 to 19.980.0200100
$20 to 49.950.0500100
$50 to 99.950.050010
$100 to 199.90.100010
$200 to 499.80.200010
$500 to 999.50.500010
$1000+1.00005

Market Price – refers to the current price of the stock at any given time 

Spread or Tick Size – the minimum difference or movement of price

Lot Size – the minimum number of shares you need to buy

Sample Calculation:

  • ABC Stock Price: $12
  • Board Lot: 100
  • Minimum Investment Required: $12 x 100 = $120

Hence, you need to buy at least 100 shares of ABC Stock to complete the trade. In contrast, the maximum number of shares you can buy is largely limited by your capital. Many brokers automate this calculation or, at the very least, show you the minimum and maximum number of trades you can make, given your capital.

Stock Trading Strategies

1. Position Trading

This trading strategy involves finding and “riding” an established price trend among blue chips and mid-cap stocks (ideally one that has been ongoing for at least a few months) for an extended period of time until the trend is broken (usually supported by a fundamental/business reason). Going with the stock’s general direction increases your odds of making a profitable trade. This is because an established trend is unlikely to shift quickly unless there is a major issue in the company or the market as a whole.

To illustrate, suppose Stock ABC has been going up for the past six months. The stock’s upward movement was fueled by a new successful product it has released and the good outlook of its industry. From $100, it is now worth $160 and has created a strong uptrend. Then, based on this, you can consider buying because the general trend of the stock is upward and will unlikely to shift anytime soon.

2. Momentum Trading

This trading strategy primarily focuses on identifying small-cap stocks moving with massive price momentum and substantial volume to support the move. This can look like a successful breakout from a major resistance, catapulting the price forward. In this strategy, you want to follow where the momentum is. These price movements typically move wildly, so proper risk management is crucial.

To illustrate, suppose Stock XYZ has been bouncing from $9 to $10 for two months. For those two months, it always came down when hitting the $9.8 to $10.00 price level, making it a major resistance. Suddenly, Stock XYZ broke the $10.00 and closed at $10.50 with massive volume to back it up. Afterward, it continued going up for two weeks and hit $13 with above-average volume to back it up. Thus, momentum is created due to its continuous upward movement and substantial volume to back it up. Based on this, you can consider buying if you believe there is still significant demand to warrant a further upward price movement.

3. Reversal Trading

Lastly, a more contrarian strategy is looking for established trends and finding signals that the stock is due for a reversal. This may look like a support level that the stock cannot break despite a handful of attempts or a consolidation phase after a massive move, which can indicate that the sentiment is changing soon.

To illustrate, suppose Stock UVW has been going down for the past three months, where the stock went from $10 to $7, making an all-time low. However, for the past three weeks of those three months, you notice that despite its numerous attempts to close below $7, it has always closed above $7, making it a major support level. Based on this, you can consider buying since it could mean that the stock is considered a bargain and there are more buyers than sellers, indicating that it may shift its course soon.

Risks and Opportunities of Trading Stocks

RisksOpportunities
Market Risk – The risk that the general market will decline due to bearish market sentiment, pulling down the value of individual stocks, regardless of their individual strengths or weaknesses.Capital Appreciation – Stocks have the potential for significant long-term growth (as evidenced by their historical performance versus other assets), outperforming other investment vehicles.
Geopolitical Risk – The risk that political instability, crises, or changes in government policies, especially in key economies (such as the US and Europe), will negatively impact market sentiment around the globe✅ Income through Dividends – Some stocks, particularly blue chips, issue dividends from the company’s residual income, which you can then reinvest or use as a source of regular income
Industry Risk – The risk that is inherent in a specific industry (such as an adverse economic event that may disproportionately hit that industry the hardest), negatively affecting all companies within that sector✅ Ownership in Companies – Buying stocks means owning a part of the company that issues it, allowing you to benefit from its growth and success, particularly over the long term.
Company-specific Risk – The risk of investing in a company that could suffer from poor management, financial instability, product failures, or even bankruptcy✅ Diversification – Stocks offer a high degree of diversification to your investment portfolio by investing across diverse and low-correlated stocks, industries, and geographies.
Volatility Risk – The risk of wild price swings in specific stocks, which can result in considerable losses within a relatively short period.✅ Regulatory Protection – Government agencies highly regulate stock markets, offering investors a higher degree of protection than other asset classes.

Costs and Fees

The costs and fees associated with stock trading vary significantly depending on the brokerage firm, the type of service provided, where you are located, and even your specific trading habits (overtrading can cost you in fees). Here are the most common costs and fees you might encounter when trading stocks:

  • Brokerage Commissions – This is the fee a broker charges for executing trades on behalf of the client. Commission rates vary widely between brokers; some even offer commission-free trades for stocks and ETFs.
  • Spread – The spread is the difference between the “bid price” (what buyers are willing to pay) and the “ask price” (what sellers are asking for). While not a direct fee, the spread can be a “hidden fee” that can affect your total trade’s cost, as investors typically buy at the higher ask price and sell at the lower bid price. (This is also how commission-free brokers mainly make money).
  • Platform Fees – If you use a specialized or premium trading platform the broker provides, there might be additional fees for greater access to exclusive features, data, or research.
  • Regulatory Fees – These are fees imposed by regulatory bodies. They are usually very small, but they can add up over many trades. The fees also vary considerably based on your location.
  • Margin Interest – If you decide to trade on margin (borrowing money from your broker to buy stocks), you will be charged interest on your borrowed capital.

Methods to Learn Stock Trading

1. Free Trading Materials Online

The first and perhaps the most inexpensive way to learn how to trade stocks is through utilizing the power of the internet to learn for free. Although this would be much longer than, say, paying someone to mentor you directly or buying an online course, it is still an effective way to learn how to trade. In fact, many traders utilized this method and are now successful. You just need patience and grit to push through.

2. Reading Books and eBooks

This second method is another relatively inexpensive way to learn stock trading. In fact, if your local library has trading books, then you can also learn for free. Nevertheless, books and eBooks are much cheaper alternatives than the next methods while still providing a goldmine of information and learning as long as you put your mind and heart into it.

3. Paid Online Courses and Webinars

The third way is to pay for premium trading content online. The cost of this method varies widely based on specific trader’s offerings. Nevertheless, we advise you to do your due diligence in researching the background of the trader and look for previous reviews to see if it is legitimate in the first place. Unfortunately, many fraudulent and unsuccessful traders make their living selling courses instead of actual trading.

4. Mentorship Program

This fourth method can be the most expensive way to learn how to trade. Mentorship provides a highly personalized and tailor-fit approach for you to learn how the ins and outs of stock trading. Nevertheless, like the third point, it is crucial to also do your due diligence before deciding to commit since a significant amount of money is likely on the line.

5. Joining Trading Forums and Social Media Groups

Lastly, you can join trading forums and social media groups to share and get trading ideas. Nevertheless, this is the method we strongly advise against doing, particularly if this is your primary way to learn how to trade. This is because these trading forums and social media groups are often filled with undisciplined and emotional traders who have most likely not been consistently profitable traders. Thus, you risk adopting their bad habits and getting a wrong impression of how trading “works.”

Over-the-Counter (OTC) Stock Trading

OTC stock trading refers to trading stocks directly between two parties without the oversight of a central exchange, such as the New York Stock Exchange (NYSE) or NASDAQ. OTC trading happens via a network of dealers who communicate and negotiate prices via telephone, email, and electronic networks.

Pros and Cons of OTC Trading Compared to Traditional Stock Trading

ProsCons
Wide Selection – OTC markets provide access to a broad range of companies, including smaller, newer, or niche companies that might offer exceptional investment opportunities.Higher Risk – OTC markets often list smaller, less established companies that do not meet the requirements to be listed on formal exchanges. 
Potential for High Returns – Early investments in successful companies that begin on OTC markets can be very lucrative if those companies grow and ultimately move to formal exchanges.Less Regulated – OTC markets are generally less regulated than formal exchanges. While there is still some regulatory supervision, the rules are usually less stringent.
Diversification – OTC markets present additional diversification options for investors’ portfolios by providing access to different companies and industries, often outside what is available on traditional exchanges.Less Transparency – OTC trading is typically less transparent than exchange trading. Prices and transaction data are not always publicly available, making it harder to obtain accurate market data.
Direct Negotiations – Transactions in OTC markets can involve direct negotiations between parties, which offer more flexibility in pricing and terms than the standardized procedure on formal exchanges.Less Liquid – Stocks traded in OTC are generally less liquid than those on exchanges. This means fewer buyers and sellers, making it substantially harder to execute large trades without affecting the price.
Flexibility in Trading Hours – OTC markets generally offer more loose trading hours than traditional exchanges with set trading hours. This can be practical for investors who cannot trade during market hours.Higher Costs – Trading costs in OTC markets can also be higher because of lower liquidity and the need for dealers to profit from your trades.

Should you do it?

Well, we advise that you do not. As a beginner, engaging in such a market is relatively more complex and, frankly, unnecessary. Furthermore, the pros of trading in the OTC market are overshadowed by the cons you are most likely to encounter and face difficulty with, especially as a beginner.

Conclusion: Stock Market is a beginner-friendly Financial Market

With all these considered, the stock market is perhaps one of the more beginner-friendly financial markets, especially compared to the relatively more complex and volatile markets such as Forex and derivatives. Additionally, it offers the safety net of being highly regulated with abundant online learning resources to help beginners like you get started. Nevertheless, it is crucial to conduct thorough due diligence, constantly refine your strategy, and adopt proper risk management practices to become a successful and consistent trader.

Frequently asked questions on Stock Trading:

What is a stock/share?

A “stock” or a “share” is a financial asset representing fractional ownership of a publicly listed company. Hence, when you buy stock in a specific company, you become a “part owner” or stockholder/shareholder of that company. As a part owner, you are entitled to voting rights that are equal to your ownership stake during stockholder/shareholder meetings.

Which stocks are good for trading?

It depends on your timeframe. Generally, there are different types of stocks, such as “Blue Chips,” which are typically the biggest publicly listed companies (such as the Fortune 500 companies) and are typically ideal for long-term investing; “Mid-Cap” stocks represent medium-sized companies in a particular industry and ideal for medium-term trading. 
Then, “Small-Cap” stocks are often relatively new companies with the lowest valuation and liquidity among the three, which is often associated with short-term trading opportunities as it is often the most volatile. Lastly, there are “Penny Stocks” that are much smaller in terms of valuation and highly speculative in nature. These stocks are predominantly only traded intra-day or for a couple of days at most.

Can I make money trading stocks?

Yes, like any other financial asset, you can make money by trading stocks. However, it is important to remember that you can also lose money or, worse, wipe out your entire account if you approach this endeavor ill-informed and without proper risk management. Hence, doing your due diligence in learning and researching about the stock market is crucial to effectively making money by trading in a disciplined manner and avoiding catastrophic losses.

How much money do you need to start trading?

It depends on your location and the broker you selected. Stock trading is the most prominent form of trading, and based on where you are (and which stock market you trade), the amount of money you need to start investing can vary. For example, in the US, there are “zero fee” brokerages where you can start investing as little as $1. On the same token, some high-end brokerages offer a “premium” suite of services and products where capital needed to start trading can go upwards of $1,000 or more. 

How do I start trading stocks?

Assuming that you have already done your research and due diligence, you then need to formally open a brokerage account that facilitates the trading of your preferred stock selection (for example, if you are not from the US but would like to trade US stocks, then you would need to open an account with a brokerage that can legally trade US stocks). You can then choose to open a “demo account” first to test your strategy and how the broker’s platform works or start live trading with small capital to test your strategy without risking a potentially significant financial loss.

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