What is trading?
Trading is buying and selling financial products to make a profit. Simply put: you buy something when you think the price will go up, and sell it when you think the price will go down. The difference between your buy and sell price is your profit (or loss).
Daytrading vs swingtrading
There are different ways to trade. The two most popular styles are:
Daytrading: You open and close positions on the same day. All trades are completed before market close. This is intensive and requires constant attention, but you avoid the risk of overnight price movements.
Swingtrading: You hold positions for several days or weeks. You wait for larger price movements and don't need to constantly watch your screen. Ideal if you're combining trading with a job.
Can you only make profit when prices rise?
No! You can also make profit when markets fall. You do this by going "short" instead of "long".
Going long means you buy a stock because you expect the price to rise. This is what most people know: buy low, sell high.
Going short means you make profit when the price falls. You first sell a stock (that you borrow from your broker) and buy it back later at a lower price. The difference is your profit.
For you as a trader, it makes no difference: you simply click "short" instead of "long" in your trading platform. The rest happens automatically. You don't need to borrow or return anything yourself - your broker handles that for you. This way you can profit from both rising and falling markets.
Which financial products can you trade?
Indexes
An index is a collection of multiple stocks that together represent the performance of a certain market. Think of the S&P 500 or Nasdaq in America. By trading an index, you're trading a whole group of companies at once. This makes the chance of unexpected outliers slightly smaller.
Stocks
Stocks are ownership shares in a company. When the company performs well, the value of your stock usually increases. The American market is most popular among traders due to high liquidity and volatility.
Crypto
Cryptocurrencies like Bitcoin and Ethereum are digital currencies. This market is open 24/7 and highly volatile. Perfect for traders who love fast movements, but also riskier.
Forex
Forex is trading currencies. You trade, for example, euros against dollars. The market is enormous and highly liquid, with spreads that are often smaller than stocks.
Futures
Futures are contracts to buy or sell a product in the future at a fixed price. You trade with leverage, meaning you can open large positions with little money. This increases both your profit and loss potential.
Options
Options give you the right (not the obligation) to buy or sell a stock at a certain price. More complex than stocks, but offers more strategic possibilities.
As a beginner, it's best to trade indexes and stocks. These are the easiest to understand and have clear, predictable movements. You don't need to understand complex contracts like with futures or options, and you have access to reliable information and analysis. Moreover, the costs are lower and the risks are more manageable than with more advanced products like crypto or forex with high leverage.
Choosing stocks
One of the most important selection criteria, especially for beginning traders, are volume and spread. Look for as high a volume as possible, at least more than 1 million transactions per day. The spread should be as low as possible, preferably no more than a few cents.
What is volume?
Volume is the number of shares traded in a day. High volume means there's a lot of trading activity. This is good because:
- You can enter and exit positions more easily
- The price moves more smoothly without large jumps
- There's less chance of market manipulation
Market manipulation means that large players (like hedge funds) artificially influence the price by placing large orders. With low volume, one large order can significantly move the price, which is disadvantageous for you as a small trader.
What is spread?
Spread is the difference between the bid price (what you can sell for) and the ask price (what you can buy for). For example: if the ask price is $100 and the bid price is $99.98, then the spread is $0.02.
A small spread is favorable. You pay less in transaction costs and need less movement to be profitable. High volume stocks usually have smaller spreads. Low volume = larger spread. When few people are trading, the difference between buying and selling is greater. This costs you money on every trade.
Besides volume and spread, there are other factors that make a stock attractive:
Volatility: How much does the price move? Too little movement means few profit opportunities. Too much movement can be risky for beginners.
Market capitalization: Large companies (like Apple, Microsoft) are usually more stable and predictable than small companies.
News and events: Earnings, product launches, and other events can cause large price movements. Be prepared for these.
Stocks for beginners
Start with the American market. This market is most accessible and has the best tools and information available.
Market indicators you should follow (and that you can also trade):
- SPY: Tracks the S&P 500 index. Gives you a feel for the general market direction.
- QQQ: Tracks the Nasdaq 100, with focus on technology.
Large tech giants are ideal to start with, for example TSLA, NVDA, AMD, AAPL, GOOGL, MSFT and AMZN.
These stocks have high volume, small spreads, and enough movement to trade profitably. Perfect for taking your first steps.
Next steps
Now that you know what trading is and which products you can trade, it's time to dive deeper into what tools you need to be able to trade. In the next chapter, you'll read more about this.