Stock Trading Guide


The stock market is basically just one giant auction, similar to any other auction, except it is incredibly efficient and involves millions of buyers and sellers and instead of toys, video games, furniture, etc. you are trading small ownership in a company (equities, stocks) and debt owed by those companies. Furthermore, you can buy currencies, options to buy/sell a company at an agreed upon price (options), trade exchange rates, etc.

So let’s start out with how this auction works.

You are a buyer of a stock. You want to buy one share of Apple. If you buy that one share at $173.90 (current day’s price), then you own 1/861.74million of that company.

So, to do this, you would first need to open a brokerage account. If you live in the US, Robinhood is a very popular trading platform. Others include Questrade, Qtrade, TD Ameritrade, etc. etc. there are many options and they differ based on how much quality information they provide you on your trades, the commissions on the trades, the customer service provided, etc.

So let’s get rolling. You open your brokerage account and you buy 1 share of APPL. The bid price is the price that is currently dictated that people are buying it at. The ask price is what the sellers want to get for it. A very liquid stock (lots of trades) would have a very low bid-ask spread.

So let’s discuss some of the mechanics of how the stock market works. The stock market follows a random walk (that is, it randomly walks forward and backwards and changes every day based on new information that comes available about a stock) and this generally follows a trend. A good point to start at to understand how this all works is to read “Random Walk Through Wall Street”.

To get into more details of this, you should start to understand how the market works. The market will go through stages: prosperity, peak, recession, possibly depression, and eventually back to prosperity. GDP growth, unemployment numbers, consumer confidence, etc. all help to tell us where we are in the business cycle but no one can be entirely sure how close we are to the next recession (we are currently in the longest bull market since The Great Depression). Another more in-depth book to consider reading is “The Intelligent Investor”.

Once you start to understand how this all works, you should figure out how to trade on it. Say unemployment numbers go down, how do you react? If the government deficit increases, how do you react? If the Fed announces that they will slowly raise interest rates, how do you react? You can read about this in “When it rains in Brazil, Buy Starbucks” and you can find an economic calendar:

So that is a great starting point for learning about trading stocks. As mentioned in other comments, you can also learn a lot from simulators and from reading investopedia articles and definitions etc.

Some common ones: Beta is the correlation of a stock to the overall stock market Price/Earnings ratio: This is the ratio of how much the price of a stock is reflective to their net earnings available to shareholders. A growth stock has a high P/E ratio.

There are two different prices, yes.

Just imagine you are negotiating to buy a bike with a guy off Craigslist. You offer $80. That’s your bid price. He says, no, that’s a ripoff. I want $120. So you’re both too far apart and can’t come to an agreement.

Then there’s a second seller of the same identical bike and he wants $110. Then there are 10 more identical bikes all selling for $110. The other guy just realize he can’t get $120 so he drops his asking price to $110. In fact, he goes down to $105 to sell immediately.

Now there’s a bunch more buyers. They’re willing to pay $100. So you can’t offer $80 any more because everyone else is offering $100. So you decide to raise your bid price to $100. In fact, you really want it, so you raise your bid price to $105. Bam. Now the bid-ask spread is zero and it sells at $105.

For thinly traded stocks though (few buyers and sellers), the seller may be asking too much money and the buyer is offering too little. In that case, there are two prices, and you may not come into agreement (we call this illiquid). Eventually with a stock that has thousands or millions of buyers and sellers, these two prices eventually converge into one – just like in the example I provided.

You can click link to register and start trading to earn.





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