The stock market is a massive market with several traders investing on a daily basis. The market capitalisation of the stock market as of September 2021 stands at $3.4055 trillion. It is proof that traders invest in the stock market and earn good returns from it in various ways. There are many ways through which investors can maximise their profits. They can use options contracts, swing trading, hedging, long term trading, short term trading and many more.
An investor of the stock market is never short of options to earn, as the market is the oldest and has updated to technological changes every time; it is the best way to generate income. Traders have to take care of some key points while investing in the stock exchange.
In the article, we have discussed the stock market, how it functions, and all options to invest and earn high profits. By the end of this article, we are sure readers will be able to understand the stock market and how they can invest in the market to maximise their profits. So let’s quickly dive into the details.
What is the Stock Market?
A stock market is a public trading market that issues, buys and sells shares of various types being traded on stock exchanges or over-the-counter. Stocks are the shares of any company, institution, or government institution etc.; these all are offered in public for trading to generate capital. The stocks are even available to be traded in fractions for traders who cannot afford to buy whole shares.
Investors holding shares of the company get the position of shareholders in the company, thus, having an ownership stake in the company. The shares of a company are also referred to as equities. Moreover, the stock market aids in the development of the economy with companies making good capital, wealth or gains through trade.
The stock market has been the oldest market of the trade sector; it was first invested through the traditional manner that is via stock brokers. Traders visited brokers offices, stock exchanges and much documentation, a hectic job for investors.
But, with technological advancement, the trade is online, there’s no need to visit a broker, all the queries are sorted over calls, documentation is almost nil and traders can monitor their trade whenever they want.
So, a more improved and developed version of stock market trading enhanced the accessibility of the market. Now, everyone can invest easily through online trading.
Stock Exchange Purpose
Next, the question that arises is why do we need the stock exchange?
The answer is quite simple. The stock market serves two significant functions of the trade. The first one is capital generation to enhance the economy, and the second is to provide investors with good investment opportunities.
Capital is the valuable part of the stock market that provides companies, institutions and others with the opportunity to expand their business. It is useful input into the market as funds are generated for expansion and more trade of the company shares. For example, If a company has converted its $1 million into shares for trading, initially, they were sold at $10 per share.
Thus, the capital of the firm increased by double; they got $10 million for the $1 million shares. The capital increased with more exposure and expansion. Companies may use the funds for expansion and grow the business.
Moreover, the companies can avoid unnecessary debts incurred due to loans or borrowing of money.
Secondly, investment in the stock market with opportunities to make money. Traders or investors of the stock market have several ways to make profits from the stock market. They have to figure out the most potential stocks and invest to maximise the profit. In fact, traders investing in stocks can earn through companies who pay dividends or by selling stocks in the market.
However, traders have to be quick and alert with the trade to never miss the opportunity.
How does the stock exchange work?
Stocks are mostly traded through stock exchanges such as the London Stock Exchange or NASDAQ. Stock exchanges are quite convenient as they offer traders a place to buy and sell shares in the market. In addition, the exchanges are regulated by authorities that have a set of rules and regulations for the operation of such organisations and the safety of investors.
For example, the London Stock Exchange is regulated by the Financial Conduct Authority (FCA). As a result, the functioning of stock market trading is smooth with the regulations of authority from frauds and other malpractices.
Some stocks are traded via over-the-counter; in this, the buying and selling of stocks are done through a dealer or broker. These are specific dealers or market makers of the stock market. OTC stocks are not required to fulfil any requirements of minimum price or other that apply on stock exchange trading.
OTCs have no proper regulations, security of trade and obligations, which makes it challenging for traders. As the traders do not have access to information relating to companies, the bid and ask prices also have high spreads and require more effort.
However, most of the stocks are traded through stock exchanges as they are more liquid, convenient and have tight spreads.
Options for the stock exchange trading
Traders of the stock market have several options in hand to trade that maximise their profit. In the paragraph below, we have discussed the possible investment options that are available with the stock market. By trading and adhering to the market tactics, traders can make money. However, inventors or traders have to be well versed with the market and how they should invest to earn.
Day trading is an active stock exchange trading strategy that requires investors to buy and sell stocks within a day. Investors hold the stocks for some minutes or hours, and when they find a potential opportunity to earn a profit, they sell it in the market.
Traders of day trading close their trade when the market closes and do not trade overnight. Instead, the trade starts with the day’s market opening and closes with the market closing.
A popular trading technique, day trading is mostly used to capitalise on small-scale market fluctuations in stocks.
However, traders have to be efficient and be proficient in their trade to earn in day trade. Traders with a complete understanding of the market, its volatility, and other factors are necessary for day trading. Traders who have years of experience in trade often go for day trading.
An intraday trading technique also called micro trading, scalping is earning small profits in the trade. It is in a way similar to day trading, where investors earn small profits in a day repeatedly. The profits may be several or little depending on the trade and market conditions. Sometimes traders may face loss as not all investments make profits.
However, the holding of securities in scalping is less than day trading; investors hold the security for a few minutes and sell them immediately to earn profit. The transactions in scalping are frequent and need quick actions from traders to maximise profits.
But, traders of such strategies require good experience, awareness of the market, take quick action and proficiency in trade.
A short term trading style to maximise profits, swing trading is quite a valuable trading pattern that helps investors make money. It operates for a few days, in which traders study the swing patterns to make further decisions. The days may range from one to seven days.
It is a technical analysis method that predicts the price movement of the security. Then, based on the swing trade patterns, investors decide their future course of action to maximise profits.
Momentum trading is a unique way of trading stocks, in which traders exploit stocks momentum. Momentum means the ability of stocks to move faster or develop; the substantial value of the stocks either moves upward or downward.
Traders of such techniques try to generate profit in such market conditions. They identify stocks that are moving upwards, the stocks that are breaking or the stocks that move sideways.
In this kind of trading, traders should be able to understand the movement of stocks. When the stock is increasing, investors sell them in the market to earn profits. Similarly, in a downward movement, the stocks are purchased at less value in the hope of selling them at a higher price. Thus, earning high returns from the stock exchange trading.
Limit Order Trading
Another opportunity of enhancing the profits in the stock market is by limit order. In limit order trading, traders can limit their maximum and minimum prices for buying or selling stock. These only set the limits and are not executed, which is the key difference between a limit and a market order.
To better understand this, let’s take an example, suppose a trader wants to purchase a company’s share in the UK but notices that the price is higher than it should have been, so he sets a limit order. The limit order is at $48 or less, so when the price of the share reaches this level, it will automatically buy the shares.
However, they also have drawbacks as the share price may fall or not is not known, so traders may wait for long.
Market Order Trading
Market trade order is the most basic and primary stock exchange trading strategy. In a market order, the traders simply invest in the stock at the current market price of the stock.
Suppose a trader wanted to invest in a company’s shares and thought it would be around $10, but it was running higher at $15, so, in this situation, the trader buys the share and executes the trade on a market order.
So, we can say that traders are willing to pay the market price for the stocks in the market order.
Leverage is the ratio that is provided by the online brokers for the client; the clients get a higher position in the market with the use of leverage. So, the traders with less initial deposit can use leverage to open at a high position. However, the risk also increases with the use of high leverage.
It is a good stock exchange trading strategy of the market, where traders have a good trade position in the market and can earn high profits with a leverage ratio. If the investment makes a small profit, traders can enjoy double profits with the leverage.
For example, a trader’s minimum deposit is $100, and with the use of leverage, the trader had a high position in the stock market. So, when the value of the stock increases in the market, traders sell it at the leverage plus the initial deposit price, thus earning double profit.
Options trading is yet another stock exchange trading technique that could be used for earning profits. These are conditional derivative contracts in which traders of the stock market buy and sell the stocks at a chosen price. However, traders of stocks who are purchasing the stock have to pay a premium charge to the seller.
An options contract is a deal between two trade parties of the stock market. In this, an underlying stock is traded at the present price within a timeframe or the expiry date decided by the parties. The price paid within the timeframe decided is called the strike price.
Moreover, options have call and put options in the stock exchange trading.
Stock exchange trading has good opportunities for traders to maximise their profits. The article has listed the major trading options available in the stock market to earn high profits.
However, the use of these requires professional knowledge and understanding of the trade and the stock market. A trader cannot go blind while trading, as they may face huge losses.
Before going live in the market, traders of the stock market should study stocks, the market and its fluctuations and look for reputed brokers that have all the services required. Some of the best brokers with proper authority and regulation are TradeATF review , ETFinance and ROInvesting review.
With the help of brokers, traders can invest in stock exchange trading, look for potential opportunities, make strategies, and invest accordingly.