Learning how to trade stocks is one of the most popular ways to invest your money. 

The potential for making very high profits is enormous, and with high-flyers such as Apple, Microsoft, and Amazon leading the way, the stock market is huge. 

In this article, we will explain how trading stocks work, what concepts and definitions are important, provide real-world examples, and highlight the 10 best stocks to trade. 

Whether you are just starting out or are getting a refresher, this guide will help to improve your trading skills.

How to Trade Stocks: Understanding the Basics

Before we get into the nitty-gritty of how to trade stocks, it’s useful to understand the basics. A stock, share, or equity – whatever you want to call it – is a fractional ownership of a company. 

When you buy a share of stock, you own a piece of that company. You are entitled to part of the company’s profits and assets.

The Size of the Stock Market

The world market capitalization of equities is greater than $90 trillion, meaning that the liquidity is vast, and all traders can get into and out of positions fairly, meaning that it is a competitive market.

Trading equities allows you to bet on the price movements of individual companies and it is a very dynamic market.

How to Trade Stocks: Key Terms You Need to Know

1. Stock

A stock is a security that represents ownership in a corporation and a claim on part of the corporation’s assets and earnings.

Real-Life Application

If you think Apple will continue to progress and grow, you might buy a share of Apple stock to profit from any increase in its value.

2. Dividend

A dividend is the portion of a company’s earnings that is distributed to the firm’s shareholders, generally occurring quarterly.

Real-Life Application

If you hold shares of a dividend-paying company, you receive regular payouts as long as you stay as a shareholder. For instance, if you own 100 shares of a company that pays an annual dividend of $1, you’d receive $100 per year.

3. Market Order

When you make a market order, that’s the same as telling your broker to buy or sell the stock at the best possible price at that moment in time.

Real-Life Application

If you wish to purchase shares of Tesla as rapidly as possible because you expect the price will rise, then you can enter a market order to buy the stock at the prevailing market price.

How to Trade Stocks: Getting Started

Choosing a Broker

The success of your trading career will depend on which broker you choose, so select a broker that’s trustworthy, has good fees, and has a strong trading platform. It’s also important that they be properly licensed by a good regulator, such as the SEC, FCA or ASIC, to make sure that your funds are safe.

Opening a Trading Account

Once you’ve selected your broker, you’ll need to open a trading account. Register your details, verify your identity, and fund your account. Most brokers provide demo accounts to test trading without funding.

Developing a Trading Strategy

A well-defined trading strategy can help you be successful in the Forex market.

Your trading strategy should include information about how and when you will enter a trade, when you will exit that trade, what your risk management rules are, and what type of Forex analysis you will use. 

Examples of Forex strategies include technical analysis, which is a method of analyzing prices and price patterns on a price chart; and fundamental analysis, which is an analysis of the financial performance of a company and/or the economy.

How to Trade Stocks: Top 10 Stocks to Trade

1. Apple Inc. (AAPL)

Apple is one of the world’s most valuable and influential technology companies, known for its game-changing products such as the iPhone, iPad and Mac.

 Real-Life Application

If you think that Apple’s next product launches will increase its stock price, you can buy AAPL and profit from the future growth.

2. Microsoft Corporation (MSFT)

Microsoft is a worldwide innovator in software, services, and solutions that empower people and businesses through a broad portfolio of products and services including Windows, Office and Azure.

Real-Life Application

If you expect solid earnings reports from Microsoft’s cloud computing sector, you might invest in MSFT ahead of a price influx.

3. Amazon.com, Inc. (AMZN)

The company is the biggest online retailer in the world, and its cloud-computing division, Amazon Web Services (AWS), alone accounts for a sizable chunk of the internet’s computing power.

Real-Life Application

Perhaps you believe that the company’s growth in e-commerce and cloud services will continue and you buy shares of AMZN to capture the benefit from these expanding market shares.

4. Tesla, Inc. (TSLA)

Tesla, the leading manufacturer of electric vehicles and a provider of renewable energy solutions, is a company known for its innovative technology and its plans for rapid expansion.

Real-Life Application

If you think that Tesla will dominate the electric vehicle sector, you might purchase TSLA shares to reap the rewards of their future growth.

 5. Alphabet Inc. (GOOGL)

Alphabet is the parent company of Google, the world’s biggest digital advertiser, search company and innovator in technology.

 Real-Life Application

If you expect GOOGL’s advertising revenue to rise, for example, you might trade GOOGL shares in an effort to take advantage of its prospective earnings growth.

 6. Facebook, Inc. (FB)

Facebook is a large social media and technology company; its various platforms include Facebook, Instagram, and WhatsApp. 

 Real-Life Application

You might buy Facebook if you think that people will continue to flock to their social network and advertisers will continue to flock to them.

 7. Berkshire Hathaway Inc. (BRK.B)

Berkshire Hathaway, a multinational conglomerate holding company whose principal investor is the renowned investor Warren Buffett, owns a number of subsidiaries in different industries.

 Real-Life Application

If you believe in Warren Buffett’s investment prowess, and also in the fact that Berkshire Hathaway’s many holdings themselves are well-diversified, you could end up buying BRK.B shares that should grow steadily for a long time to come. 

 8. Johnson & Johnson (JNJ)

Johnson & Johnson is a global leader in pharmaceuticals, medical devices, and consumer health products.

 Real-Life Application

If you think Johnson  Johnson will continue to earn above-average returns on its diverse healthcare portfolio and for its robust pipeline of innovative products, you might buy JNJ stock for its stable growth.

 9. JPMorgan Chase & Co. (JPM)

JPMorgan Chase is a multinational financial services company offering investment banking, asset management, and a range of financial services. 

 Real-Life Application

If you believe that the financial sector will outperform the market as a whole, then investing in JPM will plug you into its strong market position and diverse service offerings.

 10. Visa Inc. (V)

Visa is a leading global payments technology company, connecting consumers, businesses, banks, and governments in a digital economy. 

 Real-Life Application

 If you believe that payments and transactions will increase on digital media, you might buy Visa stock to benefit from its global leadership and increasing global footprint.

 How to Trade Stocks: Analyzing the Market

 Technical Analysis

 Technical analysis refers to the study of price charts and the use of indicators to predict future price activity. Moving averages, relative strength index (RSI), and Fibonacci retracements are examples of such tools.

 Real-Life Application

 If you see Apple forming that ‘double bottom’ pattern, you might expect a trend reversal, perhaps placing a trade to capture the anticipated movement in price.

 Fundamental Analysis

 Fundamental analysis looks at economic data, company financial results and market sentiment to gauge the value of a stock: Earnings reports, revenue growth, and profit margins are principal indicators.

 Real-Life Application

 Say, for example, that you receive news that Microsoft’s earnings were better than expected, and so you trade MSFT shares because you expect the stock price to increase as a result of induced exuberance.

 Sentiment Analysis

Sentiment analysis estimates the mood of traders and investors in the market. Social media sentiment analysis and news sentiment are examples of such tools.

 Real-Life Application

This is essential because if sentiment indicators show that the crowd is euphoric about Tesla – for example if all the traders are saying that they’re long on Tesla – this could mean that the rally will continue.

 How to Trade Stocks: Managing Risk

 Setting Stop-Loss and Take-Profit Orders

Stop-loss orders close a trade at the predetermined loss level to prevent you from getting ‘stopped out’ of a large loss. Take-profit orders close a trade at the predetermined profit level to lock in a win.

 Real-Life Application

You might buy shares in Amazon at, say, $3,000 and place a stop-loss order at $2,800 to cut off your losses, and a take-profit order at $3,500 to lock in your profit.

 Position Sizing

Next comes position sizing, the decision of how much capital to risk on any one trade. A simple rule is to never risk more than 1-2% of your trading capital on any one trade.

 Real-Life Application

You have a $10,000 trading account and want to risk 2% per trade. So, you risk $200 per trade. That keeps your risk manageable and your capital intact.

 Diversification

Diversifying across stocks helps reduce risk, as putting only a small amount of capital into each trade reduces the risk of a single trade going against you.

 Real-Life Application

Rather than trade just Apple, you would be trading a combination of stocks such as Microsoft and Amazon to spread your risk over several sectors.

 How to Trade Stocks: Staying Informed

 Keeping Up with Market News

Keeping up with the news is a must for stock traders. There are news websites, economic TV, and bulletin boards for collecting stock market information.

Some key events that are reported are the economic performance of a whole country and the announcement of a particular company about future plans. Such news can influence the price of a stock.

There are various news websites. They provide the economic situation of a country and the price of stocks. 

Economic TV is broadcast 24 hours along with some bulletin boards. Some people study markets by analyzing figures and stock share information.

Stock market forums are available online where investors are allowed to post opinions about a company. This can be useful for a stock trader when making an investment decision.

 Real-Life Application

 If you see an upcoming meeting of the Federal Reserve listed on an economic calendar, you might be careful not to buy or sell any shares until after the meeting, because interest rate decisions can have a major impact on stock prices.

 Continuous Learning

 You should always be open to learning new things, since the stock market is a place that is constantly changing and evolving. Attend webinars, read books and participate in trading communities to improve your knowledge.

 Real-Life Application

 You can improve your trading skills by attending webinars offered by more experienced traders, which can help you catch on to and understand what’s happening in the market currently.

How to Trade Stocks

Learning the art of trading stocks can be a very exciting experience, especially if you know what you are doing. 

If you learn the ropes, find a trustworthy broker, choose a good strategy, and keep yourself well-informed, trading stocks can become a great source of income. 

You just need to make sure you are fully aware of the risks involved and learn how to minimize them, as well as educate yourself on how to succeed and practice your skills until you do.