There’s a reason why so many people choose to invest their capital in the stock market, and that’s because of the variety of investment opportunities that it presents to traders. You can trade in financial instruments such as shares, derivatives and bonds on the stock market, and since prices are highly vulnerable to influence from external factors, short-term fluctuations can present great opportunities to profit.
Of course, the volatility of the market can also pose the risk of making losses, so it’s vital that you understand the factors that can cause prices to rise and fall. Additionally, when using the Plus500 stock trading platform for example, you can apply risk management tools to your trade to minimise the chances of making significant losses.
To further help you to become a proficient trader in the stock market, here are some of our top trading tips to help you on your way and to give you the confidence to open a position.
Do your research
You wouldn’t start an essay without researching the topic that you were writing about; it simply wouldn’t be possible. The same goes for trading in the stock market. Before you invest in a particular stock, it’s vital that you look into the factors that can affect the prices of the financial instruments in question. One such factor are global events that are unprecedented, like the recent coronavirus pandemic for example, but also includes annual events that take place and are charted in the economic calendar, like the Federal Open Market Committee (FOMC) meetings.
Because the landscape of the stock market can change extremely quickly, you should aim to keep up to date with news releases and the emergence of particular market trends, to help to inform your decisions. The market is also highly influenced by market sentiment, which is effectively a collective belief from traders that the price of a stock will change. This anticipation of change causes traders to react and in turn, causes price movement. This movement can be short term however, so can be a great opportunity to make a profit.
Take advantage of the tools available to you
To minimise the risk of making losses, and to help you to make well-informed decisions in the stock market, it’s important that you take full advantage of the tools and indicators available to you on an online trading platform. One of the most important skills that you will need to acquire is the ability to carry out fundamental analysis, which is the investigation of a stock’s financial health in order to determine whether it is a viable investment. This will also enable you to decide whether the stock is under or overvalued, and will give you a detailed picture of what the stock is worth.
There are a range of fundamental analysis tools available to you online, which will help you to decide whether or not to invest in a stock. These include:
- Price-to-earnings ratio
- Price-to-sales ratio
- Price-to-books ratio
- Earnings per share (EPS)
- Return on equity
- Projected growth of earnings
- Dividend yield ratio
- Dividend payout ratio
Ease yourself in
There’s no rush when it comes to investing in the stock market, as it’s better to wait until you’re ready and have sufficient knowledge of the stock, and when the market presents sufficient opportunities for investment. Before you invest your capital in the stock market, the best practice is to open a demo account, where you can trade freely without the risk of losing money. When you do eventually feel ready to invest, start with a small position, figure out your trading style and try to apply an appropriate strategy that suits you. Remember, there’s no ‘one size fits all’ approach to trading, so your trading strategy might be completely different to the next trader, but if it works for you, then it can’t be disputed.