Want to buy and sell shares online? Get started with this step-by-step guide on how to start trading stocks.
How to trade stocks
The stock market is full of opportunities for every level of trader, with thousands of shares to choose from and a variety of different ways to get involved. However you’d like to start buying and selling stocks online, you’ll need to follow these four steps:
How does the stock market work?
Most share trading takes place on stock exchanges like the New York Stock Exchange or London Stock Exchange, which facilitate the buying and selling of shares between different parties. You have to be registered to trade directly on an exchange, though, so most people will go through a stockbroker.
In leveraged trading, your provider takes the place of your stockbroker – opening and closing positions based on your instructions. Today, the majority of retail share trading takes place online, using a platform to communicate with your broker or provider.
What moves stock markets?
Like any financial market, the biggest driver of share price volatility is supply and demand.
Share supply
There’s always a limited number of available shares in any company – although it can choose to release more, or buy some back to reduce the supply on the market. If a company releases more stock and demand doesn’t rise to match the increased supply, its share price will go down. A buyback without a corresponding drop in demand, meanwhile, will increase a company’s share price.
Share demand
While a company will typically have tight control over the supply of its shares on the market, demand can fluctuate due to a wide range of factors. Here’s a quick look at three of the most important ones to watch: earnings reports, external factors, and sentiment.
Earnings reports
Most stock exchanges require that listed companies release reports breaking down their financial performance once every quarter, with a full report once a year. The contents of these reports will usually have a major influence on the company’s share price, as traders and investors pore over the details as a key part of their fundamental analysis.
Fundamental analysis involves assessing all of the internal and external factors that make up a company’s fair value, and then comparing that value to its current market price. If a stock looks undervalued, you might consider it an opportunity to buy. If it is overvalued, it might present an opportunity to sell.
A company’s financial performance offers a strong insight into its current fair value. Some of the biggest fundamentals in earnings reports that can drive demand include:
Fundamental |
What is it? |
Investing |
|---|---|---|
Revenue
|
How much capital the company is bringing in, with no costs removed. |
Particularly key is whether revenue is growing – a company may have improved its profits by cutting costs, but if revenue is stagnating it could be a bad sign of what’s to come. Revenue is often referred to as a company’s ‘top line’. |
Profit |
Revenue, minus any expenses. |
Profit determines how much money the company is making, and can be either paid to investors in the form of a dividend or reinvested in future growth. Profit is often referred to as a company’s ‘bottom line’. |
Earnings per share (EPS) |
Profit divided by the number of available shares on the market. |
EPS is an important metric on an earnings report, essentially showing what portion of a company’s value you get by buying a single share. |
Price/earnings (P/E) ratio |
Share price divided by EPS. |
P/E shows the value of a stock when compared to a company’s current profitability. While not usually listed in earnings reports, it is derived using EPS and the current share price of a company. |
Dividend changes |
How much profit will be paid to shareholders. |
A higher dividend can make a stock much more attractive to income investors and cause a spike in demand. A lower dividend, meanwhile, can have the opposite effect. |
There are lots of other things to analyse in an earnings report, including cash flow, EBITDA, or other metrics like customer growth. So it’s often best to read as much shares news as you can – specifically anything covering earnings for companies you want to trade – and gauge what you should be paying attention to from there.
You’ll also want to pay attention to anything new about the company outside of its reports. For instance, a new product announcement could have a major impact on its share price in between earnings releases.
External factors
Fundamental analysis doesn’t just mean assessing a company’s earnings reports and news, though. It requires taking a holistic approach to weighing up a share’s worth, taking into account any factors outside of the company’s control that could have an impact on its financial success.
The state of the economy a company operates in, for example, will affect its future growth. Economic expansion usually benefits business, so strong macroeconomic data – such as GDP, PMI or retail sales – can increase demand for equities, and see share prices rise.
Interest rates can also play a big part. If rates are high then investors don’t need to take big risks to get healthy returns, which can have a dampening effect on the stock market. So if it looks like a central bank is likely to raise interest rates, demand for shares may drop.
Finally, trends in individual sectors will play out on the prices of major players within. If demand for oil drops, for instance, watch out for share price drops in big oil companies.
Like earnings reports, there are lots of factors to consider when evaluating how external factors might cause demand for a share to rise or fall. For a comprehensive guide to finding opportunity using fundamental analysis, take a look at IG Academy’s fundamental analysis course.
Sentiment
Share price movements aren’t always based on fundamental analysis. The view that traders and investors have on a particular stock can also cause demand to fluctuate, with little actual data to go on.
For example, say that a major investor in a mid-cap stock decides he wants to sell his stock for reasons that have nothing to do with the company’s financial performance or external factors. Other traders may get spooked and decide to follow suit – believing that the stock is on its way down and that the investor knows something they don’t.
The rise of automated trading and technical analysis can make sentiment an even stronger factor in determining share price movement, as algorithms and traders spot the beginnings of a trend and buy or sell accordingly, reinforcing the move.
CFD trading vs Share trading
The first step you should take when getting started on the stock markets is to decide whether you want to invest in shares over the long term as part of a portfolio, or speculate on shorter-term price movements via leveraged trading. You could even combine the two – taking advantage of short-term opportunity with leverage alongside a growth portfolio.
The main difference between trading CFDs and investing in shares is the means of making profits.
- Traders will attempt to profit from buying low and selling high (going long), or selling high and buying low (going short), usually over the short or medium term
- Investors will also attempt to profit from buying low and selling high, but over the long term. They may also aim to earn income in the form of a dividend
Here’s a run-through of some popular methods of trading CFDs or investing in stocks:
Trading CFDs
CFD trading gives you access to out-of-hours markets, and the ability to go both long and short. CFDs are a leveraged product, giving you access to a larger market exposure. This can mean your investment capital can go further, but you can also lose more than your initial deposit.
ETFs can be used to invest in multiple shares at once, such as entire indices or sectors. We offer a wide range of CFDs that precisely track the underlying price of the ETF, meaning you can trade on the price of the ETF without needing to actually own the ETF itself.
Investing
Share trading is the service of buying and selling shares and other securities, through a stock exchange or over the counter, in return for a fee or commission. You’ll usually only be able to go long, but will benefit from dividends if they’re paid.
Find out more about the differences between leveraged trading and investing on our CFD vs share trading page. Or if you want to trade but aren’t sure if its right for you, take a look at ‘Is CFD trading for me?’
How to build a share trading plan
A good strategy can be hugely beneficial to your stock trading, helping you identify what went right in successful trades and what went wrong in unsuccessful ones. Here are four tips to help you develop a trading plan:
1. Are you a fundamental or technical analyst?
As we’ve seen, fundamental analysis involves assessing all the factors that might influence the price of your chosen stock to derive its fair value. Technical analysis, on the other hand, only involves assessing one thing: share price data and movement on a technical chart.
A technical analyst will use various tools to identify trends on a market’s chart, aiming to get an insight into its future price direction – and ignore all the fundamentals we covered above. You might want to rely solely on fundamental or technical analysis, or mix the two.
2. Decide how much you’re willing to lose
Your strategy should include how much you are willing to risk on each trade, and how much capital you’re willing to risk overall.
You might also want to consider including your risk-reward ratio – or how much potential profit you’d need to justify a potential loss.
A ratio of 2:1, for example, would mean that you’d always expect your potential profit to be double your potential loss.
3. Put your theory to the test
Before trialling your strategy with real money, you might want to consider opening a demo account and seeing what you can do with dummy funds.
An IG demo account comes preloaded with $20,000 virtual funds, and can be topped up at any time. You can use it to trade thousands of shares, accessing the same live prices as on a real account. Once you’re happy that your strategy would work on live markets, you can upgrade.
4. Consider automating your trading
If you’re really confident in your trading plan, then you could start to automate it – using algorithms to place trades on your behalf without any input from you.
Before you let your automated trading strategy loose on the markets, it’s usually a good idea to backtest it. Backtesting involves running a simulation to see how your strategy would perform over a period of historical data. You can then edit your strategy as necessary before you set it live.
Three steps to making your first share trade
1. Open an account
You’ll need a CFD trading account to trade share CFDs, or a share trading account to trade the physical asset. Both are quick to set up, and won’t require you to add funds before you access the platform – so you can take a look around before committing any capital.
Creating an IG CFD account or Share Trading account is a straightforward process. Once we've verified your identity and opened your account, you'll need to deposit some funds before you can deal. You can do this using your credit or debit card, or via BPAY.
If you'd rather take some time getting to know our platform and apps without risking any real money, you can open a demo account which gives you $20,000 virtual funds to practise with.
2. Find an opportunity
At IG, we offer a wide range of tools to help you identify your first opportunity:
- Technical analysis tools on powerful HTML5 charts, including indicators like Bollinger bands, RSI and moving averages
- Regular in-depth shares news and analysis, written by our team of expert analysts
- Buy and sell signals on a range of shares, from Autochartist and PIA-First
- Trading alerts, so you can set up notifications for when shares hit certain levels, or move by a certain amount
- Newsfeeds from Reuters and Twitter, integrated into the trading platform – as well as the top-trending stocks among IG clients
3. Open your first position
When you’re ready to open your position, you can trade via the IG Trading web platform, a range of bespoke trading apps for mobile and tablet, or even use advanced services like MT4 or ProRealTime (when trading CFDs).
You’ll also want to implement your risk-management strategy at this point. You can choose to add a basic, trailing or guaranteed stop, either when you make your trade or once the position is already open. Find out more about our risk-management tools.
If you’re trading shares, then choose ‘buy’ to open a long position on your chosen market, or (if share CFDs) sell to open a short one.
Open an account now
There's no minimum balance to open an account, it takes less than five minutes, and there's no obligation to fund or trade.
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