What is a stock market?
A stock market is an institution where people buy and sell shares of companies and other securities. In other words, it is a meeting point between companies (who need money to finance and achieve their goals) and savers (who want to get returns on their surplus).
What is a trader?
A trader is an individual who engages in the buying and selling of financial assets (stocks, bonds, commodities and derivatives) in any financial market, either self-employed or employed by a financial Corporation. You can be a trader and be financially independent.
What do I need to operate on the stock markets?
You need a broker. A broker is an individual or firm that charges a fee or commission for executing buy and sell orders submitted by an investor. There are a lot of brokers. For example:
- Interactive Brokers
- Bank Brokers: Selfbank, Banco Santander, BBVA, ING
You can choose one of them and begin to trading from home or from any place. You only need a computer, or mobile, to connect with you broker. Then, you can give to your broker a buy/sell order on any security and you broker will execute you order. If you are principiate you must to begin with a demo account to learn how to use the trading platform effectively. Once you decide to take the plunge into the real account it is very important to compare the commissions of each broker, because they can quickly eat away at any investment gains your portfolio makes (in this regard, bank brokers have usually the highest commissions although this is not always the case).
What financial asset can I trade?
You can trade in stocks, stock market indices, bonds and derivatives. In SGM only work with stocks and indices.
How can I make money with trading?
You can make money when the stocks rise or falls.
If you have the expectation that the security will rise then you have to open long positions in a security (acciones de unaempresa o índicebursátil). Thus, you make money if the corresponding security price increases and lose money if the price fall.
If you have the expectation that the security will fall then you have to open short positions in a security (acciones de unaempresa o índicebursátil). Thus, you make money if the corresponding security price falls and lose money if the price increases.
How can I open long positions?
You have to buy stocks via your broker (there are other ways, such as buy Futures or buy CFDs). When you want to close the position you have to sell the stocks (or sell the Futures/CFDs).
How can I open short positions?
You have to sell Futures or sell CFDs (there are more ways but they are more complicated). When you want to close the position you have to buy the Futures or CFDs. This type of products are risky because they are leveraged products. Leveraged trading (also called trading on margin) is only for experts.
As you can see there are many possibilities to open long and short positions. Among all, we recommend buying stocks to open long positions and selling CFDs to open short positions because they are the easiest ways.
What are the more important aspects to make money with trading?
There are three key aspect:
- The mathematical aspect: a trading system.
- you must have a trading system, that is to say, a set of rules that traders use to determine their entries and exits from a position. The trading system must show a positive mathematical expectation in order for the trading method to be profitable (mathematical expectation is what you expect to win or lose, on average, for each trade over a large sample of trades).
- Each operation should have a good reward/risk ratio, at least 2:1 (the reward is double than the risk). For example, if you have a potential loss of 5% in a trade then you should expect to earn at least 10%. The better reward:risk ratio, the lower success rate you need. For example, with a 3:1 reward/risk ratio you can make money in stock markets with a success rate around 40% (it would be enough a trading system that guesses right only forty of every hundred operations).
- The psychological aspect: discipline. You need cool head to follow your trading system ignoring the breaking news or opinions from others (in our web you will find breaking news only to keep you informed about the economic happenings. Do not use breaking news for trading).
- The management aspect: capital management.
- The risk of any trade is controlled with a stop loss rule (placed at the same time a trade is opened).
- Never risk more than 2% of your trading account on any one trade. Note that it is not saying invest but risk. For example, you can invest in one trade 100% of your capital in your trading account (which it is inadvisable, it is better to diversify) but you must limit losses with a stop loss so that the maximum loss does not exceed 2% of your capital.
- Thus, you can have multiple open positions at any one time risking 2% (max) of your net equity on any one of those positions.
How can I define the reward: risk ratio?
When you configure a buy order in the platform broker you can set a profit target and a stop-loss. For example a profit target of 10% and a stop loss of 5% represents a 2:1 reward/risk ratio (if the trade goes wrong you will lose a 5% but if the trade has success you will get the double). These two variables (profit target and stop-loss) are not set at random. In the next lessons we will see the right way to do it.
Summary of the Lesson: You have to contact a broker and then using the broker platform to buy and sell securities. You must start with a demo account (doing virtual trading for a while). This will help to get used to the broker software and try out your trading system. Do not you have a trading system? Don’t worry, look next lesson.