In this article, we’re going to discuss how you can successfully make money with stocks in 2019. However, to begin with, we’re first going to discuss what stocks are and how you Can Make Money Trading Stocks?
What is a Stock? Is Stock Trading a Good way to make money?
A stock is a share of the ownership of a publicly quoted company. A publicly quoted company is a company whose shares or stocks have been listed on a financial exchange for trading. A stock exchange is a regulated venue or marketplace which brings together brokers, buyers and sellers. Those who own a company stock can sell their shares to another trader or a dealer, and can also buy shares of other companies from those who own them.
Stocks are traded on national exchanges, and these are found all over the world. However, the most popular stock exchange is the New York Stock Exchange (NYSE), which features the Nasdaq, S&P500 and Dow Jones Industrial Average. Most traders trade stocks here because of the large number of listed stocks. There is also the OTC market where penny stocks are listed. Other stock exchanges that have listed stocks for trading include FTSE100 (United Kingdom), CAC40 (France), Zurich SMI (Switzerland), Shanghai Stock Exchange (China), Xetra Dax (Germany), EuroStoxx500 (Belgium), Nikkei225 Average (Japan), and Hang Seng (Hong Kong).
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Stock Trading Basics :
Like other assets, prices of stocks are subject to various intrinsic and extrinsic factors. It is important for the trader to understand these factors. The trader must also strive to know the contract specifications set out for trading stocks as CFDs. These considerations are discussed below.
Stock prices are very responsive to certain market fundamentals. These include:
Earnings Reports: Earnings reports usually contain among other data, information as to how much revenue has been made by the company and the profit or loss sustained in the course of a quarter or the full financial year. A key metric mentioned by the earnings report is the earnings per share (EPS). The earnings per share is usually compared with a consensus figure, and also compared with the corresponding period in the previous year. Deviation from the consensus is what is used in pre-market trading.
Earnings reports can be released a few hours before market open (pre-hours), or shortly after the market has closed (after hours). The earnings report is a market fundamental factor that affects all stocks.
Change in Management: Any important change at the top level of management of a company will affect the price of that stock for better or for worse, especially if such changes affect the CEO, Chief Financial Officer (CFO), company Chairman, etc. Changes can be positive or negative. If a CEO with a history of turning around flailing companies is appointed to head a new company, there is a tendency to see a jump in the price of that company’s stock. When rumors of the death of Steve Jobs hit the market, Apple’s share price tumbled. When this rumor was later found to be false, the stock price rebounded.
Merger/Acquisition: A merger or acquisition is also a mover of stock prices. Mergers and acquisitions usually leads to a strengthening of the stocks of the acquired companies.
New Product: Think of Viagra and Pfizer or the iPhone and Apple: anytime new and revolutionary products hit the market, they ultimately boost share prices. Even the attainment of a key milestone by a pharmaceutical company such as the approval of an IND for a clinical trial of an experimental drug tends to boost stocks of the company in question. In the same vein, news of failure of a clinical trial or a product recall for a manufacturing defect are fundamentals that can affect a company stock negatively.
Stocks are amenable to technical analysis. You can pick out chart patterns and other price information used for technical analysis. Many traders tend to analyze stocks using a top-down approach, starting off from the monthly charts and ending with intraday charts. Later on in this article, technical analysis will be used in demonstrating a stock trading strategy.
Stocks are traded with leverage. The European Securities and Markets Authority (ESMA) has imposed a leverage cap of 1:5 on stocks CFDs traded with brokers in the EU and the UK. A leverage of 1:5 will mean that if a trade requires $5,000 to setup, the trader will only need to put down 1/5th of this amount as margin, which is $1,000.
Margin requirement = cost of the trade volume/leverage
Stock prices are quoted in pairs. The price on the left is known as the Bid price, and that on the right is the Ask/Offer price. If a trader is buying a stock, this order is executed at the ask price. Sell orders are executed at the bid price. A quote for Netflix (NFLX) will be stated as follows:
Stock Position Sizing
Sizes of stock positions are measured in units. A full contract contains 100 units of the stock being traded. Different stocks will have a minimum position size that will be imposed by the broker.
Is It Possible to Make a Living Trading Stocks?
To successfully trade stocks for profit, an understanding of the fundamentals of a stock as well as correct application of technical analysis is required. But first, you have to position yourself to profit from stock trading by opening a verified trading account.
a) Pre-Trading Processes
Pre-trading processes cover all processes involved in setting up your stock trading account. These processes include:
- Opening a stock trading account.
- Funding your account sufficiently using a suitable payment method.
After opening your account, you need to sufficiently fund your account using an acceptable payment method. A variety of e-wallet options are available to support your account funding and withdrawal processes.
Leverage is set at 1:5, which is significantly lower than in Forex trading. So you will really need to gather enough capital as you will be required to come up with 20% margin for your trades.
b) Active Trading
Profitable stocks trading starts with the following:
- Develop a Trade Plan. A trade plan must have a list of stocks to trade, your preferred trading time, risk management, strategy, etc.
- Study the markets: Take some lessons in technical analysis and other aspects of stock trading. Watch videos and practice. If you suffer losing trades, go back and study the reasons for your loss.
- Maintain a Trading Journal: You have to keep a trading journal which details your trading activity and very importantly, reasons for your trade entries and exits. The trading journal should also feature notes taken from a retrospective view of all trades taken for the day so you can understand where you have got things right and where you have issues.
The following strategies can be used to trade stocks.
a) Trading the News
Trading the news here simply means trading the first few minutes of the market open, in response to a news piece that has hit the newswires concerning a particular stock. The most predictable news to trade would be the earnings reports. These are released 4 times a year, usually at the end of every quarter. Every company listed on the market is compelled by securities laws to release their quarterly earnings for market assessment. The good thing about earnings reports is that they have a schedule and traders are made aware of their pending release. Great sources for such news are Google Finance and the Nasdaq website (for tech stocks).
News can be released shortly before the market opens (pre-market release) or shortly after the market closes (after-hours release). Other news that affect individual stocks are released at any time of the day. For this, you must have access to a news service that can provide you with live, real-time updates.
Generally speaking, a typical news release such as an earnings report will change the market sentiment for a stock, leading traders to buy or sell. Good report will lead to pre-market buying, which will lead to a spike in the first 5 minutes of trading. A bad report will lead to pre-market selling, causing a downward spike.
This example shows response of the market to an earnings report.
The first step is to look for any news that will impact market sentiment. We got one for DY Industries, which was able to surpass earnings estimates in its latest earnings report. It came out with an earnings per share (EPS) of $0.53, which was a better-than-expected number over the consensus figure of $0.43.
News release for DY Industries
This news release led to a lot of pre-market buying. When this is the case (as visualized on Google Finance where a green arrow is shown beside the price), the strategy here is to place a BUY order on the stock platform. The aim is to have this order triggered by the expected upside gap that will occur, and to exit the after 5 minutes of market open.
Chart for DY
This move produced a huge gap to the upside, which broke the previous resistance at $49.08. Usually after the 1st 5 minutes, there is a pullback as those who got in early sell off some positions. Use a short term chart to determine the level to which the pullback ends, before a re-entry into the original position. Trading this strategy successfully requires considerable practice.
b) Trading with Technical Analysis
Outside of the earnings window and any other major news for stocks, you can trade with technical analysis. The setup below is a divergence trade scenario featuring the RSI indicator. The indicator shows lower highs while price is displaying higher highs. The price is expected to correct the divergence by heading downwards, so a SHORT trade can be initiated to follow the price movement.
Can I trade stocks round the clock?
Depending on the exchange where the stock you want to trade is listed, you can only trade a stock during the hours that the exchange is open for business. The US markets are open from 1.30pm GMT to 7.30pm GMT.
Do stock trades expire, or can I maintain a position until when I want to close it?
Stock CFD contracts have no expiration dates. They stay open until you either close the trade manually, or the trade hits the set SL/TP price targets.
What is the leverage provided for stock trading in the EU/UK?
ESMA provisions peg leverage for stock trading in the UK and EU at 1:5.
What happens to my positions during public holidays or broker-observed bank holidays?
All active positions will remain open and will be rolled over to the next trading day.