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Overview of Stock Trading and How It Operates

Overview of Stock Trading and How It Operates

The goal of stock trading is to make quick money by purchasing and selling shares. However, it’s crucial to weigh the dangers before taking a chance.

Buying and selling publicly traded company shares, or “stocks,” with the goal of profiting from price fluctuations is known as stock trading. 

What is trading stocks?

Stock traders attempt to purchase low and sell high by attentively monitoring the short-term price fluctuations of equities. Traders in stocks differ from regular stock market investors in that they are short-term investors rather than long-term ones.

Profiting quickly from stock trading is possible for those who time the market right. However, there’s also a chance of significant losses. The fortunes of a single company can soar faster than the market, but they can also tumble just as swiftly.

According to Nathaniel Moore, a certified financial planner at AGAPE Planning Partners in Fresno, California, trading is not for the timid.

Thus, you might want to avoid taking a chance with money you can’t afford to lose when trading. The majority of investors would be better off allocating their portfolio to long-term, highly diversified investments such as mutual funds or index funds. However, internet brokerages have made it feasible to trade stocks rapidly from your computer or through mobile apps if you have additional money and want to learn how to start trading.

However, you should be sure you understand the ins and outs of stock market trading before you get started. 

» Learn more: Main Types of Trading in the Indian Stock Market

varieties of stock trading

Active trading and day trading are the two categories of stock trading.

Usually, an investor engages in active trading when they make ten or more trades in a given month. They frequently employ tactics that significantly depend on market timing. To make a quick profit, they attempt to capitalise on transient events (at the company or in the market).

Buying and selling the same stock inside a single trading day is known as “day trading.” The internal operations of the companies don’t really concern day traders. Based on daily market swings, they attempt to make a few bucks in the ensuing minutes, hours, or days. 

How to trade stocks

The process of trading stocks may be broken down into six simple phases if this is your first time trying it out:

1. Create an account with a brokerage

A brokerage account must be funded in order to trade stocks. It’s a specific kind of account meant to house investments. It only takes a few minutes to open an account with an internet broker if you don’t already have one. Rest assured, creating an account does not obligate you to make an investment right now. All it does is offer you the choice to when you’re ready. 

Assign a budget for stock trading.

It can be dangerous to allocate more than 10% of your portfolio to any one stock, even if you are an expert stock trader.

“If all of your money’s in one stock, you could potentially lose 50% of it overnight,” says Moore.

  • Other typical dos and don’ts are as follows:
  • Only make investments with money you can afford to lose.
  • Money set aside for immediate, necessary payments, such a down payment or tuition, should not be used.
  • If you do not currently have a sizable emergency fund and are not contributing 10% to 15% of your salary to a retirement account, then reduce that 10%. 

3. Acquire knowledge of limit and market orders.

You can trade stocks via the website or app of your online broker once you have set up your brokerage account and budget. A number of order type options will be displayed to you. These control the course of your transaction. We cover this in-depth in our guide on stock purchases. The two most prevalent kinds are as follows:

Market order: Purchases or sells stock as soon as possible at the best price.

Limit order: Purchases or sells shares only at, or above, a certain price that you choose. The maximum amount you are ready to spend for a buy order is known as the limit price. Only a decline in the stock price will allow the request to be fulfilled.

Use a paper trading account as a practice.

“Try investing in the market without putting money in the market yet to just see how it works,” Moore advises.

He thinks you can devote your time to do that. Select a stock and monitor its performance over a period of three to six months. Many online stock brokers also provide paper trading tools that can be used to study the market. Before risking real money, clients can test their trading abilities and establish a track record with brokers who offer paper trading. 

5. Evaluate your results in comparison to a suitable baseline.

Not just active investors, but all kinds of investors can benefit from this guidance. The primary objective of stock selection is to outperform a benchmark index. That might be the S&P 500 index, which is frequently used to represent “the market.” If you are primarily investing in technology firms, another option is the Nasdaq Composite Index. Alternatively, it might be one of the smaller indexes comprising businesses according to their location, size, and industry.

Measuring outcomes is crucial. Investing in an inexpensive index fund or exchange-traded fund (ETF) makes sense if a serious investor is unable to beat the benchmark (something even seasoned investors find difficult to do). These funds are automatically invested, so they closely align with one of the benchmark indexes.

How to control the risks associated with stock trading

Regardless of your position on the investor-trader continuum, you may trade securely by being patient, avoiding “hot tips,” and maintaining accurate records.

1. Reduce risk by gradually filling jobs

Regardless of position, there’s no need to dive right in. You can lessen your exposure to price fluctuations by buying slowly (either by buying in thirds or by using dollar-cost averaging). Moore adds that you can also research exchange-traded funds (ETFs), which let you distribute your risk across a number of different companies, and high-dividend stocks, which distribute a percentage of earnings to investors.

2. Reject “hot tips

You should not be friends with those who buy advertising promoting sure-fire stocks and post in online forums for stock pickers. They frequently function as a component of a pump-and-dump scheme. That’s when dishonest individuals buy large quantities of shares in a tiny, thinly listed firm and promote it online.

The scammers pocket the gains as naive investors pile on shares and raise the price. They sell off their shares, causing the stock to plummet back to Earth. Don’t assist them in filling their wallets.

Maintain accurate records for the IRS.

Taxes on gains and losses can get tricky if you’re not utilising a tax-advantaged account, such as a standard IRA, Roth 401(k), or other account.

For various kinds of trading, the IRS has varied regulations, tax rates, and documents that must be filed. If you have profitably sold equities, be sure to budget additional funds in case your tax bill is higher than usual. Using a clever tactic known as tax-loss harvesting, loser investments can be utilised to offset other taxes, which is another advantage of maintaining accurate records.

 Where to Trade Stocks with Divadhvik

Choosing the right broker is crucial for success in the stock market. Divadhvik tailors its offerings to match your investment style and experience.

Active Traders:

For frequent traders, Divadhvik prioritizes low commissions and rapid order execution to ensure you capitalize on fleeting market opportunities. Explore our platform specifically designed for day trading to learn more.

New Investors:

Divadhvik empowers new traders with the tools they need to thrive. We offer a wealth of educational resources, including articles, online tutorials, and even in-person seminars (subject to availability).

Features to Consider:

  • Screening and Analysis Tools: Identify promising stocks with Divadhvik’s top-notch screening and analysis tools.
  • Real-Time Alerts: Stay informed of market fluctuations with timely alerts delivered straight to your mobile device.
  • Seamless Order Entry: Effortlessly place trades with Divadhvik’s user-friendly interface.
  • Exceptional Customer Service: Our dedicated support team is always available to answer your questions and guide you along the way.


Taking the time to understand the fundamentals of stock research and experiencing market volatility is crucial for long-term success. At Divadhvik, we want you to enjoy the ride while making informed investment decisions.

Don’t put more money at risk than you can afford to lose. Let Divadhvik help you navigate the exciting world of stock trading!