Trading Works

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Stock trading involves buying and selling shares in companies in an effort to make money on daily changes in price. This short-term approach is what sets stock traders apart from traditional stock market investors who tend to be in it for the long-haul.

While trading stocks can bring quick gains for those who time the market correctly, it also carries the danger of substantial losses. A single company's fortunes can rise more quickly than the market at large, but they can just as easily fall. Financial advisors generally don't recommend people invest in individual stocks unless they have money they could afford to lose.

You don't have to work on Wall Street to learn stock trading. Online brokerages have made it possible to trade stocks quickly from your home computer or your smartphone.

But before you dive in, you should make sure you know how the stock market works, the best apps for trading stocks, and how to manage your risk.What is stock trading?

There are two main types of stock trading:

Active trading is what an investor who places 10 or more trades per month does. Typically, they use a strategy that relies heavily on timing the market, trying to take advantage of short-term events (at the company level or based on market fluctuations) to turn a profit in the coming weeks or months.

Day trading is the strategy employed by investors who play hot potato with stocks — buying, selling and closing their positions of the same stock in a single trading day, caring little about the inner workings of the underlying businesses. (Position refers to the amount of a particular stock or fund you own.) The aim of the day trader is to make a few bucks in the next few minutes, hours or days based on daily price fluctuations.How to trade stocks

If you're trying your hand at stock trading for the first time, know that most investors are best served by keeping things simple and investing in a diversified mix of low-cost index funds to achieve — and this is key — long-term outperformance.

That said, the logistics of trading stocks comes down to six steps:

1. Open a brokerage account

Stock trading requires funding a brokerage account — a specific type of account designed to hold investments. If you don't already have an account, you can open one with an online broker in a few minutes. But don’t worry, opening an account doesn’t mean you’re investing your money quite yet. It just gives you the option to do so once you’re ready.. Set a stock trading budget

Even if you find a talent for trading stocks, allocating more than 10% of your portfolio to individual stocks can expose your savings to too much volatility. But this isn’t the only rule to manage risk. Other do's and don’ts include:

Invest only the amount of money you can afford to lose.

Don’t use money that’s earmarked for near-term, must-pay expenses like a down payment or tuition.

Ratchet down that 10% if you don’t yet have a healthy emergency fund and 10% to 15% of your income funneled into a retirement savings account.3. Learn to use market orders and limit orders

Once you have your brokerage account and budget in place, you can use your online broker's website or trading platform to place your stock trades. You'll be presented with several options for order types, which dictate how your trade goes through. We go through these in detail in our guide for how to buy stocks, but these are the two most common types:

Market order: Buys or sells the stock ASAP at the best available price.

Limit order: Buys or sells the stock only at or better than a specific price you set. For a buy order, the limit price will be the most you're willing to pay and the order will go through only if the stock's price falls to or below that amount.