Online stock trading is often overwhelming to new
traders. Developing a level of comfort with trading involves research,
experience, and a basic understanding of both finance and accounting. To
develop an effective online stock trading method, a new investor needs to
become acclimated to certain basic trading concepts and tricks.Online stock trading requires signing up with an online stock broker who will create an account for you. Stock brokers earn commissions when you trade stocks and interest on a margin account. This account may have an option for margin trading. Margin trading involves borrowing money to purchase stock. When you trade on margin you are trading with money that is not currently in your account. Many online stock brokers only allow investors to use margin up until a certain portion of their stock portfolio.
To start with, you should understand the differences between going long and short on a stock. Going long on a stock position means you are betting that the stock price will increase over time while going short on a stock position means that you believe that a stock will decrease from its current price. The easiest and most common way to go long or short on a stock is by purchasing or selling the stock outright. When you sell a stock you do not have to own it beforehand. Effectively, selling a stock when you do not own it means that you will have to buy it back at a later date at whatever price the market is showing at that time.
Buying and selling stocks are one way to trade online to go short or long on a stock. Another way is through option trading. You can buy sell put options or call options if you are long on a stock. If you are short on a stock you can buy put options or sell call options. Buying options means that you are betting that a stock price will be beyond the exercise price on a given date. For example, if you are buying a call option with an exercise price of 100, you are betting the stock price will be above 100 plus the price you paid for that call option.
Stock options are also a good way to hedge your risk from a stock purchase. If you are betting a stock price will increase by buying shares, you may choose to hedge your risk by selling a call option. When you sell an option you are collecting money that can offset the purchase price for your shares. However, if the stock price increases during the option life you will lose money on the option yet gain on the stock. This strategy will limit your potential gains but reduce your risk.
There are many strategies for online trading that can be used with great success. For a beginner to online trading it is important to gain familiarity with the various options available and to slowly develop a strategy as you become more comfortable with trading.
Author’s Bio: Leo as a professional online trading expert loves to add valuable guides on stocks trading, world economics, personal finance, personal loans, PPI claims (Payment Protection Insurance) etc.
