Trading Stocks

A stock trader or a stock investor is an individual or firm who buys and sells stocks or bonds (and possibly other financial assets) in the financial markets.

Individuals or firms trading equity (stock) markets as their principal capacity are called stock traders. Stock traders usually try to profit from short-term price volatility with trades lasting anywhere from several seconds to several weeks. The stock trader is usually a professional. A person can call herself a full or part-time stock trader/investor while maintaining other professions. When a stock trader/investor has clients, and acts as a money manager or adviser with the intention of adding value to his clients finances, he is also called a financial adviser or manager. In this case, the financial manager could be an independent professional or a large bank corporation employee. This may include managers dealing with investment funds, hedge funds, mutual funds, and pension funds, or other professionals in equity investment, fund management, and wealth management. Several different types of stock trading exist including day trading, swing trading, market making, scalping (trading), momentum trading, trading the news, and arbitrage.

Stock traders in the trading floor of the New York Stock Exchange. On the other hand, stock investors purchase stocks with the intention of holding for an extended period of time, usually several months to years. They rely primarily on fundamental analysis for their investment decisions and fully recognize stock shares as part-ownership in the company. Many investors believe in the buy and hold strategy, which as the name suggests, implies that investors will hold stocks for the very long term, generally measured in years. This strategy was made popular in the equity bull market of the 1980s and 90s where buy-and-hold investors rode out short-term market declines and continued to hold as the market returned to its previous highs and beyond. However, during the 2001-2003 equity bear market, the buy-and-hold strategy lost some followers as broader market indexes like the NASDAQ saw their values decline by over 60%.

Stock traders and investors usually need a stock broker such as a bank or a brokerage firm to access the stock market. Since the advent of Internet banking, an Internet connection is commonly used to manage positions. Using the Internet, specialized software, and a personal computer, stock traders/investors make use of technical analysis and fundamental analysis to help them in the decision-making process. They may use several information resources.

Trading activities are not free. They have a considerably high level of risk, uncertainty and complexity, especially for unwise and inexperienced stock traders/investors seeking for an easy way to make money quickly. In addition, stock traders/investors face several costs such as commissions, taxes and fees to be paid for the brokerage and other services, like the buying/selling orders placed at the stock exchange. According to each National or State legislation, a large array of fiscal obligations must be respected, and taxes are charged by the State over the transactions and earnings. Beyond these costs, the opportunity costs of money and time, the currency risk, the financial risk, and all the Internet Service Provider, data and news agency services and electricity consumption expenses must be added.

Although many companies offer courses in stock picking, and numerous experts report success through Technical Analysis and Fundamental Analysis, many economists and academics state that because of Efficient market theory it is unlikely that any amount of analysis can help an investor make any gains above the stock market itself. In a normal distribution of investors, many academics believe that the richest are simply outliers in such a distribution (i.e. in a game of chance, they have flipped heads twenty years in a row).

For this reason most academics and economists recommend that investors invest in funds that follow an index in the market, i.e. long-term and well-diversified investments.