The stock market is the heart of the modern economy 💚
Shares of public companies from various sectors, from fintech to energy, are bought and sold there. Fortunes are acquired and lost there. With knowledge and caution, traders and investors can make profits there. Let’s examine the essence of the stock trading approach.
- Stocks, Stock Exchanges, Stock Market Indices
- Fundamental and Technical Analysis
- Explore with Olymp Trade
Interact with the underlined words and green dots to get additional details and explanations.
Explanations and definitions of terms.
Stocks, Stock Exchanges, Stock Market Indices
First, what is a stock? Here is the definition.
A stock represents a share in the ownership of a company, including a claim on the company's earnings and assets.
Therefore, stockholders are partial owners of the company. Fractions of stocks, or fractional shares, equally represent ownership of a company, but its size is less than a full share.
While there are various ways to categorize stocks, they can all be grouped into either growth stocks or dividend stocks. Dividends are payments of a portion of a company's profits to investors that they receive for holding common or preferred shares. Growth stocks are usually those of quickly growing companies and often start-ups that don’t pay big dividends or don’t pay them at all but are expected to grow in value as their business expand. With companies like Tesla, traders make value gains.
Dividend stocks usually represent large, stable companies like Coca-Cola that have already established themselves in their niche and are known for regular dividend pay-outs even in the market’s troublesome times. With these kinds of stocks, investors benefit from the dividends rather than the value gains.
Company shares traded on global stock exchanges are the underlying assets for the dozens of trading instruments available in the Stocks mode on the Olymp Trade platform. That means traders can profit from the price movements of multiple stocks without the trouble of actually owning them and running into various risks of being a shareholder.
On the Olymp Trade platform in Stocks mode, the underlying assets are traded, on which the price of the trade is based. In this mode, two types of transactions are available to you - Buy and Sell.
In this mode, you can trade fractional shares. That is, you can open positions in units of the total value for as little as 0.01 of the shares' total value or $1.
The stock market is a general reference to the system of exchanges that list the shares of public companies and allow investors to buy and sell them. Amongst the many global stock exchanges, the New York Stock Exchange (NYSE), London Stock Exchange (LSE), and Tokyo Stock Exchanges are the major ones.
As the buyers and sellers around the world continue to interact, their transactions shapes the demand and supply for each stock. That is essentially how its price is formed and tracked by stock exchanges.
While prices of particular stocks are important for most traders’ investment portfolios, professional investors often want to assess larger trends and market sentiment. This sentiment is often expressed as “how all the stocks are doing.” It is generally what the news means when saying that markets are down, up, depressed, or rallying. Stock market indices facilitate such assessment.
Essentially, stock market indices combine the stock performance of the most impactful companies, selected based on certain criteria, into one asset organized using a statistical method. As a result, that asset tracks their collective performance and shows how the core of the market is doing at every moment. The S&P 500, NASDAQ Composite, Dow Jones, and FTSE 100 are among the most famous indices.
On the Olymp Trade platform, traders can use stock market indices as the market assessment tools and as trading instruments like stocks or currencies to make trades.
Fundamental and Technical Analysis
To choose a stock, one needs to decide if it's worth buying. Fundamental and technical analysis help reach that decision from different perspectives.
Fundamental analysis primarily looks at economic factors and a company's financial well-being to determine if its stock is good to buy.
The Olymp Trade’s Insights tool is very helpful in making a connection between fundamental factors and stock price expectations. Available through the Help menubar on the platform, it provides time-relevant price forecasts elaborated by our experts on specific instruments.
Benjamin Graham, the famous author of “The Intelligent Investor” and Warren Buffet’s mentor, stressed the importance of fundamental analysis for investors.
Below are the key factors he suggested to include when analyzing a stock:
- Corporate sector
- Current ratio
- Debt owed by the company
- Earnings per share (EPS)
- Price-to-earnings ratio (P/E)
- Dividend payouts made by the company
Technical analysis looks at the stock price dynamics. It assesses the trading activity of a particular stock with various technical indicators to forecast whether its price will rise or fall.
Below are the most popular indicators used in technical analysis:
- Trend indicators such as Moving Average, Moving Average Convergence Divergence (MACD), and Parabolic SAR
- Momentum indicators such as the Relative Strength Index (RSI), Stochastics, and Commodity Channel Index
- Volatility indicators such as Bollinger Bands, Envelopes, Average True Range, Volatility Channels, Volatility Chains, and projection oscillators
- Volume indicators such as Ease of Movement, Chain Money Flow, Balance Volume, Demand Index, and Force Index
The Olymp Trade platform offers plenty of Indicators and Advisors, and the Help Center offers guidance on how to use them.
Explore with Olymp Trade
We have just given you a lot of information and terms that are difficult for unprepared readers to understand. However, this information is useful for successful trading and understanding the stock market. We have created some of the best training programs designed specifically for people like you. Why? Because we have been there, and our goal is to make your life easier.
Here is how we do that and why so many people worldwide choose us and succeed with us. That is just a part of it. Get inside, start learning, and make your way into the world of stock trading!Trade Stocks
Risk warning: The contents of this article do not constitute investment advice, and you bear sole responsibility for your trading activity and/or trading results.
The current ratio is a measure of a company’s ability to pay short-term obligations or those due within one year.
Earnings per share (EPS) is a company's net profit divided by the number of common shares it has outstanding.
P/E characterizes the company's net profit that will be required to recoup the value of the business. Or, to put it more simply, the number of years it takes to recover an investment in a business. The lower the P/E, the better. It is calculated as follows: P/E = Price/EPS. It can also be calculated in another way: P/E = company capitalization/net income.
Trend indicators are usually charted on the same chart with the price performance and are interpreted based on how the price behaves against them. The result of their interpretation is usually a trend direction forecast.
Momentum indicators are an analytical tool - oscillator that helps identify market trends.
A volatility indicator is a special tool that helps a trader visually see and analyze the amplitude of price fluctuations of a currency pair over a certain period of time (timeframe).
The volume indicator reflects the real volume (turnover) of trading by the number of purchased or sold shares, futures, currencies, or options for a selected period of time.