Trading Stocks

Where to start and a quick intro into analyses

• TYPES OF ASSETS

Lets start by defining an asset. According to google, it is a useful or valuable thing, person or quality. So basically an asset is something of value. Value comes from someone else desiring what you have and the willingness that person has to pay for said thing. It could be anything. If I have a really nice collection of pens, that could be an asset by definition if someone else is willing to buy that collection off you. So with regards to trading, you could possess shares of a company (stocks), a contract to buy a certain amount of shares or a type of currency. I will cover stocks and options in this quick post.

1. Shares: Shares in a publicly traded company are put on a market and bought and sold by people, through brokerages. You need a license to actually purchase and sell shares so a regular person with no training would need to pick a brokerage, wherein a licensed businessperson called a broker will buy and sell shares on your behalf for a fee. This fee is for offering the service of buying and selling shares on your behalf just as you’d pay a licensed electrician to wire your house.
2. Options: Options are contracts to buy or sell a share at a certain price or strike price. You pay a premium on top of your option and they do not need to be actioned. They come in bundles of 100. For example, if you buy a call option for company x (call is a bet that the price will go up) at $0.10 with a strike price of $15.00, you will pay $10 right away for the privilege or premium of holding that contract ($0.10 x 100 = $10). so in total you have paid $10 not including brokerage fees. If that share price goes up to $20, you can exercise the option at $15.00 and make $5 per share bought, which in this example would be 100 shares so you would make $490 as the new price of the stock is now $20 and you own 100 of them minus the premium already paid. Your actual profit would be $490 minus the brokerage fees. Now with all that out of the way, the premium itself fluctuates minute by minute. SO… you can actually sell the option as an asset. If you bought one option for $1, you would pay $100 for that option. If that option went up to $2, you would make $200 less brokerage fees cause you’re now trading a contract and not a share itself. This would only happen if the share price of the option you bought rises. Like the previous example, if you buy an option for $1 at a strike price (the price you’re buying the share for if you exercise or action the option) of $15 and that share price climbs to $20, the actual value of the option goes up as well as someone is willing to pay more for that option of $15 to then make $5 per share and it is still profitable to pay for the new premium of $2.

• WHERE TO START

I would recommend paper trading or using a stock simulator of some sort. I personally used investopedia but there are probably many free options out there. That way you’re playing with fake money that acts as real money just to see how buying and selling actually work. If you truly become passionate about the game or simulation, you may actually experience a little about how it affects your emotions. This is a big challenge with trading.

Once you’ve played with some fake money and you’re ready to throw a couple bucks into the market, you need to find a broker. Not all brokers are created equal. Some major banks provide brokerage services while some brokers are solely on their own. I recommend either Questrade or Wealthsimple as I am Canadian. Wealthsimple requires very little to start with and there are no commission fees. However, if you are to use Wealthsimple, they have restrictions on what stocks you can trade which can limit profits over time. Questrade has a variable fee for trades and there are seemingly no limits to stocks that you can trade. However, always consult with the broker themselves and choose what option is best for you.

• HOW TO BUY AND SELL

There are two main orders to put through your broker. A limit buy or sell and a market buy or sell. A limit buy sets an exact price for a stock to execute the your order. Example if you wanted to buy 100 shares of a stock that is $1.25 then and you want that stock at a price of $1.30, you would set a limit buy order for $1.30 and once the stock price crosses that price point, the buy is set and you end up with 100 shares of that stock at $1.30. A market buy is almost instantaneous and you purchase shares at what the market price is. Usually this is the mean price between the what the sellers want for a share and what the buyers want for a share. Traditionally, one would buy a stock hoping the price to go up and trade for a higher price. However, you can also make money on the other side of a stock trend. If a stock is trending downward, negatively, you can short sell a stock. This is where you bet against a stock price. So if you buy a stocks of a company in an industry that is struggling and that stock is consistently trending downward, you can actually profit off that company’s misfortune. Traders bet both sides of stocks all the time and are able to consistently make money regardless of market conditions because of this.

• TRADING STRATEGIES

There are two very broad, major strategies that traders use to make money. One is technical analysis which uses past and present price movements to try and predict future price movements or price action. These strategies use indicators, which are graphical and numerical representations of what a stock is doing. Traders use these in combination with the stock’s price and price trend to try and predict what a stock will do. One thing to consider with any analysis is volume. Volume is how many times a stock is traded in a trading day. This is also what drives a stock price to move up or down.

The second major strategy is fundamental analysis. This is what wise investors and some of the richest people in the world use to find good companies to invest in over the long term. Although day trading is distinctly different from investing, the principles in fundamental analysis can be used. Basically, when using fundamental analysis, a trader will look into the books of a company to determine its financial health. From there they can build a complete image on a company’s value and whether or not the stock price is built on a company that actually has something to offer the world.

• TAXES

If you’re trading stocks or investing for the long term, you’re doing so to make money. This money will count as income and the government will want their piece. So what to do? Well, in Canada, you can actually open a TFSA trading account wherein you can trade securities, ETF’s and options. This is all tax free. BUT you need to adhere to your individual TFSA limit which you can find through the CRA website, CRA call center or if you’re truly dedicated, you can calculate on your own limit. For people with a smaller amount to trade this is perfect. If you do not have anymore room in your TFSA accounts (because your contribution limit is ALL of your TFSA accounts that you own) then you may need to open a non-registered account. If this is the case, you will need to pay taxes on any of the capital gains that you receive. Capital gains are the profits that you take after you sell a stock for more than what you bought it for. You therefore have more money than you did before and this counts as income according to the government.