Stock

How Stock Trading Works

Stock trading is a form of investing that prioritizes short-term profits over long-term gains. It can be risky to dive in without the proper knowledge.

What is stock trading?

Stock trading involves buying and selling shares in companies in an effort to make money on daily changes in price. Traders watch the short-term price fluctuations of these stocks closely and then try to buy low and sell high.

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 individual 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.

Types of 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.

Where to trade stocks

To trade stocks you need a broker, but don’t just fall for any broker. Pick one with the terms and tools that best align with your investing style and experience. A higher priority for active traders will be low commissions and fast order execution for time-sensitive trades. See our picks for the best day trading apps to learn more.

Investors who are new to trading should look for a broker who can teach them the tools of the trade via educational articles, online tutorials and in-person seminars (see NerdWallet's roundups for the best brokers for beginners). Other features to consider with stock trading apps are the quality and availability of screening and stock analysis tools, on-the-go alerts, easy order entry and customer service.

No matter what, the time spent in learning the fundamentals of how to research stocks and experiencing the ups and downs of stock trading — even if there are more of the latter — is time well spent, as long as you’re enjoying the ride and not putting any money you can’t afford to lose on the line.