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The stock market is where company stocks and shares are traded. The three main active parties are public listed companies that issue shares; traders and investors who buy and sell shares; and market makers – intermediaries that buy and hold shares to ensure stock trades can always take place.
Trading the stock market offers opportunities to generate profits as stock prices rise and fall over time by using effective trading strategies.
The stock market is actively traded by a wide range of entities, ranging from institutional investors such as hedge funds and pension funds, to day traders and independent retail investors.
Stock exchanges follow standard business hours of the countries they operate in, and are closed on the weekends and public holidays. Some stock exchanges may close for lunch during the midday.
Conventionally. , trades are made only when the stock exchange is open. However, with ECNs, buyers and sellers can communicate with each other without a stock exchange, allowing trading to take place outside of normal hours. This is known as after-hours trading.
Market capitalisation is a measure of the value of a company. It is derived by multiplying the share price by the total number of outstanding shares.
“Large-cap” companies have market capitalisations of USD 10 billion or more; “mid-cap” companies have between USD 2 billion and USD 10 billion; “small-cap” companies clock in at between USD 300 million and USD 2 billion.
When the stock market has risen by 20% or more, this indicates a bull market. When the stock market has fallen by 20% or more, this indicates a bear market. The S&P 500 is commonly used by different investors as the benchmark for the stock market on the whole.
Stock prices move up and down in tandem with supply and demand. When there are more sellers than buyers, stock prices fall. When there are more buyers than sellers, stock prices rise.
Dividends are regularly distributed, spanning intervals from monthly to annually. However, depending on the company, one might also encounter quarterly or semi-annual dividend payout schedules. Not all companies pay out dividends, but those that do tend to be mature, stable companies with less runway for share price growth.
Dividends alone do not determine the quality of a stock, and investors should decide whether to choose dividend-paying stocks based on their investing goals.
Module 2: Understanding the Different Types of Stocks
Some common groups of stocks include blue-chip stocks, growth stocks, dividend stocks and international stocks.
Stocks may also be categorised according to their levels of market capitalisation. Small-cap stocks have market caps of between USD 300 million to USD 2 billion; mid-cap stocks, between USD 2 billion and USD 10 billion; and large-cap stocks, USD 10 billion and more.
Blue-chip stocks are recognised for their top-notch quality and proven track record, subject to market conditions. They stand out as one of the preferred choices for investors aiming to anchor the core of their portfolio, albeit often at a relatively high cost.
Growth stocks are expected to outperform the market over time. They usually are younger companies with unique or innovative products or services, have a record of increasing profitability, show high return on equity (ROE) and have manageable debt levels.
Overvalued stocks are priced at levels that exceed their recent performance, and investors usually refrain from purchasing them until their prices undergo a correction. Undervalued stocks are priced less than their inherent worth, and might experience a price spike when the rest of the market takes notice.
Stock CFDs are financial derivatives that allow investors to reap the potential benefits of popular stocks without direct ownership of shares. They offer advantages such as lower starting capital and ability to trade with leverage, but also come with downsides such as no shareholder rights and the potential for losses to exceed capital.
Module 3: Preparing Your Arsenal
Live and demo accounts can both be useful for traders of all levels, and even advanced traders can benefit by using a demo account to sharpen their trades.
The most popular platforms for trading are MT4 and MT5. The former is focused on forex trading, while the latter offers a wider range of assets.
Besides MT4 and MT5, Vantage also offers other trading platforms that may be useful for certain traders. WebTrader offers cloud-based trading via any web browser, ProTrader provides additional charting tools and technical indicators, while Vantage app facilitates seamless trading over mobile devices.
Stock screeners are vital tools in stock trading, enabling traders to filter and analyse a wide range of stocks based on specific criteria and insights, thus aiding in making informed and strategic investment decisions.
Module 4: Essentials of Chart Reading
Stock charts – or more properly, price action charts – are an essential tool for traders to learn, as they provide basic but important information such as price trends and reversal points that may be potential trading opportunities.
Three common stock charts are line charts, bar charts and candlestick charts. Of the three, candlesticks provide more information than line charts while being easier to read than bar charts.
A candlestick chart is made up of individual candles, each representing a trading period (such as an hour, a day or a week, etc).
Candles are made up of a rectangle (the real body) and wicks or shadows on the top and bottom.
The length of the candle’s body tells us the difference in price between opening and closing. When the closing price is lower than the opening price, the candle is a bearish one and is traditionally coloured red. When the closing price is higher than the opening price, the candle is a bullish one, and is traditionally coloured green.
The length of a candle’s wicks tells us the difference between the highest/lowest price and what the price ultimately closed at. This can be taken as a measurement of market sentiment.
Long top wicks may be read as a bearish signal, while long bottom wicks may be read as a bullish signal. Short top wicks may be a bullish signal, while a short bottom wick may be a bearish signal.
Candlesticks reflect the trading activity of the period, and can thus appear differently from day to day. The appearance of certain candlestick shapes and patterns can indicate bullish or bearish trends.
Bullish candlestick patterns include the Hammer, Inverse Hammer, Bullish Engulfing, Three White Soldiers and Bullish Rising Three
Bearish candlestick patterns include the Hanging Man, Shooting Star, Bearish Engulfing, Evening Star, and Bearish Falling Three
Candlestick patterns do not guarantee the onset of a bullish or bearish trend. Instead, they should be taken as descriptions of price tendencies.
Trading volume reflects a stock’s strength, where high volume indicates strong interest and low volume suggests limited interest. However, it is essential to consider the context and additional factors.
High trading volumes can signify bullish or bearish trends and are used with other technical tools to guide trading decisions.
Module 5: Basics of Fundamental Analysis
Fundamental analysis is the practice of evaluating the fair value of a stock, based on the financial situation of the underlying company, as well as macroeconomic realities and conditions.
Financial statements are a key source of information and data in fundamental analysis. Investors should be familiar with the income statement, the balance sheet, and the cash flow statement.
The income statement shows the revenue and expenses of a business over a fiscal quarter or year. It helps us understand the profitability of a business.
The balance sheet displays the company’s assets, liabilities and shareholders’ equity. Assets must equal the sum of liabilities and equity.
The cash-flow statement details the inflows and outflows of a company’s cash during a specified time period, split up over cash flow from operations; from investing; and from financing.
Financial ratios are performance indicators that allow investors to compare stocks against their peers or the overall sector.
Key financial ratios include
Price-to-Earnings (P/E), which measures how much to invest to receive S$1 of earnings
Price/Earnings-to-Growth (PEG), which expands upon P/E by taking into account the projected future growth of the company
Price-to-Sales (P/S), used for stock valuation when earnings data are not available
Price-to-Book ratio (P/B), a measure of how well a stock is trading in line with the book value of the company
Debt-to-Equity (D/E), which shows much debt a company is using to finance its operations
When evaluating dividend stocks, pay attention to dividend payout ratio to ensure the sufficient profits are being reinvested for further growth. High dividend yields may not always be positive, as they may be caused by a drop in share prices.
Earnings reports can impact share prices. Three common factors to watch for are high P/E ratio, high expectations, and management guidance.
Besides earning reports, external events and factors can also cause stock prices to rise or fall.
Company mergers can increase the share price of the target company, while reducing the share price of the acquiring company. This is often short-term.
The actions and antics of senior management can also cause volatility in share prices. One famous example is Elon Musk’s tweet about taking Tesla private, which resulted in a class action lawsuit from affected investors.
Economic data releases can also affect the stock market. A poor outlook can cause share prices to fall, while strong results can inspire demand for stocks.
Module 6: Basics of Technical Analysis
Technical analysis is a framework for traders to study the price action of a stock. Charting tools and technical indicators are commonly involved, and a trader who makes trading decisions mainly via technical analysis is known as a technical trader.
Using historical price and trading volume data, technical analysis allows a trader to discern the possibility of future price trends and events.
Technical analysis is often criticised for being too subjective; this is thought to arise from differences in how charting tools are employed, as well as differences in individual interpretations.
Technical analysis is most commonly done on a candlestick chart, where traders can study individual candlestick characteristics and candlestick patterns to identify potential price reversals and incoming price trends.
Trendlines can be plotted on a price chart to better visualise price trends – uptrends, downtrends and sideways trends. This can help minimise risk.
Trendlines are also used to demarcate levels of support and resistance. Support levels represent a price floor, whereas resistance levels represent a price ceiling.
Depending on the state of the market, support and resistance levels may be broken. When price rises above resistance levels during a bullish trend, the level turns into a new support level. When price falls below support levels during bearish trend, the level turns into a new resistance level.
The Relative Strength index is widely used to signal when the market is overbought or oversold. It is displayed as a number from 0 (oversold) to 100 (overbought). Typically, traders pay attention to levels 30 and 70 on the RSI.
A moving average filters out noise on the price chart by creating a constantly updated average price. It is a lagging indicator that relies on past prices to identify the trend direction of a stock, or to find levels of support or resistance.
A pair of moving averages can also be used to discern price trends. For instance, when a 50-day moving average (shorter lag) crosses above a 200-day moving average (longer lag), a bullish trend is indicated. When it crosses under instead, a bearish trend is indicated.
A simple moving average is a simple arithmetic average of prices over a timespan. An exponential moving average accords more weight to recent prices over older ones in the time range.
While fundamental analysis and technical analysis are two very distinct approaches to trading analysis, traders can benefit from both methods. Learning both will provide a trader with a richer foundation to draw upon.
Module 7: Basics of Risk Management
Risk management is an essential skill that stock traders must master. It involves scanning for factors that may negatively affect trades and taking steps to minimise their impact.
The crux is to minimise risk while maximising the potential for returns.
Proper risk management is what sets a professional trader apart from someone who simply gambles on the stock market.
Liquidity risk arises when a stock has low trading volume. This can cause high spreads, or even prevent trades from being executed altogether.
Broker risk depends on the technology, capabilities, policies, and safety measures of the brokerage you choose.
Market risk refers to the volatility of the market and can be impacted by economic or political issues.
Traders should also be aware of country and social risks that may be at play in the countries whose currencies they are trading.
To manage risk, proper use of leverage is crucial. Be aware that leverage multiples your potential loss, which may outstrip your account value.
An important risk management strategy involves selecting the right allocation for trades, ensuring that the capital risked on each trade does not surpass a specific percentage of your total capital before leverage. This percentage can vary based on your individual risk tolerance.
Learn how to set stop losses to reduce potential losses and improve your trading outcomes.
Taking profit at appropriate levels can give you better results over the long run versus attempting to ride out every trade.
Understanding risk-reward ratio is crucial to your success. Risk-reward ratio varies from trade to trade, and you can calculate your own ratio for each trade.
A trading plan is an integral tool for risk management. It serves as a record of your trading outcomes, helps you to learn from past mistakes, and may help detect unconscious biases or negative beliefs that are hindering your success.
Module 8: Basic Stock Trading Strategies
Trading strategies are a systematic approach to buying and selling company shares on the stock market. They are based on predefined rules and criteria, and often involve the use of technical indicators.
To be effective, a trading strategy must rely on objective and accurate information and data. It should also take into account investing goals, timeline, preferences and needs.
Generally speaking, there are three types of trading styles, each differing in how long positions are held.
Day trades – a few seconds to several hours
Swing trades – days to weeks
Position trades – up to several months or even years
You should pick a trading style that suits your goals, preferences and time availability.
Fundamental analysis and technical analysis are core skills for investors and traders. You may choose either one, or blend both together.
A popular basic stock trading strategy is trend following. This involves identifying a market trend, and trading in line with it.
The key in trend following is to go with the trend. Know when the trend has changed, and adjust accordingly.
Another basic stock trading strategy to know is support and resistance. This involves charting lines of support and resistance on a price chart to discern a likely price range.
Technical indicators used in basic trading strategies include trendlines, lines of support and resistance, and triple exponential moving average (3EMA).
An important component of trading strategy is risk management. The three pillars of risk management are minimising your losses, sticking to the rules, and diversifying your positions.
Backtesting uses historical market data to discern the viability of a proposed trading strategy or model. It allows traders to build confidence, and uncover blind spots in their trading ideas.
Retail investors can practise their stock trades with backtesting tools found in most modern trading platforms.
Module 9: Trading Psychology
The largest influence behind our trading decisions is our trading psychology. This influence can sometimes be very subtle, which can make it difficult to spot.
Trading psychology may be thought of as our mental and emotional state while trading. Personality, beliefs, and past experience may also play a part.
Traders who master their trading psychology are less prone to emotionally driven decisions, and thus have a higher potential to succeed.
For most traders, the main driving forces between trading psychology is greed and fear, and the interplay between these two emotions.
Feeling fearful or greedy is natural, but problems can arise when we give in to their influence and make irrational trading decisions.
Fear can cause us to close positions too early, or even stop us from entering potentially profitable trades, reducing our overall returns.
Greed can cause us to lose profits by keeping positions open for far too long, or risk losses on positions that are improperly sized.
The three ways traders can manage trading psychology are to be consistent with your trading plan; conducting research and gathering knowledge; and staying flexible and constantly honing their skills.