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A stock trader is a person who attempts to profit from the purchase and sale of securities such as stock shares. Stock traders can be professionals trading on behalf of a financial company or individuals trading on behalf of themselves. Stock traders participate in the financial markets in various ways.
Individual traders, also called retail traders, often buy and sell securities through a brokerage or other agent. Institutional traders are often employed by management investment companies, portfolio managers, pension funds, or hedge funds. As a result, institutional traders can have a greater influence on the markets since their trades are much larger than those of retail traders.
Becoming a stock trader requires an investment of capital and time, as well as research and knowledge of the markets.
Stock traders (or equity traders) are people who trade in equity securities. Their primary goal is to purchase and sell shares in different companies and try to profit off short-term gains from stock price fluctuations for themselves or for their clients.
Traders play an important role in the market because they provide much-needed liquidity, which helps both investors and other traders. Liquidity means there’s enough volume of trades as well as buyers and sellers in the market so that stocks can be bought or sold easily.
Factors that stock traders tend to focus on include:
Although there are many trading styles, traders tend to fall into three different categories: Informed, uninformed, and intuitive traders.
Informed traders can be classified as fundamental and technical traders and make trades designed to beat the broader market. A fundamental trader might focus on earnings, economic data, and financial ratios. A fundamental trader might initiate trades using this analysis to predict how good or bad news will impact certain stocks and industries. Technical traders, on the other hand, rely on charts, moving averages, patterns, and momentum to make key decisions.
Uninformed traders take the opposite approach to informed traders and are also called noise traders. Uninformed traders do not act on fundamental analysis but rather the noise or goings-on in the markets at that moment. Price action or price movements is synonymous with noise. Uninformed traders make decisions sometimes based on volatility and try to capitalize on it for financial gain. However, some noise traders use technical analysis as well.
Intuitive traders tend to hone and use their instincts to find opportunities to execute a trade. While they may use tools like charts and research reports, they generally rely on their own experience. For example, intuitive traders might have experience seeing how the markets are impacted by major players, events, and mergers leading them to understand and possibly trade them.
Individuals can be very successful at stock trading. There are a number of stock trading strategies and techniques that are targeted at individuals. Trading platforms include Nadex, E-Trade, Schwab, and Merrill Edge.
Trading penny stocks is one market strategy that can be highly profitable for individuals. Stocks with prices of up to $5 can be considered penny stocks. Traders can buy large quantities of penny stocks at low prices, generating significant market gains. Penny stocks usually trade on over-the-counter exchanges with transactions that can be easily facilitated through discount brokerage platforms.
Institutional stock traders may have their own capital portfolios for which to earn profits. These traders are typically known for their market intelligence and ability to profit from arbitrage opportunities. This type of proprietary trading was a factor in the 2008 financial crisis, which subsequently led to new Dodd-Frank regulations and specifically the Volcker Rule.
Institutional buy-side traders have much less latitude for market trading. Buyside traders are responsible for transactions on behalf of management investment companies and other registered fund investments. These funds have numerous objectives, ranging from standard indexing to long or short and arbitrage-based strategies. Buyside traders have expertise in trading the securities held within the fund for which they seek market transactions.
Numerous traders also work for alternative investment managers, which are often responsible for a significant portion of market arbitrage trading, as well. Alternative managers can include hedge funds and private capital managers. These investment companies are actively trading a wide range of securities and financial instruments on a daily basis.
New stock traders should look to the experience and strategies of successful traders, and shouldn’t be afraid of making mistakes.
There are many types of traders, which generally describe their trading strategies and philosophies. The following list of traders shouldn’t be considered an exhaustive one because, as noted above, traders generally use a variety of methods when they execute their trades.
A day trader is commonly used to describe someone who enters and exits multiple positions in a single day. These traders never hold a position from one trading day to the next, which is why they’re called intraday traders. They tend to work with stocks, options, currencies, futures, and even cryptocurrencies.
A swing trader takes more time to monitor stocks while evaluating the opportunities available. Swing traders can hold a position for days with the goal of capturing the majority of a move in a security’s price. Swing traders might study the market for days or weeks before making a trade, buy when there’s an upward trend, and sell when the market has expected to have topped out. Swing traders, like many traders, use chart patterns and technical analysis to search for entry setups and exit points.
The buy-and-hold trader is a long-term trader. This approach is the most common, where the trader buys stock in a strong company as opposed to one that is trending. The investor doesn’t focus on short-term price movements since the goal is to hold for years with the belief that the company’s stock price will appreciate over time, along with the fundamental and economic backdrop. Buy and hold traders may continue to hold a stock throughout a recession and ride out the storm, believing the stock will appreciate on the other side of the economic downturn.
A momentum trader takes a long or short position in a stock, focusing on the acceleration of the stock’s price, or the company’s revenue or earnings. They take these positions on the assumption that the momentum will continue.
Momentum trading involves taking advantage of fluctuations in market price–called volatility–by entering into short-term trades with rising prices and volatility and selling them when the momentum reverses. The momentum trader is constantly seeking the next market wave similar to a surfer trying to catch the next wave to ride in the ocean.
KISS traders believe that the simplest solutions are the best ones, and they follow the generic principle of “keep it simple, stupid!” in their trades (this is also the supposed origin of the name of this approach to investing, too). Of course, successful KISS traders don’t abandon all technical analyses and indicators, but they do tend to abide by Occam’s Razor: “the simplest explanation is the best one.”
Stock traders shouldn’t be confused with stock investors. Institutional stock traders use the firm’s money and typically focus on short-term trades. Stock investors use their own money to buy securities and typically are not short-term traders–although, some retail traders are also short-term traders.
Most stock investors tend to buy a stock and hold onto it to generate a capital gain or dividend income. Capital gains represent the difference between the purchase price–called cost basis–and the sale price of the stock or security. Dividends are cash payments by companies that reward shareholders for buying their stock. Some stock investors hold onto positions for years, particularly if it’s a solid, stable company with a consistent track record of paying dividends. Dividend income strategies are popular with retirees since it helps generate an income stream to complement Social Security income.
A stock trader is someone who buys and sells stocks, whereas a stockbroker is a middleman or entity that helps a trader facilitate those trades. A stockbroker takes and executes stock orders on behalf of clients in return for a commission. Stockbrokers or brokerage firms may also offer additional services like equity research & analysis, market advice, portfolio management, and so on.
A bond trader is someone who specializes in trading fixed-income securities such as corporate bonds or Treasuries. Unlike stocks, individual bonds may not always trade on an exchange and must be obtained through a broker who has the facility to match bond orders. Bonds are often considered to be less volatile than stocks, on average, and represent a company’s debt rather than an equity stake.
A commodity trader is one who specializes in trading commodities such as wheat, corn, livestock, oil, precious metals, and so on. Commodities traders may trade actual physical commodities in the spot market, but more often trade in commodities derivatives such as forwards, futures, and options contracts.
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