Articles (6)
What is forex?
<p>In the world of financial markets, forex has a special place. It is the world's most popular and biggest financial market, and as of April 2022, it has an average daily trading volume of USD 7.5 trillion. But what does forex mean, and how can you trade it? In this article, we’ll walk you through the basics of the forex market and the terms you need to know to start forex trading. </p> <h2>What is forex, and what is forex trading?</h2> <p>Forex, commonly referred to as FX, stands for the foreign exchange market. It’s a global marketplace where dozens of currencies are converted into one another for various purposes, such as international trade, tourism or personal gain. Due to its nature, forex trading involves a wide range of participants in this exchange process – governments, banks, multinational corporations, institutional investors, retail traders and even regular people. In fact, anyone who has ever travelled abroad and exchanged their home country’s currency for a local currency of their destination has done a transaction on a foreign exchange market.</p> <h2>Why is the forex market so popular?</h2> <p>There are many reasons why the currency market is so popular among online traders. Here are some of its main benefits:</p> <h3>Easier to follow</h3> <p>There are only a few currencies that most traders follow – these include the US dollar, Euro, and British pound. Other favoured but less frequently traded currencies are the Canadian, Australian, and New Zealand Dollars, and the Japanese Yen. As there are only a handful of popular currencies to focus on, it can help make it easier for traders to develop a deeper understanding of their behaviour and the factors that influence their movements. </p> <h3>Liquidity</h3> <p>The large number of participants and transactions bring high liquidity to forex trading, resulting in very low trading costs. And the ever-present supply and demand makes trading on leverage highly accessible. The latter allows good traders even with a small amount of capital to extract value from the forex markets, something that’s difficult to do when trading stocks.</p> <h3>Volatility</h3> <p>Forex prices can be influenced by various factors, which often cause high volatility and, as a result, numerous trading opportunities. Take a value stock as a comparison, it may hardly move some days, making it difficult to day trade. This is not the case with Forex trading, and you can find opportunities anytime during the day, whether it be after, before, or during work hours. </p> <h3>Round-the-clock access five days a week</h3> <p>Due to its decentralisation, forex transactions can be carried out at any time, except during the weekend. There is no centralised exchange, instead central banks, large banks, hedge funds, and retail brokers have built electronic networks, and deal directly with each other to facilitate trading outside traditional trading hours.</p> <h3>How does forex work?</h3> <p>When a forex trader exchanges a currency, you sell it and buy another one. Since there are always two currencies involved in this process, forex instruments are quoted in pairs – for example, EUR/USD or GBP/USD. The first currency is referred to as the base, and the second one is called the quote.</p> <br /> <br /> <img alt="base currency EUR - USD Quote currency" src="/getmedia/6ce661c1-e988-483e-ad7a-39908fb6f085/what-is-forex-trading-image01.png" style="display: flex; margin: 20px auto;" title="base currency EUR - USD Quote currency" /> <h2>Types of pairs in the forex market</h2> <p>Forex pairs are divided into three large groups depending on what currencies are included in them.</p> <h3>Major currency pairs</h3> <p>Major pairs include the currencies of the most developed countries traded against the USD. The US dollar is always present in these pairs as the base or quote currency because it is an official reserve currency worldwide, meaning it is widely used in international trade and held as a reserve by central banks across the world. It makes USD the dominant currency in forex and other markets like commodities that are also traded against it. Some of the most popular major pairs are EUR/USD, GBP/USD and USD/JPY.</p> <h3>Minor currency pairs</h3> <p>Minor pairs also include currencies of large economies but are not tied to the USD – EUR/GBP, EUR/CHF or GBP/CAD, for example.</p> <h3>Exotic currency pairs</h3> <p>Exotic pairs usually consist of one currency of a major economy traded against the currency of a developing country. Some examples are AUD/MXN, USD/HKD and GBP/ZAR.</p> <h2>How does currency trading work?</h2> <p>The value of a forex pair indicates the value of a base currency against the quote currency. In other words, it shows how many units of the quote currency you can get for 1 unit of the base currency. This is also called an exchange rate.<br /> For example, the EUR/USD currency pair exchange rate at the time of writing was 1.02839, which means for 1 euro, you would get 1.02839 US dollars.</p> <br /> <img alt="base currency EUR - USD Quote currency" src="/getmedia/b7de8307-5d14-4929-8cd6-d1aa06f5dc55/what-is-forex-trading-image02.png" style="display: flex; margin: 20px auto;" title="base currency EUR - USD Quote currency" /> <p paraeid="{b45da9f9-ab40-462f-8ec2-c07bc0d46b8a}{75}" paraid="900764359">It is important to note that since the forex market is decentralised, the exchange rate may vary from one broker or bank to another. </p> <p paraeid="{b45da9f9-ab40-462f-8ec2-c07bc0d46b8a}{91}" paraid="1272472748">When it comes to online trading, brokers source their exchange rates from a group of establishments called liquidity providers – usually banks and other large financial institutions and display them as bid and ask prices.</p> <h2>What are bid and ask prices in forex?</h2> <p>In forex trading, you have probably come across "bid" and "ask" prices. Think of the "bid" as the price you'll receive when you want to sell a currency. The "ask" is the price you'll pay when you want to buy. For example, if you're looking at EUR/USD, the "bid" tells you how many US dollars you'll receive for selling 1 Euro, while the "ask" represents how many US dollars you need to spend to buy 1 Euro. As you can see in the image below, you would receive 1.02839 USD for selling one Euro, while if you were to buy one Euro, you would need to pay 1.02847. This buy price is slightly higher than the sell price because of the spread, which is the difference between the “bid” and “ask” prices. </p> <br /> <img alt="table with instrument sell buy columns" src="/getmedia/0dc1949c-bd93-47ef-a868-7acf8d50ef8f/what-is-forex-trading-image03.png" style="display: flex; margin: 20px auto;" title="table with instrument sell buy columns" /> <h2>What is the spread in forex trading?</h2> <p paraeid="{b6259188-8ad3-442e-91ef-fc8790f06976}{19}" paraid="909016290">A spread in forex trades means the difference between the buy and sell prices that represents the transaction cost of every currency pair. Whether you buy or sell a currency, you will always be charged this amount upon opening a trade. The spread is what your broker earns for enabling you to trade. It is a markup, the same way as retailers adds a markup in any other product. However, the high competition in the forex markets ensures it’s the cheapest financial market to trade. </p> <p paraeid="{b6259188-8ad3-442e-91ef-fc8790f06976}{75}" paraid="1881540912">In the image below we see that the cost of trading is 0.8, for a 100,000 Euro transaction the cost would be 8 USD, making it unbeatably cheap. </p> <p paraeid="{b6259188-8ad3-442e-91ef-fc8790f06976}{95}" paraid="643707991">When you open a trade, the spread is deducted from the start. In a winning trade, the spread cost is deducted from a profit, and in a losing one, it is added to the loss. </p> <br /> <img alt="table with instrument sell buy columns" src="/getmedia/0d6ce7ac-c7be-40f0-82b6-4a292c3855ac/what-is-forex-trading-image04.png" style="display: flex; margin: 20px auto;" title="table with instrument sell buy columns" /> <p>It’s important to note that a spread directly depends on the liquidity of a currency pair. For example, the most liquid pairs (majors) usually have very tight spreads, meaning traders can open positions at a lower cost and make a profit faster if the market moves in their favour. Minor pairs are traded less often and have wider spreads, slightly increasing the trading cost, and exotic currency pairs have the widest spreads.</p> <p>The spread amount also varies from broker to broker and can even be different depending on the account type within the same broker. For example, if you trade forex with ThinkMarkets, a Standard account will give you access to tight spreads – just a few pips, but if you choose a ThinkZero trading account, most pairs will have 0 spreads.</p> <h2>What are pips in forex?</h2> <p>In forex trading, pip stands for percentage in point or price interest point. It is the smallest one-digit movement of a currency’s price measured by the fourth decimal point and used to calculate a spread.</p> <p>Here is a little graphic to help you understand how the price of a currency works:</p> <br /> <img alt="EUR/USD" src="/getmedia/5a1f9093-0c16-4fcd-b1c7-7e8274bec12c/what-is-forex-trading-image05.png" style="display: flex; margin: 20px auto;" title="EUR/USD" /> <p>Forex pairs that have Japanese yen as a quote currency are displayed only until the third decimal point, so the pip is measured by the second one.</p> <img alt="USD/JPY" src="/getmedia/5ee3c9cb-3972-4b49-b098-7c761624aefb/what-is-forex-trading-image06.png" style="display: flex; margin: 20px auto;" title="USD/JPY" /> <p>To calculate a spread, you need to subtract the sell price from the buy price. In our previous example, the spread is:</p> <br /> <img alt="1.02847 - 1.02839 = 0.8 pips" src="/getmedia/72f5e4d8-fc4b-4dbe-aa5f-b081b3ec9fbd/what-is-forex-trading-image07.png" style="display: flex; margin: 20px auto;" title="1.02847 - 1.02839 = 0.8 pips" /> <p>On ThinkMarkets’ proprietary platform, ThinkTrader, the spreads are displayed within each price quote for your convenience, so you don’t need to calculate them.</p> <p>Now, your next question may be how to calculate your profit or loss in pips when you trade forex and how to trade forex in the first place. Head over to our <a href="/en/trading-academy/forex/what-affects-forex-exchange-rates">next article</a>, where we discuss it in detail. You can also create a demo trading account on ThinkTrader to apply your newly obtained knowledge in practice.</p>
What are stocks?
<p paraeid="{3905333e-d6ad-49f8-b2a7-46ee067cf7da}{244}" paraid="1767617311">Most people are familiar with the term stock market – it’s a market where you can buy or sell stocks, but there is much more to it than just that. <br /> </p> <p paraeid="{d02067f4-da4e-4032-b7cc-a7294b695deb}{17}" paraid="112530676">Almost every country in the world has its own stock exchange or even multiple exchanges where people can buy and sell stocks, among other financial instruments. <br /> </p> <p paraeid="{d02067f4-da4e-4032-b7cc-a7294b695deb}{33}" paraid="241417236">These exchanges are a regulated environment. In certain countries, the same regulatory bodies that licence online brokers oversee transactions on their respective stock exchanges to ensure transparency and prevent fraud. For example, the United Kingdom’s largest stock exchange, the London Stock Exchange (LSE), is regulated by the Financial Conduct Authority (FCA). Every time a stock is traded (bought or sold), it is monitored by this regulator for discrepancies, ensuring compliance with its policies. <br /> <br /> <br /> What are stocks, and how are they different from shares and equities? In this article, we’ll dive deep into all these details and explain everything a trader needs to know about stocks.</p> <h2>Stocks vs shares vs equities</h2> <p paraeid="{d02067f4-da4e-4032-b7cc-a7294b695deb}{109}" paraid="787304823">A stock is a representation of a company’s ownership. The term stock is often used interchangeably with the term share. However, there is a difference. Stock implies ownership in general, regardless of its size, while a share is a unit of measurement of this ownership. Equity is another term commonly used, and it refers to the total ownership stake in a company without any debt involved. <br /> </p> <p paraeid="{d02067f4-da4e-4032-b7cc-a7294b695deb}{143}" paraid="37962362">For example, you may often see your balance being called equity on trading platforms. In this case, it’s the total amount of funds you own after deducting any loss you may incur if you have open trades. <br /> </p> <p paraeid="{d02067f4-da4e-4032-b7cc-a7294b695deb}{159}" paraid="2087999960">To sum up all three terms – if Apple Inc. were to have 1,000 shares only and you owned 100 of them, you would also own Apple’s stock or a part of its equity. </p> <p><br /> <br /> <img alt="TFMKT-4086-Image1-1.png" src="/getmedia/ec1a6c59-0298-47bd-a30c-d9c992e3979e/TFMKT-4086-Image1-1.png" title="TFMKT-4086-Image1-1.png" /></p> <h2>How does a stock work?</h2> <p paraeid="{d02067f4-da4e-4032-b7cc-a7294b695deb}{186}" paraid="772652413">Most companies start as privately held. It can be either an individually owned business, where all assets and hence all the stock belong to one person, or a partnership with two or more owners, where stock is divided between them. In both cases, a company may seek to raise capital and attract investors to expand its coverage and services. To make an investment opportunity appealing, the business raising capital will offer partial company ownership in exchange for funding. In simple words, third-party investors receive some ownership of a company for providing their capital to it. <br /> </p> <p paraeid="{1199522b-70e2-4b7d-9954-8024da34ca44}{5}" paraid="1105466596">For example, let’s say your friend opens a startup, and you provide USD 10,000 to help it grow, and receive partial ownership in this startup on pre-defined terms and conditions in return. As you now are a shareholder, you will receive your share of the profits, and have the right to vote on decisions. If a startup does grow into an established company, more capital might be needed to allow the firm to grow. At this stage, a company can go public and sell shares on the stock market to raise more capital. <br /> </p> <p paraeid="{1199522b-70e2-4b7d-9954-8024da34ca44}{81}" paraid="2146976948">This is when a company gets listed on a stock exchange and goes through an Initial Public Offering (IPO) – the process of devising an investment plan, setting share prices, their total number and making them available to the public. </p> <h2>How many shares can a company have?</h2> <p>An individually owned business can have as little as one share representing 100% of a company’s value and belongs to the owner – that’s the minimum possible. Once a company goes public, there is no limit to the number of shares it can issue. Apple, for example, has billions of shares. However, the law of supply and demand works in this case, too, and the more shares there are available on the market, the lower they are usually priced. That’s why large corporations issue shares gradually, carefully evaluating demand to prevent a significant price drop. Apple added new shares to the market only five times in over 40 years, every time making sure that investors anticipated it.</p> <h2>Types of stocks</h2> <p>Besides private and public stocks we discussed above, the two main types of stocks are common and preferred.</p> <h3>Common stocks</h3> <p>Common stocks are the most popular type of issued stocks. In most cases, shares available to the public belong to this category. Common stocks tend to be more volatile than preferred stocks, offering higher potential reward but also higher risk to traders. The holders of common stock have voting rights and the right to receive dividend payments, although the latter is not guaranteed.</p> <h3>Preferred stocks</h3> <p>On the other hand, preferred shareholders tend to offer more predictable income, with higher and fixed dividend payouts. However, they usually always come with no voting rights and limited growth. In case a company goes bankrupt, the holders of preferred stock are also prioritised in being repaid compared to common stock owners. <br /> <br /> <img alt="TFMKT-4086-Image2-1.png" src="/getmedia/44b32dcd-b4d6-4ceb-936b-de9c739a910b/TFMKT-4086-Image2-1.png" title="TFMKT-4086-Image2-1.png" /></p> <h2>What is a dividend?</h2> <p paraeid="{1199522b-70e2-4b7d-9954-8024da34ca44}{232}" paraid="1690159432">A dividend means a distribution of a company’s earnings or profit to shareholders as a reward for their investment. It is usually paid quarterly in cash or in the form of additional shares. However, not all companies pay dividends and some reserve the right to reinvest their profit into the company’s growth instead of sharing it with investors. For example, high-growth companies usually choose to reinvest instead of paying dividends. Even some of the giants that are profitable, like Amazon, Meta and Google (Alphabet), follow the same policy to ensure continuous growth. <br /> </p> <p paraeid="{acb2c30d-64dd-4b07-82ea-8b974d18a721}{47}" paraid="1759198674">When a company announces a dividend distribution, investors are only deemed eligible if they have bought shares before a set date, called the ex-dividend date. The average dividend payouts vary but typically fluctuate between 2% and 5% of a share price depending on the company’s industry. For example, in the energy sector, dividends average 5%, while healthcare companies often pay a little over 2%. <br /> <br /> <img alt="Group-63232.png" src="/getmedia/6c3e696d-2936-48b7-a3e7-cd0a5821df92/Group-63232.png" title="Group-63232.png" /></p> <h2>What exchanges can a company list its stock on?</h2> <p>Most companies can be listed on any exchange in the world as long as they meet the minimum requirements set by the exchange. The main defining factor in choosing an exchange often depends on where the target audience (potential investors) are located. Hence, most companies get listed on an exchange in the same country where their headquarters are. That’s why Apple is listed in the US, Mercedes-Benz in Germany and Xiaomi in China.<br /> <br /> Some companies list their stocks on more than one exchange in pursuit of a larger exposure. For example, the two major US stock exchanges – New York Stock Exchange (NYSE) and Nasdaq – have hundreds of non-American companies listed on them.<br /> <br /> These exchanges are the largest in the world by market capitalisation, meaning they have a lot of companies listed on them, including the largest corporations. This, in turn, leads to high liquidity and market movement that presents many trading opportunities, attracting potential traders and investors.<br /> <br /> Not sure what’s the difference between stock trading and investing? Head to our next article where we explain it in detail and show <a href="/en/trading-academy/stocks/how-to-trade-stocks">how to trade stocks with CFDs</a>.</p>
How to trade stocks
<p>Stock trading has always been a popular activity to generate passive income, and the COVID-19 pandemic only brought more demand to it. According to various research, stuck at home or laid off from their jobs, people started actively looking for other ways of entertainment and income.<br /> <br /> The user count of stock trading apps has almost tripled since 2019, and websites with educational content on financial markets have seen a four-times surge in the number of visits. However, not many websites offer a beginner-friendly explanation of the concept.<br /> <br /> In our article, we aim to help inexperienced traders understand how to trade stocks as we explore the basics of it and focus on one of the most popular ways of doing it – stock trading with CFDs.</p> <h2>What is the difference between stock trading and investing in stocks?</h2> <p>First of all, let's establish the difference between stock trading and investing in stocks, as both versions are widely spread.<br /> <br /> Many traders use these terms interchangeably or call any stock-related activity trading. It makes sense because whether it's day trading with a quick turnaround or a long-term investment portfolio, the end goal is the same – to make a profit once the price grows.<br /> <br /> However, there are significant differences. For example, you can trade stocks without buying them. Moreover, it is also possible to benefit when a stock price goes down, not only when it's gaining value. That's what sets trading and investing apart.<br /> <br /> At ThinkMarkets, we use the term investing when a trader physically buys an instrument. Investing in stocks means buying a company’s shares and acquiring its ownership along with the right to receive shared profit if their stocks pay <a href="/en/trading-academy/indices/stock-market-indices ">dividends</a>. It usually implies having a long-term plan – most investors hold their shares for an extended period of time, from several days to years or even decades, selling them for profit when their price grows significantly. Some buy and sell their shares regularly to get smaller but regular profits.<br /> <br /> On the other hand, other traders speculate solely on short-term price movements of stocks without buying them. We call this activity trading, and one good example of it is CFD trading.</p> <h2>Why trade stocks with CFDs?</h2> <p>CFD trading is very popular among traders because it offers multiple benefits, such as:<br /> </p> <ul> <li>Opportunity to capitalise on both rising and falling prices by going long or short;</li> </ul> <ul> <li>Accessing the underlying stock at a lower cost than buying it outright via leaverage;</li> </ul> <ul> <li>There are no ownership requirements, providing cost-effective and flexible access. </li> </ul> <p><br /> In addition, CFD trading is available on all global markets, making it an attractive way to trade multiple instruments at once.</p> <h2>How to trade stocks with CFDs</h2> <p>If you are not familiar with the concept of CFD trading, we discuss it in detail in our <a href="/en/trading-academy/cfds/what-are-cfds">CFD trading: a beginner’s guide.</a><br /> <br /> To give a brief example, let’s say you decided to trade Apple shares. The current market price is USD 152.00.</p> <h3>Going long</h3> <p>If your research suggests that the price is going to increase, you open a long CFD position (buy). Keep in mind that when you trade stocks with CFDs, one contract usually equals one share.<br /> <br /> The price does go up to USD 162.00. The difference – USD 10, is your profit. If your prediction turns out incorrect and the price drops to USD 142.00, you lose USD 10.<br /> <br /> <img alt="" src="/getmedia/b1f80809-53c2-4530-a173-0bc72696d9fa/article-how-to-trade-stocks-long.webp" /><br /> <br /> In the news reports, you may often hear such an event described as the price moved by ten points, not dollars. It’s because price movements on the stock market are measured by points, where each point equals USD 1:<br /> <br /> <img alt="" src="/getmedia/d7650b39-5092-497a-acf8-48b96a9e7cf7/article-how-to-trade-stocks-long-formula.webp" /></p> <h3>Going short</h3> <p>In the opposite scenario, you can place a short CFD trade (sell) if you think the price is going to go down. If it does – you get profit, and if it moves in the opposite direction, you incur a loss.<br /> <br /> <img alt="" src="/getmedia/76d9c0a5-929f-41d7-af3a-d1d05dc1b2a6/article-how-to-trade-stocks-short.webp" /><br /> <br /> As you can see, no matter whether the stock price appreciates or depreciates, you have an opportunity to capitalise on its price movements because you can trade in either direction with CFDs.<br /> <br /> In this example, the AAPL abbreviation is Apple’s stock ticker you’ll see across all trading platforms. It’s a unique code used by companies for easier identification, the same as USD stands for the United States Dollar in forex.</p> <h3>Spreads</h3> <p>It is also important to note that depending on whether you open a long or short position, the initial price will slightly differentiate. It happens because every financial instrument has two prices in trading: buy (bid) and sell (ask).<br /> <br /> A sell price indicates how much money you would receive if you were to sell a stock, should you own it. On the other hand, the buy price means how much you'd need to pay to buy a stock. In CFD trading, both numbers mean the price of a contract you can open. The difference between these two prices is called the spread, and it is the fee a broker charges for facilitating the transaction.<br /> <br /> The image below shows a spread of the Apple stock – 9.0 or 90 cents.<br /> <br /> <img alt="" src="/getmedia/0d85eb30-6f54-4138-9d19-79d65f072b7d/article-how-to-trade-stocks-spreads.webp" /><br /> <br /> Keep in mind that the placement of a decimal point is different in index trading and trading stocks. The same 9-cent spread in stock trading would be marked as 0.9.</p> <h3>Leverage in stock CFD trading</h3> <p>CFD traders usually trade stocks with leverage. Leverage means funds borrowed from a broker to open a larger position. To place a trade with leverage, you only need to cover a small deposit called a margin. The bigger the leverage, the smaller the margin.<br /> <br /> For example, if you trade with 30:1 leverage in our previous example, you will only need to pay one 30th of USD 152.00, or USD 4.56, to trade a share of Apple worth over a hundred dollars.<br /> <br /> <img alt="" src="/getmedia/9f8ea23b-31bb-4185-bb37-33774d89a927/article-how-to-trade-stocks-leverage.webp" /><br /> <br /> Your profit doesn’t get smaller. It’s still the same USD 10, which is more than your initial deposit. It’s important to understand that if your trade is unsuccessful, the loss will also remain the same and exceed your initial deposit. That’s why using <a href="/en/trading-academy/cfds/risk-management-tools-in-cfd-trading">risk management tools</a> like stop loss and take profit is crucial in CFD trading.<br /> <br /> However, before you start trading stocks with real money, it's advisable to practice your skills and learn how to use risk management tools on a risk-free demo account pre-loaded with virtual funds. ThinkMarkets' proprietary trading platform, <a href="/en/platform/download-thinktrader">ThinkTrader</a>, offers over 3,000 global stocks and favourable trading conditions for beginners and experienced traders.<br /> <br /> If you are looking for tips on identifying trading opportunities on stocks, check out our <a href="/en/trading-academy/stocks/what-affects-stock-prices">What affects stock prices?</a> article, where we explain factors affecting their prices.</p>
What affects stock prices
<p paraeid="{45bdec93-b9d8-4864-bd9d-c0a3f0631972}{159}" paraid="679473590">Over the long term, the stock market tends to appreciate in value. This is because as the economy grows, companies' earnings increase, which helps drive stock prices up. If you look at the chart of a popular index like the S&P500, which tracks the 500 largest US companies, you'll see that its value is higher today than it was 10, 20 or 30 years ago, even when you take into account stock market crashes, like the ones we saw in 2000, 2008, and 2020.These crashes can be hard to stomach for long-term investors as the capital gains they have generated over the years take a hit. The good news is over the long term, the stock market tends to bounce back, which means investors can recoup these losses. </p> <p paraeid="{af858a94-1cd1-433e-a49b-06c9a8d210b5}{36}" paraid="1056185374">On the other hand, <a href="/en/trading-academy/cfds/what-are-cfds">CFD traders</a><a href="/en/trading-academy/cfds/what-are-cfds"> </a>value a market crash as much as a rally because both present trading opportunities for them. In this article, we’ll explain how to identify these opportunities as we go through the main factors affecting stock prices. </p> <h2>Main factors influencing stock prices</h2> <p>All the factors that may indicate an upcoming price change of a stock can be divided into three groups: macroeconomic, microeconomic and human.</p> <h3>Macroeconomic factors</h3> <p>All the factors that may indicate an upcoming price change of a stock can be divided into three groups: macroeconomic, microeconomic and human.</p> <img alt="" src="/getmedia/5a527f95-9404-4bc3-96a5-ab43534f97ff/article-what-affects-stock-prices-macro.webp" /> <p><br /> As the COVID-19 pandemic proved, the global and local state of the economy can significantly influence stock prices. This influence can be both positive and negative, depending on the nature of the crisis. For example, tech companies like Amazon or Apple were thriving while the borders were shut and people were stuck at home, while their non-tech counterparts were tanking one after another.<br /> <br /> With a crisis like that, it’s quite hard to predict where exactly it’s going to hit. Although big market crashes are an exception, not the common stock market’s nature, and hence have to be analysed individually.<br /> <br /> The day-to-day stock market performance is much easier to analyse. Over the years, traders and analysts identified price movement patterns and established macroeconomic factors that can indicate an upcoming price change. Here are some of them:</p> <p><strong>Inflation and interest rates</strong></p> <p>These two factors are usually linked together as they are correlated. Increasing inflation usually leads to increasing interest rates and vice versa. In a nutshell, the lower these rates are compared to their previous data, the better it is for stocks as it becomes cheaper for consumers and businesses to access credit. Traders usually keep an eye on the <a href="/en/economic-calendar">economic calendar</a> to follow these announcements and place their trades accordingly. <br /> </p> <p><strong>Gross domestic product (GDP)</strong></p> <p>A growing GDP rate usually signals a strong economy and is reflected in the higher price of stocks. However, if the growth is too steep, it can indicate the opposite as, in the long term, it can lead to higher inflation, which tends to have a negative impact on the value of stocks. It is important to note that stocks tend to move just after the release of economic data as they discount the future. This means that major stock indices will move lower when the economy is at its worst as investors and traders position themselves for better times ahead.</p> <p><strong>Exchange rates</strong></p> <p><a href="/en/trading-academy/forex/what-affects-forex-exchange-rates">Foreign exchange rates</a> are usually the product of the previously mentioned factors – a country’s low inflation and GDP growth lead to the strengthening of its currency compared to foreign currencies. Thus, a strong currency as an isolated factor of analysis can also indicate a potential increase in the prices of stocks that originate in the same country.</p> <p><strong>Political events</strong></p> <p>The political climate in the form of either local events, such as presidential elections or geo-political tensions, like armed conflicts and wars, usually has a strong effect not only on stocks of participating countries but on global stock prices too. In the case of elections, it can be both positive and negative, depending on market sentiment. Wars, however, tend to bring distress and falling prices to the stock market.<br /> <br /> All the macroeconomic factors are usually very intertwined and need to be studied as an aggregate – both on the local and global levels. It is also important to keep in mind the economic, political and trading relations of a country where the stock you analyse originates with other countries, as their economies may influence each other. Moreover, it’s always good to keep an eye on the American economy as it usually has a strong global influence, with the US dollar being a globally accepted reserve currency.</p> <h3>Microeconomic factors</h3> <img alt="" src="/getmedia/597c1913-938b-4722-b9f3-8f65d07a17e7/article-what-affects-stock-prices-micro.webp" /> <p><br /> In addition to global drivers, there are also factors on a smaller scale that may affect share prices, such as the company's performance.<br /> <br /> Any positive news, such as higher-than-anticipated reported earnings, new advanced product launches or efficient management restructuring, tends to drive a company's stock up.<br /> <br /> Negative events such as lower-than-expected profits, lawsuits, and any controversy or drops of confidence in company leaders can have the opposite effect and trigger price drops.<br /> <br /> One factor that stands out is the dividend announcement, which usually causes a short-lived price spike caused by dividend hunters. A consequential price drop often follows as a result of a sellout of the shares that were bought with the sole purpose of receiving dividends.<br /> <br /> Microeconomic factors are often reinforced and sometimes even triggered by market sentiment – the way traders perceive the event and the level of investor confidence, which brings us to the last group of factors affecting stock prices.</p> <h3>Human factors</h3> <img alt="" src="/getmedia/70ce09e9-5764-4a22-9ee1-01aa97b52284/article-what-affects-stock-prices-human.webp" /> <p><br /> These are the factors that influence the stock market due to public activity. For example, a new product launch can positively or negatively affect a company's stock price, depending on how traders and investors feel about it. If they believe a product has potential and will gain popularity, it will attract more buyers and traders to the company stock. On the other hand, if they believe it will be a failure, they might start pulling their investments out and sell the stock, causing its price to decline.<br /> <br /> Increased demand for certain products or stocks, leading to their increasing prices, can also be caused solely by public activity. The infamous GameStop saga, for example, at one point brought a whopping 2,000% increase to the company's stock price, followed by an almost equal a large price drop and another surge in just a little over two months. The entire series of events was caused by public activity and sentiment.<br /> <br /> Factors like market sentiment are nearly impossible to predict with a fundamental analysis of a company or economy. That’s where <a href="/en/trading-academy/what-is-technical-analysis-in-trading">technical analysis</a> steps in, but it is usually considered an advanced technique. If you are just starting out your stock trading journey, it is advisable to study the basics first and practice trading on a <a href="/en/demo-account">risk-free demo account</a>. For example, ThinkMarkets’ proprietary platform <a href="/en/platform/download-thinktrader">ThinkTrader</a> offers CFD trading on over 3,000 global stocks and USD 10,000 virtual funds to test and improve your trading skills.</p>
10 Tips to Successful Trading
<p>A solid plan for your online trading activities will provide a blueprint for your trading activities and define your goals.<br /> <br /> This, in turn, will help you stay on track and potentially avoid an undesirable outcome. Creating a trading plan involves a lot of moving parts.<br /> <br /> Creating a successful trading plan takes a little more than that. In this day trading guide, we’ve outlined ten essential steps every trading plan needs to have.</p> <h2>1. Understand the market <br /> before you start trading</h2> <p>A solid understanding of the financial market you are going to trade on is crucial for building a good trading plan. Having a strong knowledge base will help you navigate a large volume of information in a trading world confidently and make educated trading decisions.<br /> <br /> No matter what financial instruments you choose for your trading journey – forex, indices, commodities or others – there are three main points any day trader needs to focus on:</p> <ul> <li>Market terminology</li> <li>Unique traits of the market</li> <li>Factors influencing price movements</li> </ul> <img src="/TMXWebsite/media/TMXWebsite/circle.jpg" /> <p>For example, in forex, price movements are measured in pips, while in all the other markets, they are measured in ticks or points. This unique trait of each market requires an understanding of the market terminology.<<br /> <br /> Factors influencing price movements in each market will also vary. Forex, for instance, is heavily influenced by economic reports from the home countries of the traded currency pairs, while the prices of commodities are highly dependent on supply and demand. As a result, forex will move in large swings when economic reports are released, (especially reports from the US, Eurozone, or Japan), and commodities will see a lot of movement after the announcements of shortages in supply. To identify trading opportunities presented by such events, you need a clear understanding of what exactly influences each market.</p> <p>A good starting point to learn the basics of trading for beginners can be the trading guides on our website. Keep your demo account open as you go through any new information, and try to apply it in practice whenever possible.</p> <h2>2. Determine market conditions</h2> <p>Evaluating market conditions, in a nutshell, means identifying strong trading signals that present trading opportunities. To determine it, you need to be able to analyse the market you selected.<br /> <br /> There are two main methods of doing it – fundamental and technical analysis. The main difference between the two is the type of data used to predict future market movements.<br /> <br /> Technical analysis is based on the past price movements of an instrument, while fundamental analysis studies economic and financial factors that may affect the markets in future.</p> <img src="/TMXWebsite/media/TMXWebsite/fundamental_analyse.jpg" /> <p>At first, analysing financial markets may seem complicated and even intimidating. However, like with any other complex topic, you can start with a basic approach and advance little by little once you start getting a better understanding of how financial markets work.<br /> <br /> If you are just getting into day trading for beginners, it may be easier to start with news trading, identifying support and resistance levels and understanding some basic chart patterns. On the other hand, advanced traders can find trading signals in complex economic reports and technical indicators. Regardless of your experience level, you need to have a clear understanding of the analysis process you use before you start relying on it.<br /> <br /> However, whether you choose fundamental analysis, technical analysis or a mix of the two, it’s important to note that neither provides a guaranteed trading outcome. Any market analysis only indicates a potential price movement and could help determine your entry point.</p> <h2>3. Know where to enter the market</h2> <p>In trading, the entry point refers to the price level you are willing to open a trade at. While doing your market analysis, you will often see that sometimes the markets are primed for trading, while at other times it may be best to stand aside. If the trading signal you have identified is strong, you can open a trade right away. However, if you are unsure of the current market conditions or the available information is providing conflicting signals, it could be better to hold on and wait for a trade with a stronger signal.<br /> <br /> There will also be times when the signal seems strong, but your desirable entry point is not available on the market yet. In this case, you can place a pending order that will be executed only once the price reaches your specified level. Pending orders can help you manage risk and ensure that you enter the market according to your predetermined plan.<br /> <br /> To get some insights about the entry points as a trader, you can also keep an eye on the regular <a data-di-id="di-id-788ae628-c73859d3" href="/en/market-news/" rel="noreferrer noopener" target="_blank">market news</a> posted on our website by trading experts. Financial markets are unpredictable, and even experts can't guarantee the next price movement. However, they share valuable tips that may help you adjust and fine-tune your trades.</p> <img src="/TMXWebsite/media/TMXWebsite/laptop.jpg" /> <h2>4. Assess your risk appetite</h2> <p>New traders tend to have a strong aversion to risk and often focus too heavily on losses or, worse, refuse to close a losing position. They increase their risk exposure and believe that the market will return in their favour. Successful traders know there is a potential risk in every trade.<br /> <br /> That’s why setting an appropriate risk level before you start trading and sticking to it is one the most important steps of creating a day trading strategy. A wise day trader won't risk more than they can afford to lose.<br /> <br /> Determining how much of your capital you can risk per trade depends on your total trading account size and experience. Many traders use a 1-3% risk level as their control point, but beginners usually start with 1% to get comfortable with the idea. For example, if your trading capital is USD 10,000, you might decide to risk 1% per trade, which would be USD 100. However, this percentage should be based on your individual risk tolerance and trading strategy.</p> <img src="/TMXWebsite/media/TMXWebsite/risk-appetite_1.JPG" /> <p>It is not uncommon to experience strings of wins and losses, but whether you have a good day or your predictions are incorrect, it should not change your pre-determined risk level.</p> <h2>5. Understand your risk/reward ratio</h2> <p>A risk/reward ratio is a balance between how much you are willing to lose in order to gain a certain reward. Once you know your risk level, the next step is to set a desirable reward level. Just like with a 1-3% risk level, a 1:3 risk/reward ratio is widely considered appropriate among traders.<br /> <br /> It means you should expect no more than three points of return for every point you risk. So with a trading capital of USD 10,000 and a risk level of 1% (USD 100), your target return should not exceed USD 300. However, beginners often prefer to start with a lower reward level as well and set their risk/reward ratio to 1:1, which is USD 100 as a target return for every USD 100 of risk.<br /> <br /> In many cases, a reasonable reward goal will also depend on the instrument and market you are trading on. For example, you shouldn’t expect a 300-point price move from a market with a 100-point average range.</p> <img src="/TMXWebsite/media/TMXWebsite/risk-reward-ratio_1.JPG" /> <h2>6. Control your trading capital</h2> <p>The price movements on any trading market are outside your control as a trader. What you can control is the negative or positive impact any one of them has on your trading account. Risk management tools, such as stop loss and take profit, will help you keep your risk/reward ratio in check and avoid undesirable and unpredicted results.<br /> <br /> Generally speaking, every trade you place has only three possible outcomes:</p> <ul> <li>The market goes in your favour = you gain</li> <li>The market moves against you = you lose</li> <li>The market trades sideways = no gain and no loss</li> </ul> <p>To have control over your trading account, features are available to use such as take profit to lock your gains in successful trades and stop loss to limit your losses if the market moves against you.<br /> <br /> Following our previous example, for the trading account of USD 10,000 with a 1:3 risk/reward ratio, your stop loss could be set to USD 100 and take profit to USD 300. While many trading platforms will automatically calculate and display potential profit and loss for set take profit and stop loss levels, it's important for traders to understand how these levels relate to the price movement of the asset they are trading.<br /> <br /> As we mentioned earlier, following your predetermined risk level without changing it for already running trades is crucial. Many traders have made the unfortunate mistake of adjusting stop-loss orders lower and lower on a losing trade until they hit the point of ruin. Whereas other traders have adjusted take-profit orders higher and higher just to see their profits vanish as a trade quickly reverses against them.<br /> <br /> Sometimes you will find yourself in a third scenario, where the instrument you are trading on moves sideways for an extended period without bringing you the desirable gain and not triggering your stop loss. In such cases, traders often prefer to exit such trade manually, re-evaluate their trading plan and wait for a stronger trading signal.</p> <h2>7. Document your trading plan</h2> <p>The easiest way to re-evaluate your day trading plan is to go through each and every step of it and check whether the information you determined earlier is still relevant. That’s why documenting it is essential.<br /> <br /> Here are some example steps that could be included in any trading plan:</p> <ul> <li>Previous trading session review</li> <li>Existing trading opportunities analysis <ul> <li>Macro-analysis of the current market – news, economic reports, other factors that impact markets</li> <li>Micro-analysis of the current market – review of charts and technical indicators</li> </ul> </li> <li>A defined entry point</li> <li>A defined risk you are comfortable with per trade</li> <li>Defined stop loss and take profit levels</li> </ul> <p>Every trading plan is unique and depends on the personal goal of a trader. You may follow the same steps or create different ones to match your personal trading needs – no matter which option you choose, documenting it could still help you stay on track.</p> <img src="/TMXWebsite/media/TMXWebsite/checklist_1.jpg" /> <h2>8. Put your plan to the test</h2> <p>Going through the motions of your trading plan is as important as documenting it. Use a demo account of your trading platform to test it in a simulated real-world market environment with no risk.<br /> <br /> Making an effort to practise trading on a demo account can help identify weaknesses in your trading plan and allow you to adjust it where necessary. To give your trading plan a real test, keep in mind that when trading with a demo account, it is critical to follow your plan and execute each step as if you were trading in a live environment.<br /> <br /> That means placing trades only if your plan signals it, respecting all stop-loss and take-profit levels and making adjustments or course corrections only after the end of a trading day, not during it.<br /> <br /> Many beginner traders make the mistake of not treating their demo account with the same discipline and mindset they would have for their live account with real money. As a result, when the same trading strategy is applied to a live trading account, the results will differ greatly compared to the demo account. Moreover, not following the predetermined actions will make it much harder to review and analyse your trading session later.<br /> <br /> That’s why it is important to stick to your trading plan to prepare yourself for transitioning from a demo account to live.</p> <h2>9. Remove emotions from the equation</h2> <p>Uncontrolled emotions are one of the key reasons traders abandon their trading plan and fail to achieve the outcome they seek.<br /> <br /> When you begin to trade, it is important to remove any non-related or outside influences from your environment to allow yourself to trade with a clear focus and have a better trading experience.<br /> <br /> Seasoned traders apply various techniques to eliminate emotions from day-to-day trading and follow the structure and discipline provided by a well-thought-out trading plan. Some of them use a daily ritual, such as a short checklist related to their trading plan. Others use a brief physical exercise to help clear their mind and sharpen their focus. It can be anything else that works for you personally as long as it helps to achieve the main goal – developing a process that will help you execute each and every step of your trading plan without deviation. Like any new skill you are learning, your trading process will soon develop a natural flow and become second nature as long as you stay true to it.</p> <img src="/TMXWebsite/media/TMXWebsite/emotions.jpg" /> <h2>10. Find out what type of trader you are</h2> <p>nce you run your trading strategy a few times, you will start noticing that some trades work better for you than others. That’s when you know it’s time to find out your trading personality.<br /> Understanding your own trading personality can help you achieve the most positive experience and results from your trading. Some traders are better suited for high-volume, short-term trading, while others thrive using a slower long-term style.<br /> <br /> Determining what trading style works better for you is just as important as knowing the personality of the market you decide to trade on. There are many assessments available online to help you learn more about yourself in a trading environment, as well as numerous books and articles written on trading psychology and behavioural finance. Explore who you are as an individual and how that can apply to your trading psychology and strategy.</p> <img src="/TMXWebsite/media/TMXWebsite/human_1.JPG" /> <h2>Bonus: 11. Apply discipline and consistency</h2> <p>There is no ultimate success route to trading, but as with many things in life, being disciplined and consistent could be seen as key. It may take more than one try and some patience to find out whether a certain strategy is working.<br /> <br /> Beginner traders often give up on their plans as soon as they face their first loss and move to another strategy hoping it will work better. Stay disciplined and consistent, study the details of your trading sessions and plan your next steps only with a clear understanding of what works well and what doesn’t.<br /> <br /> Ready to get stated with day trading? Start with ThinkTrader. Our award-winning platform gives access to over 4,000 financial instruments, market news and multiple analytical tools to help you define your trading plan.<br /> <br /> Try it now on the <a data-di-id="di-id-8245fa02-6d05b691" href="https://web.thinktrader.com/account/login" rel="noreferrer noopener" target="_blank">web</a> or download the app [QR code]./p></p> <p><img alt="" src="/getmedia/e1074687-a223-4ed5-a7a2-540d16d4b2cd/QR-code_1.png?width=200&height=200" /></p> <p><a data-di-id="di-id-89b33f44-3ddfd855" href="/TMXWebsite/media/TMXWebsite/10-tips-to-successful-trading-pdf.pdf" onclick="DownloadFn()">Download the pdf</a></p>
What are Earnings Reports and How It Affects Stock Prices?
<p paraeid="{b457e087-b4a7-4d4f-9986-2beb6a7fd9a2}{207}" paraid="880894850">Understanding earnings reports provides traders with invaluable information about the financial health and prospects of companies. By deciphering earnings reports, traders can make more informed decisions on buying, selling, or holding stocks, all while minimising risks and potentially maximising rewards. <br /> </p> <p paraeid="{b457e087-b4a7-4d4f-9986-2beb6a7fd9a2}{239}" paraid="517118183">These reports are the financial lifeblood of publicly traded companies, and comprehending their significance is the first step towards making informed trading decisions. <br /> </p> <h2 paraeid="{b457e087-b4a7-4d4f-9986-2beb6a7fd9a2}{249}" paraid="960882141">What Are Earnings Reports? </h2> <p paraeid="{b457e087-b4a7-4d4f-9986-2beb6a7fd9a2}{255}" paraid="1647578478">Earnings reports, often referred to as quarterly earnings or corporate earnings reports, are periodic financial updates provided by publicly traded companies. They serve as a comprehensive snapshot of a company's financial performance during a specific quarter. Companies release earnings reports to fulfill regulatory requirements, maintain transparency, and keep shareholders and the broader market informed about their financial health. <br /> </p> <h2 aria-level="2" paraeid="{fc04172f-d300-426a-a8b2-dd29a4d1ac02}{6}" paraid="313468375" role="heading">Key Components of Earnings Reports: </h2> <p paraeid="{fc04172f-d300-426a-a8b2-dd29a4d1ac02}{12}" paraid="173663505">Here are the fundamental elements that make up an earnings report: <br /> </p> <p aria-level="3" paraeid="{fc04172f-d300-426a-a8b2-dd29a4d1ac02}{18}" paraid="1701304314" role="heading"><strong>Revenue </strong></p> <p paraeid="{fc04172f-d300-426a-a8b2-dd29a4d1ac02}{24}" paraid="1524644434">Revenue, also known as sales or turnover, represents the total income generated by the company. It is a critical indicator of a company's ability to generate income and sustain growth. <br /> </p> <p paraeid="{fc04172f-d300-426a-a8b2-dd29a4d1ac02}{30}" paraid="1417414845"><strong>Earnings Per Share (EPS) </strong></p> <p paraeid="{fc04172f-d300-426a-a8b2-dd29a4d1ac02}{36}" paraid="83483195">EPS is a measure of a company's profitability and is calculated by dividing the net income (profit) by the total number of outstanding shares. <br /> </p> <p paraeid="{fc04172f-d300-426a-a8b2-dd29a4d1ac02}{42}" paraid="1881627272"><strong>Guidance </strong></p> <p paraeid="{fc04172f-d300-426a-a8b2-dd29a4d1ac02}{48}" paraid="1941621333">Guidance, also known as forward guidance, offers a glimpse into a company's expectations and projections for future performance. This forward-looking information can significantly impact investor sentiment and stock prices. <br /> </p> <h2 aria-level="2" paraeid="{fc04172f-d300-426a-a8b2-dd29a4d1ac02}{54}" paraid="40589137" role="heading">The Impact on Stock Prices </h2> <p paraeid="{fc04172f-d300-426a-a8b2-dd29a4d1ac02}{60}" paraid="956453565">The release of earnings reports is often followed by market volatility. When a company releases its earnings report, it provides a comprehensive view of its financial performance over a specific period. This transparency allows investors and traders to gauge the company's health, profitability, and growth potential. <br /> </p> <p paraeid="{fc04172f-d300-426a-a8b2-dd29a4d1ac02}{68}" paraid="605736825">Positive results, such as revenue growth and higher-than-expected earnings per share (EPS), often lead to a surge in investor confidence, resulting in an increase in the company's stock price. Conversely, disappointing earnings can trigger a sell-off, causing stock prices to plummet. <br /> </p> <h2 aria-level="2" paraeid="{fc04172f-d300-426a-a8b2-dd29a4d1ac02}{74}" paraid="194869486" role="heading">Earnings surprises </h2> <p paraeid="{fc04172f-d300-426a-a8b2-dd29a4d1ac02}{84}" paraid="1465374990">One of the key concepts during earnings season is the notion of earnings surprises. An earnings surprise occurs when a company's actual earnings or revenue differ from analysts' expectations. These surprises can be either positive (beating expectations) or negative (falling short of expectations). Earnings surprises often lead to sharp price movements in the stock market. <br /> </p> <p paraeid="{fc04172f-d300-426a-a8b2-dd29a4d1ac02}{90}" paraid="340778528">When a company reports better-than-expected earnings, it tends to boost investor confidence. This positive sentiment may result in a surge in demand for the company's stock, driving up its price. <br /> <br /> <br /> On the other hand, if a company fails to meet earnings expectations, it can lead to a rapid decline in stock prices as investors may sell their shares in disappointment. </p> <p paraeid="{fc04172f-d300-426a-a8b2-dd29a4d1ac02}{112}" paraid="99863519"> </p> <p paraeid="{fc04172f-d300-426a-a8b2-dd29a4d1ac02}{116}" paraid="619820475">The dates leading to and following the release of Earnings reports present traders with potential market opportunities. They can either go long or short depending on their analysis of the situation. <br /> </p> <p paraeid="{fc04172f-d300-426a-a8b2-dd29a4d1ac02}{122}" paraid="376516497">Ready to trade? Log in to <a href="http://portal.thinkmarkets.com/" rel="noreferrer noopener" target="_blank">ThinkPortal</a> to access your trading platform now! </p>
Stocks Trading Articles
Gain a better understanding of stocks and discover how you trade them to potentially profit.
