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What is stock trading?

Stock trading is simply the process of buying and selling shares. But it is usually considered to refer to short term, speculative investing (using the minimum cash outlay) rather than buying shares for the longer term (or taking shares up or paying for them and holding for gain or income).

Although the settlement system has changed from what was known as 'account trading' to the present system of 'rolling settlement' still similarities in trading strategies. In the account system there was a set number of trading days (usually 14 days or two weeks) in each account. The trader would buy and sell to close within the same account, firstly in order to settle the two trades on balance and secondly to get a refund on the stamp duty (UK). This was known as a 'closing bargain'. In the present system of Rolling settlement the default settlement is known as T+3. That is Trade date plus the next three working days. It is possible to close this position with the same settlement date. For example the following day would need to be dealt T+2 and the next day T+1 (the minimum settlement). To get round this the trader will deal with an extended settlement if possible. That is T+10 (like the old account trade) or even T+15 or T+20. The 'market' is likely to want a bit more on the price as they are effectively financing the trade. Extended settlement is not available on automated (SETS) trades which are all T+3. The advantage of SETS is that your order can be entered at any price level on the order book and a buyer can be 'the market' or the bid. For example if the price is 98-100 the trader can enter his order to buy at 99 when the price will then be 99-100.

Going back to the market order a further way to extend settlement is by way of a 'cash & new'. The trader may use technical analysis rather than fundamental analysis to find his trades. Technical analysis is basically using empirical price data to predict the future price. The simplest example is a price chart or graph which instantly gives a time based view of the share price over the desired period. In one view this will show highs and lows (support and resistance). The chart will usually incorporate volume data and also 10/20 day moving averages. It is usually acknowledged that the small trades (retail) will be wrong and that the larger trades (professionals & institutions) will be right.

When trading short term the entry price is most important. The general level may be ascertained from technical indicators but it is imperative for the trader to get the keenest market prices. This is probably impossible for on-line traders and requires some sort of direct market access (DMA). A usual screen price, the best price between all the market makers (the 'touch') could still have a Spread of over 10% meaning the buyer at the ask is losing 10% plus the dealing costs straight away. Just one example, Oracle Coalfields has a screen price of 6.75-7.75 (about 15% Spread) whereas a good trader should get nearer to 7.

It is most important for the trader to get the very best prices, although, of course, the share price still needs to go up to make a profit!

References: Firstrade.com stock trading