Stock traders either focus on short-term investments, long-term ones or a combination of both. When it comes to day trading and other very short-term stock market investments, it’s a zero-sum game.
You’re either going to be on the winning side of a trade and make money or be on the losing side and end up with less money than before.
If you want to make money by stock trading, it’s essential to understand how to value stocks and identify mispriced securities, possibly with help from stock investment websites and software. You also need to know the other stock market players and how they affect the market.
This point only becomes clearer after the recent market mania surrounding trades in GameStop, AMC Theaters, Express Outfitters and more stocks of an older retail age.
The famous millennial and Gen Z investing app, Robinhood, temporarily suspended trading in these stocks, causing a major backlash. Some other free stock trading apps followed suit, though admittedly to a lesser extent and with less of an impact.
As evidenced by users abandoning the platform for Robinhood’s alternatives in droves, many likely did so after seeing the company’s mission of “democratizing finance” as hypocritical after these actions.
They experienced Robinhood only allowing users to sell certain securities they owned and how that would stand to benefit Wall Street hedge funds- not mom-and-pops who have wielded this app.
This article goes into how to value a stock and then reviews the stock market players involved in situations just like this on a daily basis. They will be who you face on the other side of the trade.
How to Value a Stock
Fundamental analysis focuses on measuring the intrinsic value of stocks and investors usually use it when choosing long-term investments. This method looks at past and present data, looks at stock news and market developments, including (but not limited to):
- Industry statistics
- Investor conference calls
- Press releases
- Analyst estimates
Using this information, fundamental investors assign a projected stock value and determine if it currently trades below this value. If so, this makes a stock undervalued and worth buying. If not, this makes a stock overvalued and worth avoiding (or selling short).
Technical analysis aims to figure out the future price of a stock based on patterns and trends. Technical analysts will look at signals, such as:
- Simple moving averages (SMA)
- Support and resistance levels
- Momentum indicators (for example, the relative strength index)
Day traders and swing traders use this strategy for making short-term investments. Some investors use a combination of fundamental and technical analysis, depending on the situation. You will want to make use of the best stock research and analysis apps to identify these opportunities.
The stock comes complete with tools like Level 2 Advance Nasdaq quotes for measuring depth-of-market as well as information you need to conduct your fundamental and technical analysis.
To get you started, the free stock trading service even offers free stocks for signing up and making a deposit of at least $100.
The Stock Market Industry Players
Think about investing in stocks like taking a test in school which your teacher grades on a curve. You can thoroughly study a stock, but that doesn’t necessarily guarantee you an A+ in profits. The actions of other industry players will affect your bottom line.
The following groups participate in the stock market and will issue or be the stock market players you face on the other side of the trade.
Private companies issue a predetermined number of shares to shareholders. Companies that qualify and register can “go public” and be listed on stock exchanges.
This process starts with an Initial Public Offering (IPO), where eligible people can buy shares at a certain price before the general public. The company only receives money from the initial offer and not when the people who bought shares in the IPO later sell them at different prices.
However, companies often do stock buybacks where they buy back shares from the marketplace. The company reabsorbs shares from buybacks and the number of outstanding shares on the market lowers.
Likewise, companies can also register shelf offerings or secondary market offerings where they sell more of their stock into the market to raise additional equity.
People who work at corporations may partake in insider trading, which is sometimes, but not always, illegal. It’s illegal if they trade based on information that isn’t yet available to the public.
A brokerage firm is an intermediary between a buyer and a seller. They are most popularly thought of in terms of buying and selling stocks. The broker either matches buy orders with sell orders or meets a customer’s order through its own inventory.
When connecting buy and sell orders, the broker may receive a commission from one or both parties. They may also earn a portion of the bid-ask spread, netting them a penny or more on each share traded.
When counted over millions of shares, this can turn into serious money for ensuring orderly, efficient markets.
Most online brokers have eliminated commission fees and instead brokers like Robinhood, Webull and Acorns make their money from premium services or get paid by exchanges for the volume they supply.
When brokers don’t charge commissions on their trades, we recently found out with halted trading on shares of GameStop there is a cost for free trades: selling order flow to clearinghouses and giving insight into retail traders’ activity.
→ Equity Analysts
Equity analysts, sometimes referred to as equity research analysts, supply financial guidance and stock knowledge to brokers, investment advisors and individual investors. Essentially, they act as a professional stock picking service.
Brokerage firms, mutual funds, hedge funds and others, hire equity analysts to make recommendations to institutional portfolio managers. They can suggest whether to buy, sell, or hold stocks. Usually, analysts focus on companies within a specific industry.
Each day, equity analysts pay attention to the stock market and news about companies they are assigned. Based on what they discern could affect market returns, they update users of their research on their findings.
→ The Securities and Exchange Commission (SEC)
The U.S. Securities and Exchange Commission is a large independent federal agency created following the stock market crash in the 1920s. The SEC primarily enforces the law against market manipulation.
Further, the U.S. Securities and Exchange Commission (SEC) has a mission to:
- Protect investors
- Maintain fair, orderly and efficient markets
- Facilitate capital formation
For over 85 years, the SEC has operated on the concept that everyone should be treated fairly and have access to market information about securities sold into the market.
Public companies, fund and asset managers, investment professionals and others, must disclose significant financial information to allow investors the full information they need when making investment decisions.
The SEC monitors over 27,000 entities in the securities industry and has returned $1.2 billion to wronged investors during the last fiscal year.
→ Individual Investors
Trading by individuals has climbed significantly since major brokerages started offering zero-commission trades. In the first half of 2020, individual investors were responsible for 19.5% of U.S. stock market trades. This percentage is nearly double what it was in 2010.
Typically, but not always, a growing economy leads to more stock buying activity. Then, people invested in equity markets increase their wealth. Individual investors choose whether to invest in stocks focused on growth, income or value to buy in a variety of ways.
Some do research similar to equity analysts, but few have that much time. People may choose to invest in companies they work for, brands they trust, or base decisions mainly on what’s happening in the news.
My preferred investment style involves investing in index funds because of the low-cost and broadly-diversified nature of these investments. Over time, these returns will compound and yield significant returns on their own.
I lower costs further by using a service like M1 Finance to slash broker-related costs to $0. When you lower your costs to nothing and invest in an automatically-rebalanced, diversified portfolio, you could have significant appreciating assets in hand.
→ Institutional Investors
Institutional investors own approximately 80% of equity market capitalization. These are legal entities that invest on behalf of their investors. Institutional investors include organizations, such as:
- Mutual funds
- Insurance companies
- Credit unions
- Hedge funds
- Venture capital funds
Institutional investors have a significant influence and impact on the market, in both positive and negative ways. They are entitled to lower fees and preferential treatment, but they also have fewer rules protecting them.
→ Penny Stock Promoters
A penny stock is any security issued by a small company that trades for under $5 per share. Penny stocks trade on apps like Webull and Robinhood and can carry extreme volatility because of the low trading volume.
It doesn’t take much buying or selling to affect the stock price substantially.
This volatility can either scare an investor or excite them because a small rise in price can make investors huge gains, but it can also mostly be lost with even a slight dip.
Penny stock promoters are people who try to inflate a penny stock’s price artificially. Sometimes, people hire them and other times they promote on their own accord.
After securing a large number of shares in a penny stock, penny stock promoters will start trying to convince anybody that the stock price will rise, citing any available “evidence”.
If successful, many others buy the stock and the price will go up. Once up, the promoter sells out of the position and leaves others holding the bag for an unprofitable stock.
Regulators from the SEC often refer to this as a “pump-and-dump” scheme when used to manipulate the market purposefully. When done so, this qualifies as an illegal activity.
It’s essential that anyone who invests in penny stocks does their own due diligence and thoroughly evaluates stocks. If you choose to invest in penny stocks, make it a small overall portion of a diversified portfolio. This should never be a primary, long-term strategy.
Instead of gambling with penny stocks in the hope of them going to the moon, you should consider purchasing growth stocks selected by Motley Fool’s Rule Breakers service.
The recommendation platform screens thousands of stocks in an array of industries to predict which stocks will be tomorrow major market winners.
The service targets homerun stocks they believe will become the Amazons and Netflixes of tomorrow.
Stock Market Players: Who You’re Up Against
When you consider all the stock market industry players, it becomes clear that, rather than trying to beat the stock market, it’s a better strategy to join it.
An index fund is a mutual fund or exchange-traded fund (ETF) that holds a representative sample of the securities in an index.
They are designed to match the performance of the benchmark. It’s a method where rather than trying to redistribute existing wealth, investors are gaining from the future wealth that companies will generate over time.
These are the best investments for their consistent market performance over long periods of time.
Historically, index funds perform very well as a long-term investment and consistently beat other types of funds held in various types of investment accounts.
Additionally, since these funds use passive management, the fees come in lower than actively-managed funds.
As billionaire Warren Buffet wrote in 2016, “Both large and small investors should stick with low-cost index funds.” Rather than competing with others in the stock market and either winning or losing, consider index funds where the longer you wait, the more you usually make.
About the Site Author and Blog
In 2018, I was winding down a stint in investor relations and found myself newly equipped with a CPA, added insight on how investors behave in markets, and a load of free time. My job routinely required extended work hours, complex assignments, and tight deadlines. Seeking to maintain my momentum, I wanted to chase something ambitious.
I chose to start this financial independence blog as my next step, recognizing both the challenge and opportunity. I launched the site with encouragement from my wife as a means to lay out our financial independence journey and connect with and help others who share the same goal.
I have not been compensated by any of the companies listed in this post at the time of this writing. Any recommendations made by me are my own. Should you choose to act on them, please see the disclaimer on my About Young and the Invested page.