How to Trade the US Stock Market

How to Trade the US Stock Market

Reading Time: 7 minutes

In the US stock market, traders and investors engage in a financial tango of precision, strategy and risk management. 

You, too, can join this ballet of bulls and bears, stepping into the rhythm of stock prices and market volatility.

How the US Stock Market Works

The US Stock Market comprises exchanges where publicly traded company securities are listed and can be bought, sold, and issued. Major US exchanges include the NASDAQ and the New York Stock Exchange (NYSE), with the latter serving as the largest stock exchange in the world. Stock markets are where business meets investment, creating opportunities for growth, profit, and sometimes loss. The US stock market's liquidity and diversity make it an appealing outlet for domestic and international investors to grow their wealth.

Major US equity indexes, such as the S&P 500, the Dow Jones Industrial Average and the Nasdaq Composite are key indices traders and investors use to track the performance of large US-listed companies. These indexes are market averages, so they cannot be traded directly. This is where the derivatives market steps in - think futures, options and Contracts for Differences (CFDs) - allowing market participants to trade based on the underlying price movement. As such, these indexes are always cash-settled. 

US Stock Market Instruments

The US stock market can be traded in various ways. In addition to futures and options, another way of engaging with US stocks is through Exchange-traded funds (ETFs), which represent investment funds traded on stock exchanges, much like individual stocks. An ETF invests in assets such as stocks, commodities, or bonds and usually tracks an index. Their main benefit is to let investors purchase a diverse portfolio of securities in a single transaction. For example, an ETF that tracks the S&P 500 will expose investors to 500 large-cap stocks, spreading out the investment risk across different sectors. The share price of an ETF fluctuates throughout the trading day as they are bought and sold. 

Another instrument, as briefly highlighted above, allowing trading and investing in the US stock market are CFDs. CFD trading is a form of investment that allows traders to speculate on rising and falling prices of global financial markets, including individual stocks and equity indexes. Instead of purchasing physical shares, you trade the underlying stock’s price action with CFDs, and all are cash-settled. 

Making Your First CFD Trade

To begin trading CFDs on the US Stock Market:

1. Choose a Reliable Broker: The first thing you should do is find an online CFD broker you can trust. FP Markets has sophisticated and easy-to-use resources, a transparent low-cost pricing structure and a first-rate multilingual Customer Support Team. 
2. Know Your Market. Knowledge of your traded market is essential. It is actually a form of risk management. This should be obvious as without an in-depth understanding of the markets you are trading, this could lead to unnecessary losses. 
3. Trading Strategy: You should have more than just 'buy low, sell high' as your plan. Your trading plan should detail well-defined entry and exit strategies. All trading strategies should be backtested to ensure the idea has been validated and has a positive expectancy. 
4. Risk Management: Risk management is key to longevity in this business when you trade CFDs, or any financial market. No matter the trading strategy employed, no matter its win rate, without risk management, stock trading will be a difficult endeavour. 

Analytical Approach

Two primary ways of analysing stocks are fundamental and technical analysis.

• Fundamental analysis involves looking at a company's financial records to see how much money it makes, how much it spends, what assets it has, and what debts it owes. To determine how healthy the market is, you need to also know about economic indicators like GDP, jobs data, and interest rates. When the news comes out, pay close attention. Events in the news, like changes in politics or the world economy, can often move stock markets.
• Technical analysis is focussed on trends. Technical research is about finding trends and using previous price action to forecast how stock markets will move. You will learn how to read different kinds of charts, how to use technical indicators like moving averages and the Relative Strength Index (RSI), and understand different candlestick chart patterns.

Ready to Trade?

1. Select a Stock: Based on your analysis, if you think electric cars are the way of the future, you could select stocks like Tesla (TSLA). Or if you think the US economy is set to improve, a position in the S&P 500 could be an option.
2. Take a Position: If you think Tesla's stock will increase, consider a long position (buy) in TSLA; If you think it will go down, consider a short (sell).
3. Choose the trade size: Calculate the position size. 
4. Set levels for the 'stop-loss' and 'take-profit': This is the same as telling your broker, 'Pull me out if I start to lose too much money or reach the profit objective’. 

The Closing Bell 

Everyone, from seasoned investors to eager newcomers, can trade on the US stock market and take advantage of the many possibilities it offers. There's more to it than just buying and selling stocks, it's an active participation in the fast-paced and constantly shifting business landscape in the United States. With patience, a commitment to informed decision-making, and a strategic approach, you can effectively navigate this financial landscape and work towards achieving your investment objectives.