Chapter 1
Introduction to Stock Trading

"If you had invested $10,000 in SPY in 1993, you would have around $220,000 by 2025. But if you had actively managed your trades with data-driven strategies, you might have seen even greater results."

It’s a tempting thought, isn’t it? The idea that with a bit of knowledge, the right tools, and discipline, you could take control of your financial future. That’s the allure of stock trading — a world where everyday individuals use the same markets as institutional giants to build wealth, achieve goals, and chase dreams.

Consider Sarah, a middle school math teacher who started investing in ETFs during her summer breaks. Ten years later, she’s not just teaching numbers — she’s using them to build a second stream of income that funds her annual travels to Europe.

Or Mike, who once lived paycheck to paycheck as a delivery driver. After learning the basics of trading and sticking to a strategy, he grew a modest $5,000 savings into a $60,000 portfolio in five years — not by luck, but by discipline and data.

These are not fantasies. They are real stories of people who saw trading not as a gamble, but as a skill — a craft that can be studied, refined, and mastered over time.

And it doesn’t have to be your full-time job. Many successful traders started part-time, using spare hours on weekends or evenings to study charts and test ideas. The market rewards those who are consistent, not those who are constantly watching the screen.

But what exactly is stock trading? Why do so many people dive into it — some succeeding, others failing? And what do you really need to know before placing your first trade?

This chapter is your gateway. We’ll strip away the jargon, demystify the mechanics, and start with the basics that every aspiring trader must understand.

When we say "data-driven", we mean using historical price data, patterns, and statistics to make smart decisions — instead of relying on guesses, feelings, or random tips. It’s about looking at what has actually worked in the past, testing strategies over decades of real data, and using that knowledge to improve your odds of success in the future.

1.1 What are stocks?

A stock is a small piece of a company that you can buy. When you own a stock, it means you own a tiny part of that company. This small part is called a "share". If the company does well, the value of your share might go up, and you could make money. If the company does poorly, the value might go down.

Companies sell stocks to raise money. For example, if a company wants to grow, hire more people, or build something new, it needs cash. One way to get that cash is by selling shares to people like you and me. This is often done through something called an IPO, or Initial Public Offering, where the company sells its stock to the public for the first time.

Once a stock is available to the public, people can buy and sell it on the stock market. You’ve probably heard of big markets like the New York Stock Exchange or the NASDAQ. The price of a stock changes all the time based on how many people want to buy it or sell it. This is why stock prices go up and down — it’s just people trading based on what they think the company is worth.

There are different types of stocks, but most people start by buying "common stocks." These may give you voting rights in the company and sometimes even pay you a small part of the company’s profits, called a "dividend." Another type is "preferred stock", which usually doesn’t give you voting rights, but it may give more steady payouts.

In simple terms, buying a stock means you’re investing in a company and hoping it grows. Over time, many people have built wealth by buying and holding stocks of strong companies. That’s why learning how stocks work is one of the first and most important steps in your trading journey.

1.2 Understanding Stock Markets

The stock market is a place where people buy and sell shares of companies. Think of it like a giant marketplace — instead of trading fruits or electronics, people are trading ownership in businesses. When you hear that "the stock market is up" or "the market is down," it means the prices of many stocks have gone up or down on average.

Stock markets make it easier and safer for people to trade stocks. They provide a central place where buyers and sellers can meet. Some of the biggest stock markets in the world include the New York Stock Exchange (NYSE) and the NASDAQ in the United States. These exchanges list thousands of companies, from small startups to giant corporations like Apple or Amazon.

Every trading day, millions of shares are bought and sold. Prices are determined by supply and demand. If many people want to buy a stock, the price usually goes up. If many people want to sell it, the price usually goes down. These price changes happen constantly and reflect what investors think about a company’s future, as well as news, global events, and economic data.

It’s important to understand that there isn’t just one stock market. There are many markets around the world — in Tokyo, London, Hong Kong, and more. Each has its own companies, trading hours, and rules. However, they are all connected. When something major happens in one country, it can ripple across markets worldwide.

In this book, we will focus primarily on understanding how stock markets operate, how investors make decisions, and how market trends can create opportunities. A strong grasp of how markets function is the foundation for building successful, data-driven trading strategies.

1.3 Why trade stocks?

There are many reasons why people choose to trade stocks. The most obvious is the potential to grow your money. Historically, the stock market has provided better returns over the long term than most savings accounts, bonds, or real estate. While there are risks involved, smart and disciplined trading can turn modest savings into significant wealth over time.

Another reason is accessibility. Thanks to modern technology, anyone with a smartphone or computer and an internet connection can trade stocks. There’s no need to be on Wall Street or have a financial degree. With the right knowledge and strategy, individual traders can take advantage of the same opportunities as large institutions.

Trading stocks also offers flexibility. You can trade full-time or part-time, depending on your lifestyle. Some people place a few trades a month; others prefer to trade daily. It’s up to you. The stock market is open on weekdays, and many online platforms let you research and manage your trades at any hour.

Beyond money, trading can also be intellectually rewarding. It encourages you to stay informed about the world — how companies work, how economies react to events, and how human behavior influences market trends. Many traders enjoy the challenge of making decisions based on logic, analysis, and strategy.

Lastly, trading stocks gives you the power to take control of your financial future. You’re no longer relying solely on a paycheck, a pension, or a government plan. You’re building something that belongs to you. And while it takes effort to learn, the potential rewards — financial and personal — make it a journey worth starting.

1.4 Types of trading: Long-term investing vs. trading

When people talk about making money in the stock market, they usually fall into two broad categories: long-term investing and short-term trading. Both approaches aim to grow your wealth, but they involve very different strategies, mindsets, and time commitments.

Long-term investing typically means holding stocks or funds for at least one year, and often longer. However, the strategy in this book is not a simple buy-and-hold approach. Instead, it focuses on staying in the market during strong upward trends and exiting when clear signs of weakness appear. We aim to avoid major downturns by using data-driven signals to guide our decisions. The goal is still to benefit from long-term growth, but with smarter timing and better risk control. This method requires patience and discipline, but it also allows for more flexibility and protection than traditional buy-and-hold investing.

One of the biggest benefits of long-term investing is that it doesn’t require constant attention. Since trades are infrequent, you don’t need to monitor the market every day or worry about short-term volatility. This makes it ideal for people with full-time jobs or other commitments who can’t or don’t want to watch the market closely.

Another advantage is lower costs. Frequent trading can rack up transaction fees, even on low-cost platforms, and may also trigger short-term capital gains taxes — which are typically higher than long-term capital gains taxes. By holding investments for longer periods, long-term investors can reduce the impact of taxes and fees on their returns.

Long-term investing also helps reduce emotional decision-making. Short-term traders can be tempted to react quickly to news or price swings, which often leads to poor timing. Long-term investors, on the other hand, are more focused on fundamentals and can ignore short-term noise.

Trading, by contrast, involves more frequent buying and selling. Traders attempt to take advantage of short-term price movements, which can be rewarding but also requires much more time, attention, and emotional discipline. It can also lead to higher taxes and transaction costs.

In this book, we will primarily focus on long-term investing — holding positions for one year or longer. Our goal is not to chase quick profits, but to build a reliable, data-driven system that helps you grow wealth steadily over time. By using indicators like moving averages and backtesting them with historical data, we aim to find smart entry and exit points that align with long-term success.

1.5 Understanding risk

Before we go further, it’s important to acknowledge that trading stocks involves risk. Prices can go up or down, sometimes quickly. Even with the best data and strategies, losses are part of the journey. This book won’t promise guaranteed returns — no book should. But with the right tools and mindset, you can learn to manage risk, avoid common mistakes, and make smart, informed decisions over time.

1.6 Stock Trading vs. Other Types of Investments

Although this book is focused on stock trading — particularly long-term investing using data-driven strategies — it’s helpful to understand how it compares to other popular investment options. After all, stock trading is just one path toward financial growth. Depending on your goals, time horizon, and risk tolerance, you may also consider real estate, bonds, cryptocurrency, or even traditional savings accounts. Each has its place, and understanding their differences can help you make smarter, more balanced decisions.

Stock Trading

Stock trading involves buying and selling shares of publicly traded companies. It offers high flexibility, relatively low barriers to entry, and the potential for strong long-term returns. Through diversified ETFs like SPY, investors can gain exposure to hundreds of companies with a single trade.

Pros:

• High liquidity — you can buy and sell quickly.
• Historically strong returns over the long run.
• Easy to start with small amounts of money.
• ETFs provide built-in diversification.

Cons:

• Short-term volatility can be stressful.
• Requires emotional discipline and some market knowledge.
• No guaranteed returns.

Real Estate

Real estate is a time-tested investment. Whether through rental properties, flipping houses, or buying land, it offers both income potential and long-term appreciation. However, it comes with higher upfront costs and hands-on responsibilities.

Pros:

• Tangible asset with potential for value growth.
• Can generate passive rental income.
• Offers leverage and tax advantages.

Cons:

• Requires significant capital to get started.
• Illiquid — selling a property takes time.
• Property management can be time-consuming.

Bonds

Bonds are fixed-income investments where you lend money to governments or corporations in exchange for interest payments. They’re often used to reduce portfolio risk and provide steady income.

Pros:

• More stable than stocks.
• Regular interest income.
• Useful for risk-averse investors or retirees.

Cons:

• Lower returns compared to stocks.
• Sensitive to interest rate changes.
• Long-term bonds may lose value if rates rise.

Cryptocurrency

Cryptocurrencies like Bitcoin and Ethereum are digital assets that operate on decentralized networks. While highly speculative, they have attracted attention for their rapid growth and innovation.

Pros:

• Potential for high returns.
• Decentralized and globally accessible.
• Tradeable 24/7.

Cons:

• Extremely volatile.
• Regulatory uncertainty in many regions.
• High risk of scams and technology failures.

Savings Accounts and CDs

Savings accounts and certificates of deposit (CDs) are among the safest ways to store money. They’re ideal for short-term goals and emergency funds, but not for long-term wealth building.

Pros:

• Very low risk — often FDIC insured.
• Simple and highly liquid.
• No market exposure.

Cons:

• Very low interest rates — often below inflation.
• Minimal growth potential.

Putting It All Together

There’s no single "best" investment — each option has its role. You might use a savings account for emergencies, bonds for stability, and stocks for long-term growth. Some people also include real estate or a small allocation to crypto for diversification.

However, the focus of this book is stock trading, particularly using data-driven strategies for long-term success. By concentrating on stocks and ETFs, we can build strategies that are flexible, scalable, and historically proven to deliver strong results over time.

Later in this book, we’ll take everything you learn and apply it to real historical data to test which trading approaches have actually worked best. But first, we need to build the right foundation.