Like HowStuffWorks on Facebook!

How the Online Trading Academy Works

        Money | Online Banking

What is trading, anyway?

For many people, the guiding principle of successful investing is "buy and hold." The logic behind the strategy is basically this: The market for stocks, bonds and other financial instruments is inherently volatile over the short-term, which means that investments can fluctuate in value from day to day and week to week in such a way that those movements can expose someone buying and selling over a truncated timeframe to substantial risk. Those who advocate a buy-and-hold investment approach, however, argue that long-term investing allows investors to take advantage of the overall historic trend upward in the market while avoiding the gyrations and risk apparent in the short-term movements of the market.

Active investors, on the other hand, see an opportunity for profit in those short-term movements. Rather than purchasing a mutual fund, which contains a basket of securities, and holding it for a long period of time, active traders buy and sell individual financial instruments with the belief that they can anticipate whether they will go up or down, thus enabling them to profit from that movement. The concept is that it is possible to gauge market trends in such a way that allows individual investors to make larger profits than would be possible from using a buy-and-hold approach.

There are many so-called active trading "styles." Day trading is probably the best known, and many people mistakenly believe that day trading is the only kind of active trading. As the name indicates, day trading involves an investor buying and selling securities in the course of one trading day; for example, a day trader who buys a share of Exxon-Mobil in the morning will sell it by the end of the day. In other words, day traders do not hold onto securities overnight or, in trading parlance, it is said that they do not hold onto a "position" from one day to the next. There are other active trading styles, each of which involves different time horizons and strategies. Other active trading styles include swing and position trading and scalping.

Active trading became especially popular during the dot-com boom of the late 1990s, fueled both by the seemingly inexorable rise of just about all stocks, as well as the proliferation of Internet access allowing individuals to buy and sell stocks easily. Not surprisingly, an entire industry has swelled up around servicing individuals interested in trading. Companies like E*TRADE and Charles Schwab, for instance, not only provide traders the necessary access to markets for buying and selling securities, but also boast of having the in-depth research tools needed to trade profitably. Countless books and magazine articles and newsletters -- not to mention TV shows like Jim Cramer's "Mad Money" -- provide an avalanche of tips and strategies for beating the market.

Click ahead to read about who attends the Online Trading Academy and what they're learning.