Although most people will probably know or have heard the term ‘investing’ regarding stocks, trading stocks allows for more lucrative opportunities. That being said, trading stocks successfully requires a lot of hard work behind the scenes and generally involves extensive research and self-discipline. While it is not always simple, beginners can still get started with stock trading, even if they have never touched any financial instruments before, thanks to the proliferation of tutorials, articles and courses online.
If you are looking to trade stocks, here are a few overall steps that most traders need to keep in mind before they actually start trading for real. Make sure to read through this article to learn more!
What is stock trading?
Stock trading is very similar to investing in stocks, in that you are trying to take advantage of the fluctuating market in the stock market. The main difference is that while investing generally takes a long-term approach and investors usually stick to a buy-and-hold strategy, a stock trader is looking to find opportunities in the short term. As such, they often try to buy low and sell high. While there are a lot of advantages that come with stock trading (and it is a lot more lucrative and simply investing), the risk is higher too. Just as a single company can rise rapidly, so too can it fall. As such, trading is not recommended for the faint of heart.
That being said, with enough time and self-discipline, most novice traders will be able to at least get the hang of what stock trading entails. Some may even end up doing quite well! Again, this all depends on if you have done the appropriate preparations, and that you keep your financial goals and situation in mind at all times when trading.
Generally, the logistics of trading stocks come down in a few different steps:
Open a brokerage account
This is one of the simplest steps–you must set up a brokerage before you can access the stock market! To do so, you need to find an online stockbroker. There are plenty of brokers online, which can make this process very overwhelming. As such, here are a few features to consider before you commit to a particular broker:
Traders: If you are trading, you may want to consider using brokers that offer charting capabilities. These features will help you to sport opportunities or trades that have a low cost. This is great for traders because they will likely be making a lot of trades in the stock market.
Funds: If you are interested in investing in funds, you may want to consider picking a broker that offers a wide selection of financial instruments. This includes commission-free ETFs or no-transaction-fee mutual funds.
Investors: If you are planning to invest, then you may want to pick a broker that is slightly pricier but offers more research. This is so that you can pick the most optimal stock to invest in long-term.
Beginners: If this is your first time planning to trade, or even set up a brokerage account, then you may want to select a broker that provides a high level of customer support. Good customer support generally consists of guiding you through various questions, as well as helping to resolve issues promptly and quickly. Some brokers also offer free educational resources such as articles and videos so that you know how to use the broker’s features and tools, as well as strategies on how to trade.
Check out tutorials
Luckily, even if you may be a beginner, there are still plenty of financial articles, stock market books, website tutorials and more to be found online. All of these can help you to expand your trading knowledge. That being said, it is still important that as a beginner, you do not narrow your focus to one aspect only. Instead, it is best that you study everything related market-wise, including ideas and concepts that you may not feel are particularly relevant. A few books you may want to get started reading include: The Nature of Risk by Justin Mamis, Technical Analysis of the Financial Markets by John Murphy, Stock Market Wizards by Jack D. Schwager, to name a few.
Set a trading budget
Even if you are a stock trader, putting over 10% of your portfolio in any individual stock is still considered to be very risky. As some experts say, if you put all your money in one stock, you could potentially lose 50% of it overnight. So, say, if you want to invest, you could first start by saving around $200 a month. Then when you get to $1000, you may choose to invest $500 of that. Other things you need to think about include:
- Invest and trade with money that you can afford to lose.
- Do not use any funds that are for near-term, must-pay expenses (for example, down payments, tuition, and bills, to name a few).
Practice with a paper trading or demo account
One of the best ways to get better at trading is through practising – usually with a paper trading or demo account. These accounts usually involve the use of a stock market simulator, which emulates the look ad feel of how an actual stock exchange performs. However, there is no real money involved, meaning even if you end up making a loss when using this type of account, there still is no risk. So, this is a fantastic way of practising your strategies, and analysing any results so you can see what you have done well, and what you need to improve.
Fortunately, most brokers offer some kind of demo account for you to test your strategies with. A paper trading account also allows you to familiarise yourself with your broker’s features and tools, as well as its interface, so you won’t be surprised when you start trading for real.
Execute your trade
Once you have found what you are going to trade, it’s time to execute it, with a proper trading account this time. There are two basic order types that you need to know, though most experienced brokers will use more complex options than just these two:
Market order: This will buy or sell your stock as soon as possible at the best price at the time you place your order. So, if you place a market order to buy a stock, you will buy at the lowest current asking price. If you are looking to sell a stock, you will sell at the current highest bidding price.
Limit order: Here, you buy or sell the stock only or better than a specific price you have set. This means you have to specify to the broker the price you want for that particular trade. If the broker can get that price or better, then the trade will be executed.