How to trade the stock market – Stock trading is not like shopping at some retailers where there are tags of fixed prices on items. In stock trading, investments are priced in real time. Buyers and sellers engage in real time pricing through active bidding.
Just like in every business, Stock trading operates on a system of supply and demand. A trader buys stock hoping that the value will appreciate so that other traders would want to own a share in that company over time. When the value or popularity of that stock appreciates, traders will compete to own it and openly bid up the sale price. Theoretically, when the price of a share rises, it means that the value and potential (fundamentals) of the firm has been improved.
How to trade the stock market
Buying and selling of stocks (shares of ownership in a company) can make you a lot of money. However, it is easy to lose money to the system. So, to become a successful trader, it is significant that you familiarize and acquaint yourself with the tools necessary for trading. Learn about the theory behind it, and how you can survive your first year as a beginner-trader. Below are the steps and tips to stock trading, basically for beginners.
1. Open an account – choose a stock trading service
First-things-first: before you can begin buying and selling of stocks, the first thing you need to do to decide which online trading service you want to use. Take your time to choose a reliable brokerage firm and open a stock brokerage account. For those who already have personal accounts, go ahead and create a professional trading account; keep it separate. Now take your time to play around with the interface in order to get used to it.
Take advantage of free research tools that your brokerage firm might offer. Practice with these tools and have yourself familiarized with the system. For example, if the brokerage firm features virtual trading, use it to practice as much as you can before thinking of putting real money to work. I’ll expatiate on this later in this article.
Things you should consider when choosing an online stock broker
When you’re choosing an online broker, pay attention to the costs of the services the brokerage provides. Consider the level of support you’ll need from qualified brokers. As a neophyte, it is advisable that you start with a company that can provide all the personal advice and assistance you’ll need for your investments. Don’t be too concerned about advanced tools for now. When your skills grow, you may wish to pick a broker that offers tools for advanced trading, such as margin trading and short trading.
Below are popular brokerage firms known for offering high quality services and support:
- TD Ameritrade
Some of these companies, for example, ShareBuilder, also offer services similar to banks, with ATM cards that give traders the privilege to access non-invested money. They also offer services that enable investors to invest their cash in a money market fund to gain a slightly higher return than a traditional savings account.
If you’re the “do-it-yourself” type of trader, you can use discount online broker services. These services will give you access beyond buying and selling of stock. They allow you to buy mutual funds, bonds, certificate of deposit, retirement accounts, fixed income fund, exchange-traded funds and more. You will be the ultimate person to make the final decision on every investment and whether or not to buy or sell. And another cool thing here is that you don’t need a large amount of money to start.
2. Read and research
Start reading financial articles and stock market books. Most of these materials are not expensive and not too difficult to grasp the ideas within them. When you study, don’t be one minded, study everything market-wise, grab even ideas you don’t think are relevant at this time. In stock trading, the more equipped you are, the more successful you’re likely to become.
If you don’t know books to read, here are some must-read books I’d recommend to every beginner-traders out there:
- Winning on Wall Street by Martin Zweig
- Stock Market Wizards by Jack D. Schwager
- Technical Analysis of the Financial Markets by John Murphy
- The Nature of Risk by Justin Mamus
- Trading for a Living by Dr. Alexander Elder
3. Watch the market
Start following the stock market at your spare time. News websites, such as Google Finance, Yahoo Finance, CBS MoneyWatch are great resources for new investors or beginner-traders. If you’re looking for more sophisticated coverage, go to The Wall Street Journal, Bloomberg, and Investopedia. You can also keep track of the market every day by using TV, check out financial channels like CNBC and more.
4. Learn how to analyze
Learn the basics of technical analysis and observe price charts. Read companies spreadsheet. This will give you a trading edge over competing traders who ignore them. There are two ways a trader can choose stocks. The first is known as fundamental analysis – this method relies on the use of a company’s public statements and financial reports to carry out analysis on the health of the business. For fundamental analysis, income statements, news, yearly and quarterly earnings, Balance sheets, and so forth are all considered as significant tools for making analysis. With the help of the internet, you can easily search and get these reports online. There are also good tutorials online that will teach you how to read them.
Another way to invest is known as technical analysis. This method is not as practiced as or widely accepted as the first method – fundamental analysis. However, most traders use the combination of both methods when choosing stocks. Most experienced traders choose a company with good fundamentals and then trade occasionally on technical indicator.
Before rolling up your sleeves to trade any stock, ensure that you make a thorough research about the company. Pay attention to things like its leadership and competition. Yahoo Finance is a good place to get financial statements and stock price histories (charts) that will provide insight into the company’s health.
Stock websites also display some professional analysts’ ratings about a particular stock, showing whether that analyst is advising a trader to buy, hold or sell a stock. Closely observing those analysts may help you to make a wise decision.
5. Practice trading
It’s time for you to practice trading without real money. Virtual or paper trading gives you the privilege to practice how to trade without making real stakes. It allows neophytes (beginner-traders) to follow real-time market actions, such as buying and selling decisions that make up the ideas of theoretical performance record.
Virtual trading is made up of a stock market simulator that features the look and feel of a real stock exchange performance. Take your time to make lots of trades with different strategies, and then analyze your results for obvious flaws. A good number of online brokers feature online simulators. Some also allow their clients to engage in paper trading with their real money entry platforms. Whichever one your broker supports, use it to have yourself acquainted with how the stock trading system works before rolling up your sleeves to trade with real money.
The drawback of paper or virtual trading is that they won’t let you peacefully co-exist with the twin emotions (fear and greed) that every trader feel when they trade with real money. This feelings can only be felt by traders when they lose real money. And since you’re not trading with real money, these emotions: fear and greed will definitely not surface themselves. That is the flaw of simulated trading. These feelings will definitely surface when you start trading with real money – even if your paper or virtual results look impressive. The good thing about virtual or paper trading is that they’ll will help you to fully understand how the system.
Other ways to learn and practice
The quote, “the more you know, the better equipped you are to prosper” says it all. Seek education in your stock trading career. There are classes online and offline that can be beneficial to you in the long run. These classes are in different levels – starting from novice (for beginners) to intermediate (and pro). For example, in the novice class, you’ll be taught how to analyze the aforementioned analytic charts.
These classes may come in form of seminars. For example, professional traders often conduct seminars for beginner-traders. These seminars can provide valuable insight into the overall market and specific investment strategies. Plus, learning from an experienced trader will quickly expose you to things that might take you years to learn. Some of these traders will teach you about types of assets, a particular aspect of the market or a trading technique.
Getting yourself a mentor is also a good way to quickly learn. If you have a coach to guide you, critique your techniques and offer advice, then you’re on the path of becoming a pro in no time. If you don’t have, and would like to have, you can get one here Investors.com or Morningstar.com. Most online trading schools also offer mentoring as continuation for their programs.
You can also subscribe to a trading group like Winner’s Edge Trading or a particular trader like the Stock Whisperer. They offer online trading tutorials and trading rooms (where you’ll have access to observe live trades, and practice with a demo account.
I can’t tell you when to start trading with real money. My advice is that you should be patient – take your time to make research and practice virtual trading before putting some real money at stake.
6. Keep a journal
When you start trading with real money, start a daily journal and document all of your trades, indicate reasons for taking risk. Also indicate the holding period and final profit or loss numbers. This diary of observation will give you a trading edge in stock trading. It will help you to go from being a novice to becoming a pro trader.
General tips for stock beginner-traders
Below are general tips for beginning investors – read them, love them, and live them.
Do not invest money you cannot afford to lose
Decision making is one thing you can’t run away from as a stock trader, and you need to be intelligent here when making decisions. Make smart decisions about what you can afford to invest, and start small. Once you start making some gains from one or two stocks, you can then reinvest those gains with a little peace of mind. Those gains will then become your principal into other stocks and funds.
Diversify in your investments
Diversification is something you need to pay attention to as a stock trader. Remember, it is better to put your eggs in different baskets than putting them all in one basket. Stock trading is not a reliable source of income. Hence, consider investing your money in an electronically traded index fund that holds large stocks. Electronic traded index fund can be purchased and traded like stocks, but because of its nature of diversification, losses in a particular sector may be cancelled out by gains in another.
Don’t be a guess trader – trade only when you have done a lot of research
Just like any job out there, frequent practice of your skills will boost your performance, but your skills will definitely suffer if you fail to practice them frequently. In stock trading, “practice” means keeping your ears in the financial industry – reading the latest news and financial reports on companies you wish to invest in. If you don’t have time to practice (make some research), I’d advise you invest in an index fund instead, or hire a professional to handle your investments for you.
Make a plan and stick to it
The moment you become too irrational in this industry, you’re likely to fail woefully. Don’t just buy stocks, before you even consider buying a stock, make some considerations. Ask yourself questions like “what circumstances would lead me to sell it?”
Most brokerage firms have the ability to schedule buy and sell orders based on some criteria, like increase in your original investment, or percentage drop. This is the part where limit order comes in. Scheduling limit order will help eliminate emotion out of your finance. I’ll explain further below.
Make a plan and stick to it. For example, know how much to invest, why you are buying a particular security, the percentage of return to expect, and finally, have an exit plan.
Don’t buy high – wait for opportunities
As an intelligent stock trader, you need to start small. Don’t let the extreme pace of stock trend lure you into buying stock. Be patient for opportunities to get a lower entry point before jumping in to buy.
Don’t let fear control you
Fear is one thing that most stock traders (especially the neophytes), deal with on a regular daily basis. If you can’t control your fear, it is likely to cripple your mind.
The fear of losing money invested cloud the mind of beginner-traders. Don’t give in to fear when you see stock values plunge for a company. You need to understand that the set of people who are likely to succeed in this industry are those willing to take risk. Don’t let your emotion think for you, rather, use your emotion to think.
Types of Stock Market orders
This type of order is very common. You can tell your broker to sell your shares at the best price or to buy shares at the current price. These orders are executed almost immediately, and they have the lowest commissions.
Limit order allows investors to set a specific price they are willing to pay if they’re buying stocks, or how much they will accept if they’re selling. See it this way, you can tell your online broker the actual price you’re willing to take if you’re selling stocks, and the price you’re willing to pay if you’re buying. The drawback of limit orders is that in some cases, your order may not be executed – your order will only be executed if your price is reached.
Take for example, you own 150 shares of a company, which are trading for $70 per share, and the stock has been estimated to fall to $50. In order for you not to miss out on any gains in case you’re wrong, the best order to apply here would be a limit order. Although, you could sell the stocks outright with a market order, but you’re likely to lose some gain if it turns out that you’re wrong. With a limit order, you can tell your broker to sell the stock if it falls to $65 per share.
Limit orders are filled only at the price a trader sets. If the stock price falls further than the set price, in most cases, the broker might be able to sell part of the shares, sometimes, none.
Stop market orders
This order is somewhat similar to limit orders. Stop market orders allow traders to set a price they want to buy or sell shares. Whenever a stock hits the price a trader sets, the order will convert into a market order and will be executed immediately.
Take for example again, if you have 150 shares of a company, which are trading for $70 per share. This time, you make a stop market order for $65. And then wake up to find that the stock price has gone all the way down to $35. Now all your stock would have been sold, but your online broker will sell the shares at whatever the price was the time your order converted to a market order, which in a situation like this would be $35.
Stop limit orders
This is order is quite flexible. In other words, it is customizable. Firstly, a trader can set the activation price. The moment that price is hit, the order becomes a limit order with the limit price the trader has set.
For further understanding, let’s say a company is trading for $70 per share when you enter a stop limit order with an activation of $65 and a limit price of $55. This is how it would go: Let’s say you wake up to discover that the stock has instantly plunged to $35. Now your broker would turn your order into a limit order after it falls below $65.
When the stock fall to $55, the broker would fill orders at that price if possible. Unlike the stop market order, here, you would not dump the shares when they fall as low as $35.
Trailing stops orders
If you’re into buying and selling individual stocks, trailing stops is a good idea to consider, as it would give you the idea of how far you’ll let it fall before cutting your losses.
Regular limit orders gets executed or expired. Trailing stops orders try to prevent this from happening. With this, you can instruct your online broker to sell a stock if it falls by a certain number of points (or a percentage). Some professionals suggest not to let a stock fall more than 10% below the price you paid.
Other things you should know
When an ‘all or none’ restriction is issued on a trade, it means that the broker must fill the order completely or should not fill it at all.
Setting time frames
You can enter an order and let it stay active until you decide to cancel it. Also, you can enter an order for an active stock just for the day you place the trade. Note: if the order is not filled, it will expire.
NOTE: Limit orders usually attract extra charges, hence, I’d recommend you check the commission fees before you start trading. Some brokers charge higher than the others, and some brokers don’t offer limit order.
Reading online articles doesn’t guarantee your qualification to trade stock. As I mentioned above, take your time (maybe 6 months) to practice trading with real-world data before putting your money at stake. Watch a lot of tutorials online (you can find some for free on YouTube). And finally, don’t overload yourself with too much information.