Stock trading used to be limited to Wall Street, but the advent of online brokerages made it faster, easier, and more affordable for individuals to buy and sell stocks themselves, without the need for a stockbroker. Popular for beginners and veterans alike, online stock trading is revolutionizing the market and providing unique opportunities for people to cash in.

Trading stocks, or shares of ownership in a company, can lead to big profits, but it can also cost you your shirt. Once you understand the tools of trading, the factors that drive market shifts, and the theory behind trading, however, successful stock trading for beginners is well within reach.

How to Understand Stocks

Online Stock Trading for Beginners

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The first step in how to start trading stocks is learning how the stock market operates. Like all business, the stock market relies on a system of supply and demand.

Stocks are issued by companies to raise cash and are then traded on an exchange. This is first done through the initial public offering, or IPO, with the price set based on an estimate of what the company is worth and how many shares are on the offer. Over time, the company gains money to grow its business, and the shares continue to trade.

Traders continue to trade company’s stock after the IPO because the perceived value evolves over time, influenced by the investors and traders buying and selling the stock. In buying a stock, you’re hoping that other traders will become interested in owning a share of that company. As the popularity increases, the demand increases, causing traders to compete over stock shares and bid up the sale price.

In theory, a high share price indicates value and potential in a company. This is known as fundamentals. In practice, however, any number of circumstances can influence changes in the stock prices, which makes the behavior difficult to predict. In time, stocks as a whole have an upward trend, which is why so many investors diversify their holdings and keep them long-term. Money is made by buying stocks for companies expected to perform well.

Some established companies also offer dividends to shareholders. This is a small percentage of the company’s profit, which is sent to shareholders. While the stock price may rise and fall, the losses and gains associated with the share price are completely independent of the dividends, giving investors a regular source of income.

Glossary of Stock Market Terminology

Part of demystifying the stock world is understanding the commonly used terminology.

  • Real-time trades: These are trades executed when requested, as opposed to being held with other orders to be executed during a specific trading window. This option is sometimes available at a cheaper rate, but it gives you less control over your investment.
  • Cost-per-stock trade: This value is based on a fixed price per trade or the size of the trade, such as the principal value or number of shares.
  • Minimum initial balance: This is the minimum balance needed to trade. This value fluctuates based on the investor trading on the margin, which typically requires a higher minimum balance.
  • Research reports: Detailed reports of market information are known as research reports. These can be helpful for investors who don’t have time to conduct thorough research.
  • Bonds: These are a fixed-income investment in which an investor loans money to a corporate or government entity to borrow for a specific time period. As the owner, you earn interest on the loan.
  • Mutual funds: These are an investment made up of a pool of money from different investors with the purpose of investing in securities. This lowers risk exposure by maintaining a diversified group of assets.
  • ETFs: Like mutual funds, Exchange-Traded Funds (ETFs), provide exposure to a group of assets, but they differ in that they’re traded on an exchange like a traditional stock. ETFs are offered commission-free on occasion, which allows them to be traded more frequently.
  • Real-time data: Online brokerages provide a real-time data feed that displays stock quotes and changes with little lag time for the most accurate information. The standard delay in real-time data is 10 minutes, which has little impact on trades.
  • Day traders: These are traders who execute a high volume of trades within a short period of time. Day traders are legally recognized as pattern day traders with special account requirements.
  • Penny stocks: These are stocks with share prices under $1, though some brokerages have more specific criteria.
  • Options: These are a type of derivative security with a price intrinsically linked to the price of something else. Options are contracts that give you the option, but not the obligation, to buy or sell an asset at a set price within a specified period of time.
  • Margin: Margin loans allow investors to borrow money from a brokerage for investments. These loans come with a margin rate, or interest rate charged by the brokerage, and come with considerable risk.
  • Futures trading: Futures involve a contract that is an agreement to buy or sell a fixed amount of stock at a predetermined price on a specific date. Futures differ from options in that there is an obligation to buy or sell, rather than an option.
  • Currency trading: Currency trading is speculating on the performance of different economies, also known as Forex, Foreign Exchange, or FX trading.
  • Analysis software: This kind of software gives you the ability to compare the past performance of stocks over a fixed period of time. This provides an in-depth view of the market.

Researching Stocks

There are two methods of research commonly used to buy and sell stocks: fundamental analysis and technical analysis.

Fundamental analysis uses a company’s financial reports and public statements to determine the health of the business. These documents can include income statements, balance sheets, news releases, and yearly and quarterly earnings. These reports are public information and easily found online. Market and industry trends, historical analysis, and media publications also play a part in fundamental analysis.

Technical analysis is the less common of the two and uses fluctuations in stock prices to detect patterns and make predictions for a profit. Though it’s not as widely practiced as fundamental analysis, most traders use a combination of both types of analysis to inform their stock decisions. Investing in a company with strong fundamental and technical indicators is a sound strategy that carries less risk than relying on technical indicators alone.

Prior to buying or selling any stock, you should thoroughly research the company, its competition, and its leadership. Many sites offer a compilation of financial statements, stock histories and charts, and news stories that give you valuable insight. These sites often include ratings of a given stock from professional analysts that indicate whether a stock should be bought, held, or sold. The ratings and advice from professional analysts are recorded as well, so examining these reports can complement your research and reinforce your trade decisions.

Finding an Online Brokerage

If you’re looking to trade and invest in stocks, bonds, futures, ETFs, mutual funds, or currency, you need a brokerage account to act on your behalf. With many useful resources, online brokerages are the best way to trade stocks online. However, since the fees, investment types, research tools, and trade options vary between brokerages, it’s important to find the one that is best suited to your needs and experience level.

The commission on trades can vary between brokerages as well, which is an important aspect to consider. While you may not think a few dollars more on a trade is an issue, that can easily add up. Even if you’re only looking to trade once a month, for example, that can result in hundreds of dollars paid in commission at the end of the year.

Another aspect of finding an online brokerage to watch for is investment help. Evaluate the costs associated with research reports, if any, and look for sites with good customer service reviews, should you run into any issue along the way. An online brokerage with physical branches is also a good choice, whenever possible.

If you’re only looking to trade small amounts, try to find a brokerage that has a low minimum initial deposit. Some brokers require tens or hundreds of thousands to get started, which may not be a feasible option for someone just learning how to trade stocks online.

In general, opening an account with an online brokerage requires a U.S. address, your social security number, your date of birth, and the name and address of your employer. You’ll also need a checking account for deposits and withdrawals.

How Do I Trade Online

The process to get started with online stocks is simple. Once you choose your online brokerage, you can set up an account, deposit money, and you’re ready to go. Learning where to start investing and how to use your account can be a little more intimidating, however.

Once you’ve logged on, it’s time to decide what stocks you want to buy. You may even have some companies in mind already, but before you can buy or sell, you need to know a company’s stock ticker. A ticker is a unique series of one to five letters that identifies a company among the thousands of stocks trading in the U.S. market.

Fortunately, finding a company’s stock ticker is easy. Many online brokerages have their own search engine tool for finding stock tickers, but you can also search in the finance section of a news site. Apple Inc. is a well-known company, so we’ll use that as an example.

Let’s say you want to buy shares of Apple Inc. Using the search engine on your online brokerage account or a finance site, start typing “Apple Inc.” into the search bar. As you’re typing, you’ll see suggestions for stock tickers you may be looking for, and Apple Inc. will come up as “AAPL, Apple Inc.” This four-letter stock ticker is how the market recognizes Apple Inc.

Once you find the stock ticker of the company you want, you click on the button to trade. From there, you should be presented with several blank fields that allow you to define your trade:

  • Buy or sell (buy).
  • The number of shares or dollar amount, in the case of partial shares (100 shares, for this example).
  • The name of the stock you want to trade (AAPL).
  • The price you’re willing to pay per share (Apple Inc. is $185.50 per share).
  • The order type.
  • The timeframe of the order.

These answers will create an order to buy 100 shares of Apple Inc. stock at a cost of $18,550, plus the commission on the trade, which varies by brokerages. Order type and timeframe require a little more background information.

There are several order types in the stock market. Market and limit orders are the most common, but stop-loss or stop-limit orders are also optional with some brokerages.

  • A market order will execute at the current stock price at the moment you enter the trade, which can lead to some variation between what you expected to pay with your original order and the price you end up with.
  • A limit order buys or sells a security when its price reaches a certain point. This ensures you won’t have to pay more than the price you entered, and you won’t sell for less. This guarantees the price you’ll pay or be paid, but not that the trade will necessarily occur.
  • A stop order instructs the broker to buy or sell a stock if the price rises above or falls below a certain point. The price of a stop order is not a guarantee, however, and goes off the current market price.
  • A stop-limit order is a combination of stop orders and limit orders. If the price of a stock passes a certain threshold, the order becomes a limit order instead of a market order.
  • An all-or-nothing order involves placing an order at a single price in a single transaction. If you buy a significant portion of a company’s stock, it’s filled over time to prevent a drastic increase or decrease in the price of the stock from a huge order. With all-or-nothing orders, however, your trade will only be executed if it can be done in a single transaction to avoid these problems.
  • A trailing stop order sets a stop price as either a spread in points or a percentage of the current market value. This is used to protect gains and limit losses. If the stock falls below a certain point determined by your trailing stop loss, it will be sold, and if it increases, your trailing stop order will convert to a market order for a profit.
  • A bracket order is similar to a trailing stop order in that you have a specific percentage of spread, but you add an upper limit that, once reached, results in the stock being sold.

Selling short is another order option, though it’s recommended that beginners avoid it. This speculative practice can lead to unlimited losses, in theory, so it’s incredibly risky. Many people like the possibility of profits, however, which is why it’s so common.

Shorting a stock is basically betting that it will fall, allowing you to take advantage of the situation. You place a short sell order, borrowing from the broker, then sell them on the open market. If the stock falls, you’ll be able to buy the shares back at a lower price and return them to the broker, keeping the difference as profit. Keep in mind that selling short requires margin privileges on your brokerage account and enough capital to buy the stock back and return it to your broker, should it increase.

There are several options for your trading time frame as well. You can set your order to execute immediately, expire at the end of the day, stay valid during or outside of market trade hours, or stay valid until canceled. Choosing your trading time frame depends on your own needs, but setting an order to expire at the end of the day keeps you from accidentally buying stocks days or weeks after the original order.

Once you’ve filled out all of this information, you can see a preview of your order or put it through. Your brokerage will send you a summary of your order and its cost so you can double check the information. From here, confirm that you want to place the order or go back to make changes, and once the order is placed, your brokerage will try to buy the stock at your set price, within the time frame you set. Once complete, you’ll have successfully made your first trade online and will now be the proud owner of your first stock.

Stock Trading Tips for Success

Online trading can be daunting, especially for beginners, but smart strategy and conservative investment behavior can help you gain significant returns without unnecessary risks.

Here are a few tips for trading success:

  • Don’t risk what you can’t afford to lose. Starting with gradual investments helps you learn the ropes and minimize risk, not to mention that it keeps you from losing money you don’t have. Once you begin to see returns on savvy investment decisions, you can use those gains to reinvest in other stocks and increase your profits.
  • Diversify with exchange-traded funds (ETFs). Trading stocks has a reputation for creating overnight millionaires, but the reality is quite different. Investments are a reliable source of income, especially if you’re focusing on volatile stocks that hold the promise of excellent returns. ETFs trade like stocks but hold assets like stocks, commodities, or bonds to keep the trading close to its net asset value. These diversified funds have a combination of high-risk and low-risk assets, which balances the losses in one sector with the gains in another.
  • Stick with research. Stock trading isn’t based on guesswork. It should be approached with thorough research and strategy, such as reading current news and financial reports on potential investments. If you don’t want to do the legwork, investing in an index fund or using a stock broker to trade on your behalf is the better choice.
  • Have a plan. Playing it fast and loose with your stocks is a great way to lose your money. Keep it rational by deciding the circumstances that would lead you to sell, such as a percentage you wouldn’t be willing to risk. Many brokerages give you options to buy and sell based on predefined criteria, such as a percentage increase or decrease in your investment or limit orders, which is an order to buy or sell a stock at or above a specific price.
  • Avoid buying high. A common pitfall for beginners is jumping on a stock that’s on a rapid upward trend with the expectation of cashing in big. While there are times this is a sound strategy, it’s usually better to wait for an opportunity for a lower entry point.
  • Don’t overthink it. Beginners often cause themselves a lot of undue stress worrying about losing their invested money with every dip in the market. While stock values can plunge on occasion, it doesn’t mean you should immediately pull out. Investments are long-term and require patience, foresight, and perseverance, so don’t live and die by every daily fluctuation in your shares.

How to Get Started

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