The term “stock trading” can be slightly misleading to new investors. You don’t trade stock like you would a packed lunch in grade school. For example, 100 stocks of Company A for 100 stocks of Company B. In the stock market, “trading” is referring to buying and selling.
The inner workings of the market are a mystery to most investors. Thankfully, is not necessary to understand all of the minute details of the market when trading stock. It is, however, important to have a general understanding of how the financial market functions prior to investing.
What Is Stock Trading?
Stock trading folks are usually referred to as stock traders. Stock traders are people that regularly buy and sell stocks with the intent to profit on the market price fluctuations of said stock. Stock traders are essentially short-term investors. In contrast to long-term investors who are purchasing stock in a corporation with the intent to pass it on to family someday, stock traders are hoping to make some money within minutes, hours, days, or months.
There are two different strategies to consider when stock trading:
An investor that participates in a minimum of 10 trades per month is considered an active trader. Active trading practices a strategy that focuses on timing the market. Active traders study short-term events at either the company level or using market fluctuations with the goal of making a profit in the next few days, weeks, or months.
Day trading is exactly as the term suggests. Investors play a game of hot potato with shares by buying, selling, and exiting their positions in a stock all within one day. This strategy does not focus on the actual events and positions of the stock’s company but rather on simply making a few quick dollars by taking advantage of daily price changes.
How to Get Into Stock Trading
If this is your first time attempting stock trading, it is best to start simple and invest in a wide range of low-cost index funds with the goal of long-term outperformance.
With that in mind, there are six key steps to follow when stock trading:
- Open a brokerage account.
- Establish a budget.
- Study and practice market and limit orders.
- Establish a practice stock trading account.
- Use a realistic benchmark for evaluation returns.
- Stay focused and keep a healthy perspective.
A brokerage account is an account that is specifically designed for holding investments. This is required for stock trading. Opening a brokerage account is easy and can be accomplished online within a matter of minutes. If you plan to make a lot of stock trades, then it’s best to take note of the costs accompanied with every trade. This cost is known as the broker’s stock-trading commission.
In order to keep the risk of stock trading low, it is recommended that you not allocate more than 10% of your portfolio to individual stocks. Investing more than 10% opens up a larger volatility risk to your account.
Stock trading is a great way to turn a profit; however, you want to make sure that you’re financially stable before beginning this financial investment. That said, a few more basic guidelines to practice when setting up a budget are as follows:
- Only invest money that you can afford to lose.
- Make sure you have an emergency fund established before investing.
- Focus on getting a minimum of 10% of your income into a retirement account.
After opening a brokerage account and establishing your budget, you can use the broker’s webpage or a trading platform to begin placing your stock trades. There are several options for order types that determine how your trade will be placed; however, the two most popular orders are as follows:
- Market orders
- Limit orders
Market orders will buy or sell the stock as quickly as possible at the best possible price. Limit orders will only buy or sell stock at a price that is equal to or greater than whatever price you dictate. A buy order will be set at whatever price you’re willing to purchase the stock at, therefore, the sale will only happen if the price decreases to being equal to or less than your specified price.
Most of us were taught that practice makes perfect. Stock trading is no exception to this idea. A practice stock trading account creates a low-pressure environment that can give investors a hands-on investing experience. Most online stock brokers offer this type of account through their virtual trading tools.
Using a realistic benchmark to measure returns is a step that should be practiced in all areas of investing. The main goal when choosing stocks is to stay on top of a benchmark index. Some investors use Standard & Poor’s 500 index while investors who focus on technology stocks may choose to use Nasdaq’s composite index. Smaller indexes are also available that are tailored based on the size, industry, and location of companies.
It is extremely important to measure results when investing. Outperforming your chosen benchmark is key. If this is a struggle, then it is best to continue investing in low-cost indexes, as mentioned previously, that have a performance that is similar to your benchmark index.
Active investing is better practiced as a hobby rather than as a desperate attempt at fast money. You don’t have to find the next great stock investment in order to trade stocks successfully. If an investment is really a good one, it will keep its stockholder value for years to come. You just need to keep your focus and perspective on the long-term goal.
Stock Market Basics
The following are basic tips to practice when trading stocks:
- Take your time.
- Ignore the sponsored ads.
- Study the different types of stocks.
- Maintain accurate and detailed records.
When building your positions, it is wise to take your time and grow slowly. This lowers your risk and reduces volatility exposure. There’s no need to rush into something that you’re planning to stay in for the long run.
Those sponsored ads promising profitable stocks are not looking out for your best interests. More often than not, they are investors that are using the ad to drive up the price of stocks by luring innocent investors into purchasing them which then increases the price of the stock. Once that happens, the owners of the ads can quickly sell their shares and earn a profit.
Studying the different types of stocks is a great tip for obvious reasons. If you’re looking to excel at the game, you need to know what you’re dealing with and understand all of the players involved.
There are a few benefits to keeping accurate stock records. The IRS enforces different guidelines, rates, and forms depending on the type of trading investors practice. The whole process can become quite complicated and is made much easier if you have organized records. Another benefit is that investors can potentially use any losses as a deduction on their taxes.
Overall, you will never regret time invested in learning the basics of stock trading and getting hands-on practice experiencing the fluctuations of the market.
How to Trade Successfully
A great way of looking at your stock trading is to view it as a wall of protection or a suit of armor. You want to invest in smart, thorough, and reliable stocks that can shield you as you dive into the stock market. To do this, you want to consider companies that have a long-term, stable performance with proven and established executives. Another thing to look for is companies with a long-term trend of greater-than-average earnings growth such as Coca-Cola or Proctor & Gamble.
The following are four factors to keep in mind when beginning your adventure into stock trading:
- Don’t get too adventurous. Avoid newer technology type stocks because it’s much more difficult to evaluate them. Keep your focus on veteran stocks that allow you to evaluate them based on their past 10-year performance.
- If you can’t evaluate a company’s potential 10-year forecast, it shouldn’t be a consideration for your early portfolio. You want to focus on companies that can provide you with a guaranteed return on equity. This means you want to look at companies with low capital and a tendency toward high returns.
- Find companies with a generous cash flow. Companies with hefty financial resources typically will not have any issues making money so that their shareholders will profit.
- Find companies with a low debt-to-equity ratio. Lower debt means a company has more room to grow and that earnings growth are likely growing based on shareholder’s equity rather than borrowed money.
Get Started In Stock Trading
As mentioned throughout this article, you will not regret having a thorough understanding of the market and equipping yourself with the right tools so that you experience a successful hobby of stock trading. That said, you don’t want to miss out on the available resources over at Raging Bull.
Raging Bull is made up of an experienced team of investors that are ready to help you excel at stock trading. Be sure to check out their free resources and set up a no-cost training session with one of their expert trainers.