One way to take advantage of the stock market is through stock trading, which is similar to investing in stocks but with a major difference. A trader’s approach tends to be more on a short-term basis, in order to capitalise on market movements. This means traders generally hold stocks for an hour, day, week, or even a few months. In contrast, investing usually in a longer-term approach, by holding onto assets over a long period of time, such as for many years.
If you are interested in dipping your toes into this particular activity, below are a few tips you should keep in mind before you begin stock trading.
Open a trading account
If a trader is looking to trade stocks online, they must first have to open a trading account. The most common way to do this is by opening an account with an online stockbroker. There are plenty of brokers to choose from, so you will need to find one that you trust, which means researching them and what services they provide is necessary. Each broker also comes with their own specialities.
If you are someone who already has a personal account with a broker, it is still good practice to keep a professional trading account separate. You should also spend time becoming familiar with the account interface as well as take advantage of any free trading tools and research offered exclusively to clients. Other factors you may want to consider include fee structures, educational resources, on-the-go accessibility, stock analysis tools, and more. For beginners, it is best that you choose a broker that has a wide offering and can support you when times get tough.
Opening up a trading account is generally straightforward and simple, and very much like opening a bank account. Traders complete an account application, provide proof of identification and choose how they want to fund the account – either by mailing a check, or transferring funds electronically.
Set a budget
It is considered best practice for traders to set a trading budget for themselves and stick to it. For traders who are drawn towards shiny new investments or companies, then experts generally recommend that you allocate up to 1-2% of your investment budgets towards those particular assets. Traders can start trading with just about any amount, however, it is important that they do not touch the money they may need in the short-term, such as for mortgages, fees, or emergency funds.
Research stocks you want to buy
Once a trader has set up an account, it is time to start researching companies and picking which stocks you want to trade. A good place to start for beginner traders is to research companies you already know from previous experience as a customer. If you are feeling overwhelmed, don’t worry. Try to keep your objectives simple – you should look for companies of which you already want to become a part owner. As Warren Buffett once said, “Buy into a company because you want to own it, not because you want the stock to go up.”
Once you have identified these companies, it is time to start doing in-depth research. You can start by checking out the company’s annual report – more specifically, the management’s annual letter to shareholders. The letter will give you a general guideline on how the company is doing, and what is happening with the business, in addition to providing context for the numbers you see in the report.
Afterwards, most of the information and analytical tools that you need to evaluate a business will likely be available on your broker’s website. This information can include SEC filings, conference call transcripts, quarterly earnings updates, and recent news. A few online brokers also provide tutorials on how to use their tools and may even teach novices how to start picking and trading stocks for those who have never done it before.
Learn to analyse stocks
Generally, trading tends to rely on technical analysis, which is making decisions based on stock price and historical market data, instead of fundamental analysis, which involves evaluating a company and determining what it is really worth. The main goal of technical analysis is to analyse the price movements of an asset in an attempt to predict future price movements. While a technical analyst will look at statistical trends and patterns, a fundamental analyst will likely start with the company’s financial statements instead.
While the two styles are often considered opposite approaches, it does make sense to combine the two methods to give you a broader understanding of the markets and help you better gauge where any investments are likely to be heading. As such, it is important that you spend the time learning how to read and analyse charts if you are considering trading stocks.
Practice stock trading
After you learn how to analyse the market and charts, you can start putting your analytical skills to practice. One way to give stock trading a try without putting any real funds on the line is by virtual trading, or by using a demo account. Most brokers in fact offer clients a demo account to try out their platform’s interface, as well as to practice any trading strategies without the fear of incurring losses. Paper trading usually involves the use of a stock market simulator that has the look and feel of an actual stock exchange’s performance. Use this opportunity to make lots of trades, including utilising a lot of different strategies, and analyse how well you perform and where any obvious flaws lie.
Understanding trading definitions and terms
For first-time traders, there can be a lot of numbers and technical jargon that may make it difficult to understand how to place a trade, or what you are even supposed to be doing when trading. You can refer to the below cheat sheet for some basic stock trading terms:
Ask: For buyers – this is the price sellers are willing to accept for a stock.
Bid: For sellers – this I the price buyers are willing to pay for a stock.
Spread: This refers to the difference between the highest bid price and the lowest ask price.
Marketorder: This is a request to buy or sell a stock ASAP at the best available price.
Limitorder: This is a request to buy or sell a stock only at a specific price or better.
Stop/Stop-loss order: This is an advanced order to sell a stock once it has reached a particular price point.
Plan your first trade
Once you have funded your brokerage account and are ready to make your first trade, it is time to think of a strategy, which will help you to maintain discipline and consistency when you trade. A good trading plan typically outlines the entry (buy) and exit (sell) points. This should be informed by factors like your skill level, risk level, and overall financial goals. Keep in mind that every position you hold will have its own parameters – meaning you have to give each stock the attention that it deserves.