Tips on How To Begin and Survive on Stock Trading
Stock trading is usually a lucrative yet risky venture. It is only lucrative if you know what you are doing. However, if you do not know how to trade stocks, I will strongly recommend that you go slow. First, look for enough knowledge that will guide you through stock trading. As I will always say, stock trading is not always about what happens on your national stock exchange. You should note that not everyone who buys and sells stock can be categorized as a stock trader. We can group the stock buyers and sellers into two groups depending on how often they buy and sell stock.
The kinds who stand in front of display screens and scrolling tickers the whole day, buying and selling out stock whenever they find a chance, are what we call stock traders. On the other hand, the stock investor is a category comprising more successful stock buyers and sellers. They have long-term goals, and once they buy stock, they will “forget about it” until the expiry of a given period.
If you have been thinking about becoming a stock trader but do not know how to go about it, you do not have to worry because this article has you covered. Follow this guide to the latter, and you will become a successful stock trader.
What is stock trading?
There is no universal definition of stock trading. Usually, when we talk of stock trading, we are confined to a limited amount of time. However, stock trading involves more concise activities which happen on the stock market. In simple words, stock reading involves buying and selling stock to capitalize on the fluctuation of stock prices.
The traders usually buy and sell out stock in the short term, usually hours or days. With the stock market, the traders anticipate that they will buy the stock at lower prices and sell them out in the course of the day when the stock goes up. It is like gambling because it is hard to predict when or if the stock prices will increase.
If done correctly, stock trading could be such a lucrative venture. However, just like real-life gambling, stock trading depends on odds, which can be such a risky venture. I will say it again; if you are going to trade in the stock, you should know what you are doing so that you do not lose your money easily, as most traders have always done.
Before delving into more nitty-gritty details about stock trading, it would be wise that you understand the two types of stock trading:
Type 1- Active Trading
When a trader places more than ten trades per month, we can say that the investor is involved in active trading. Usually, active trading relies on the timing of the market strategy. The traders watch the short-term happenings in the firm or the market fluctuations. They will purchase the stocks at lower prices and time the market to see when the stocks hit the all-time high, at which point they will sell out their stocks, thereby making profits. However, the timing of the market strategy has not been so effective in the stock market. Traders who rely on this strategy end up failing. We will, later on, learn more on why timing the market will not work out for you.
Type 2- Day Trading
As the name suggests, day trading is where buyers buy out stock at the beginning of the day and close their positions of the same stock within the same day. With this type of stock trading, the traders usually care less about the affairs of a company. Their primary aim is to make a few dollars at the end of an hour, day, or week, depending on the fluctuation of prices in the stock market.
Want To Start Trading in Stocks? Here is How
After grasping the basic details about stock trading, it is now time to see how to trade stocks. Before you start off the procedures I have explained below, I have got a bit of nice advice for you- Keep things simple and slow, and invest in a diversified mix of low-cost index funds. Above all, be patient. Successful investors are best served on long-term outperformance.
The following are the six fundamental steps that will guide you through successful stock trading:
1. Open a Brokerage Account
First things first, to trade in stocks, you will first need to open a brokerage account. A brokerage account is a special kind of account that will allow you to buy and sell out multiple types of investments. If you do not have an account yet, then you must create one. There are several trading platforms or online brokers that you could choose to work with. Please note that creating a brokerage account does not mean that you should start trading in stocks immediately. It just gives you the option to start trading immediately, when you are finally ready to start doing so.
2. Set Up A Stock Trading Budget
Stock trading is usually a risky venture, and this is why you should be very careful when allocating your funds to it. For instance, it will not be wise to allocate more than 10% of your portfolio to individual stocks as this leaves your funds exposed to too much volatility. With stock trading, it is important that you follow the following guidelines;
- Just like in gambling, you should only invest that which you are ready to lose
- Do not use funds that have been earmarked to meet your short term expenses, such as paying off your hospital bills and school fees
- You must have an alternative source to pay your health emergency fund and cater to other contingencies. As a general rule, never depend upon the rewards of stock investing to pay your bills or emergencies.
3. Learn how Market Orders and Limit Orders Operate and How to Use Them
At this point, you already have your brokerage account and a budget to finance your stock trading. You are now set to use your online broker’s account to place your stock trades. You should now understand the kind of orders that you are likely to be presented with. Understanding the orders is important because they dictate how your stock trading will fair on. The two most popular types of orders are:
Type 1- Market Order
Here you must buy and sell the stock as soon as possible at the prevailing stock prices.
Type 2- Limit Order
Only buy or sell stocks when the prevailing prices are better than the ones you set. For the purchase of stock, the limit price will be the lowest of your set price. For the sale of stock, the limit price should be high than the one you set.
4. Before you go real, Try out Stock Trading With a Virtual Trading Account
As the saying goes, practice makes perfect. In stock trading, there is nothing as bad as inexperience and ignorance. To gain experience with stock trading, you should try using the virtual trading tools offered by the trading platforms. For instance, you can try out paper trading that will let you test your understanding of stock trading and build up a track record before investing real money in stocks. Most stockbrokers offer these tools.
5. Have an Appropriate Threshold to Measure Your Returns
Measuring results is a critical thing that any serious investor should be willing to do. To see whether or not your stock trading venture is successful, you must be able to outperform the benchmarks. This tip is important to both the newbies and experienced stock traders. Some of the popular benchmarks you could choose to work with include the Standard and Poor’s 500 Index, the Nasdaq Composite Index, and many other indexes.
6. Keep Your Perspective
Successful stock trading does not require you to burn your midnight oil trying to find the next breakout stock in the market. The truth is that by the time you discover a looming pop in the stock of a specific company, many people would have also discovered it already. So, you might think you came early to make the profits when in truth, you came late. However, in stock trading, you can never be late for a party. Great investments will continue to deliver success to clever investors. To succeed, it would be good to treat stock investing as a hobby and not a platform for quickly becoming rich.
Wrapping It Up
Stock trading is such a lucrative venture. However, without following the trading tips I have explained above, your venture is dead on its inception. Another important thing you should never forget is choosing your broker wisely. The broker you choose to work with could easily make or break your stock trading investment. You should pick a broker with all the tools and terms that are best aligned to your stock investing experience and style.