November 22, 2019
Trading stocks is both an exciting and potentially lucrative practice, but could also be a huge mistake if you are not prepared. Whether you are wanting to get into trading on an active, daily basis or are looking to invest with a more long-term return in mind, you need to ensure you are aware of all the tricks of the trade and the risks you will be taking. This kickstart guide to trading stocks outlines what you need to know, the equipment you need to have and essential things to do before you start trading real money on the stock market.
Get to know the stock market
The first and most basic step is to understand that stocks or shares are pieces of a company. Each stock has a value which will fluctuate depending on how the company is performing and other economic factors. They can change from one second to the next, so choosing when to buy and sell these stocks can either earn or lose you a lot of money. There are several stock exchanges all over the world which open and close at different times of day. The majority of buying and selling of stocks happens in the first few hours after each market opens. Each company’s stock is assigned a different ticker symbol which identifies each stock with a code between 1-5 letters.
The objective of trading stocks is to sell them on at a higher price than you bought them for, or to sell and then buy stocks back when they are cheaper (called shorting). Either strategy will earn you a profit, but whether or not you choose to short stocks will depend on your long term objectives.
Think about your motivation
Think long and hard about what you want to accomplish through trading. For example, some embark on trading as a full time career through day trading, i.e. buying and selling stocks within a day. Others may trade on a weekly basis (swing trading) if they also have another job and will do their research during the evenings. Some will buy stocks for a long term investment as they don’t intend to sell for months or several years. You can try your hand at more than one strategy, but before you do you need to analyze your finances.
Analyze your finances
To trade on a daily basis you are likely to need a minimum capital investment of $25,000 to make it viable. Swing trading on a weekly basis does not necessarily require as much upfront capital, but you want to have enough capital available as and when an opportunity comes up. You also need to consider brokerage fees and commission in your trades as this will eat into your profit. Investing for the long term requires the least amount of capital as you can trade when you have enough to buy 100 blocks or shares of a stock at a time and commission is not so important.
You can minimize the amount of commission you pay by making larger trades as opposed to lots of smaller ones, e.g. rather than buying a 100 shares each week you could buy 400 per month and save yourself some commission, assuming the transaction has a low value.
Choose a broker and trading platform
You will need a broker to facilitate your trades with others in the market or, in other words, to make it possible for you to buy and sell. Ideally, you should find a broker who has low fees and commission, is reliable, honest and is able to support you with advice and research as to which stocks to invest in. If you are considering day trading, you should also take their efficiency into account as you need to be able to complete transactions quickly.
Brokers will provide a trading platform which is the technology which enables you to see stocks, research companies and carry out your transactions. Compare multiple trading platforms before deciding on which is the best for your choice of market and style of trading.
Practice before you trade in real money
When you have made a shortlist of some brokers you should practice trading in their demo accounts. This will help you to not only get used to using the platform but also practice your trading strategies and get familiar with identifying patterns. You are not using real money at this stage so you can be a bit risky and play around with analysis techniques to help you identify the best opportunities for profit. If you are unable to profit using the demo account, it’s unwise to risk real money with a live account.
Dan Cormac knows how to make his money go further. A freelance financial journalist, Dan is passionate about personal finance. Whether you hope to escape the chains of debt, to save for a house, or to retire within a decade, Dan explores the most effective ways you can achieve your financial goals.