Many people have heard about stocks from different places. We may have heard them in movies, read them in books, or watched business news where anchors talked about stocks and numbers we had no idea about. Even now as adults a lot of people are confused about stocks with some people having a vague idea of what they are and others still being as oblivious as they were as children. So before we talk about stock trading, let’s briefly get to know what stocks are.
A stock is a type of investment or asset that represents an ownership share in a company. So, in simpler terms, if you buy a company’s stocks you are buying a small part of that company called a share. When you buy a company’s stock you are putting some form of hope in that company because you anticipate the stock increasing in value so that you can sell it at a profit. When you buy stocks in a company you are called a shareholder.
Chances are you already probably own stock because once you have a 401(k), your employer has most likely invested it in a mutual fund that can hold a large number of company stocks together.
When companies go public, they sell their stock on a stock market exchange like the New York Stock Exchange which tracks the supply and demand of each company’s stock because this affects the price of the stocks.
There are two main types of stock trading. Active trading is when a strategy is involved in a usually month-long process with ten or more trades to make a profit. Day trading is a more fast-paced type of trading with investors buying and selling mostly that same stock taking advantage of the price dips and highs throughout the day.
Stocks are high-risk investments and before getting into them one has to have in mind that they can either lose all their money or get huge rewards. You don’t just blindly start trading stocks with no guide or learning process. You have to get an understanding of dividends, brokerage accounts, types of stocks to invest in, and cons that exist in the stock trading world. This guide is here to help you.
Get A Brokerage Account
To start trading stocks you need to have funds, and these funds have to be put in a brokerage account which is a special type of account designed to hold investments. If you are using online brokers you should also check their commission rates so you can find a legit one with low rates. A good amount of research is also good from places like a motley fool or any other good information source. There are numerous options now when you want to get a brokerage account due to the abundance of online brokers. You don’t need to put any money into the account yet but it is a great first step to guarantee your commitment to investing in stocks.
Set A Budget
This is very important as trading stocks is not the get-rich-quick scheme people make it to be. Do not put money that is earmarked for immediate use like tuition or mortgage.
A good streak of trading might deceive you into putting in more money but you should play safe and spread your portfolio across various stocks to reduce exposure to too much volatility.
Learn Order Types
Most online platforms have several trading options which inform how your trade goes. There are many types but the two most popular types you should know are market order and limit order.
A market order will immediately buy or sell stock at the best available price. Limit order involves you setting a specific price where stocks will be bought or sold at or better than.
Learn How To Identify Different Patterns
Pattern recognition is key to success in any field. This is especially true in trading stocks, where making the right decision at the right time can mean the difference between a profitable trade and a costly mistake. By understanding what kinds of patterns tend to repeat themselves, you can get a better idea of where a stock might be headed and make more informed decisions about when to buy or sell.
There are all sorts of different patterns that you can look for, but some of the most common ones include trendlines, support and resistance levels, head and shoulders formations, and bullish divergence patterns.
For instance, a bullish divergence suggests that a stock price may be about to start rising after previously declining, while a head and shoulders pattern suggests that the stock will soon start falling after reaching a peak. Learning how to identify the bullish divergence pattern and other patterns can help you make better-educated decisions and give you an edge when trading stocks.
Practice With A Virtual Trading Account
This is an important step in learning how to trade stocks. It is a low-pressure situation where there are no stakes so you are allowed to make all your rookie mistakes. Many online brokers offer trading tools you can practice with and it allows you to get used to trading before you put any money into it.
Keep Your Eye On The Goal
Many times you will be tempted by a company touted as the next big thing on the stock market and you will rush to get a piece of it. The thing is that other traders must have already priced into the stock and it may be too late to make a quick profit. That doesn’t mean you should get rid of it, you can hold it for much longer because stocks should arguably be treated as a long-term investment instead of some path to quick riches.
Even when it seems like the stocks keep on dipping, just hold out hope because you might profit in the end. If you lose anything, dust yourself and get back out there.
Ignore Hot Tips
A lot of forums on social media and everywhere claim to have the best tips about stocks to buy and it is best to ignore them because it almost always is a sponsored scheme.
A lot of times, they are part of a pump-and-dump scheme where dishonest people are using a small company’s shares to create hype and drive the price up so they can dump their stocks in it quickly causing it to crash.
Do Your Taxes
This is also important because different types of traders require different IRS forms and you don’t want to be the one with a backlog of taxes.
Keeping good records can also help you gain some advantages in the form of tax-loss harvesting.
So, let’s go over what you need to do if you want to trade stocks:
● Get a brokerage account
● Set a budget
● Learn order types
● Practice with a virtual trading account
● Keep your eye on the goal
● Ignore hot tips
● Do your taxes
These are just a few things you need to know so you can get started with trading stocks. This guide doesn’t guarantee you a sure profit because the stock market is forever volatile but hopefully it helps you manage your losses and maximize your gains.
Disclaimer: Stocks, like Futures and options trading, involves substantial risk of loss and may not be suitable for everyone. This article is a guide and hence does not constitute advice.
Featured image: Unsplash (Tech Daily).
