Stock Trading: How to Begin, How to Survive

 

What is stock trading?

Stock traders buy and sell stocks to capitalize on daily price fluctuations. These short-term traders are betting that they can make a few bucks in the next minute, hour, day or month, rather than buying stock in a blue-chip company to hold for years or even decades.

There are two main types of stock trading:

Active trading is what an investor who places 10 or more trades per month does. Typically, they use a strategy that relies heavily on timing the market, trying to take advantage of short-term events (at the company level or based on market fluctuations) to turn a profit in the coming weeks or months.

Day trading is the strategy employed by investors who play hot potato with stocks — buying, selling and closing their positions of the same stock in a single trading day, caring little about the inner workings of the underlying businesses. (Position refers to the amount of a particular stock or fund you own.) The aim of the day trader is to make a few bucks in the next few minutes, hours or days based on daily price fluctuations.



How to trade stocks

If you're trying your hand at stock trading for the first time, know that most investors are best served by keeping things simple and investing in a diversified mix of low-cost index funds to achieve — and this is key — long-term outperformance.

That said, the logistics of trading stocks comes down to six steps:

1. Open a brokerage account

Stock trading requires funding a brokerage account — a specific type of account designed to hold investments. If you don't already have an account, you can open one with an online broker in a few minutes. But don’t worry, opening an account doesn’t mean you’re investing your money quite yet. It just gives you the option to do so once you’re ready.


2. Set a stock trading budget

Even if you find a talent for trading stocks, allocating more than 10% of your portfolio to individual stocks can expose your savings to too much volatility. But this isn’t the only rule to manage risk. Other do's and don’ts include:

  • Invest only the amount of money you can afford to lose.

  • Don’t use money that’s earmarked for near-term, must-pay expenses like a down payment or tuition.

  • Ratchet down that 10% if you don’t yet have a healthy emergency fund and 10% to 15% of your income funneled into a retirement savings account.

3. Learn to use market orders and limit orders

Once you have your brokerage account and budget in place, you can use your online broker's website or trading platform to place your stock trades. You'll be presented with several options for order types, which dictate how your trade goes through. We go through these in detail in our guide for how to buy stocks, but these are the two most common types:

  • Market order: Buys or sells the stock ASAP at the best available price.

  • Limit order: Buys or sells the stock only at or better than a specific price you set. For a buy order, the limit price will be the most you're willing to pay and the order will go through only if the stock's price falls to or below that amount .

  • 4. Practice with a virtual trading account

    There’s nothing better than hands-on, low-pressure experience, which investors can get via the virtual trading tools offered by many online stock brokers. Paper trading lets customers test their trading acumen and build up a track record before putting real dollars on the line.

    Several of the brokers we review offer virtual trading, including TD Ameritrade and Interactive Brokers.

    5. Measure your returns against an appropriate benchmark

    This is essential advice for all types of investors — not just active ones. The bottom-line goal for picking stocks is to be ahead of a benchmark index. That could be the Standard & Poor’s 500 index (often used as a proxy for “the market”), the Nasdaq composite index (for those investing primarily in technology stocks) or other smaller indexes that are composed of companies based on size, industry and geography.

    Measuring results is key, and if a serious investor is unable to outperform the benchmark (something even pro investors struggle to do), then it makes financial sense to invest in a low-cost index mutual fund or ETF — essentially a basket of stocks whose performance closely aligns with that of one of the benchmark indexes.

Comments

Post a Comment

Popular posts from this blog

Steps to consider before starting a stock trading business

The Stock Trader is the person or maybe it can be a company which is involved in trading of equity securities. Basically, the term stock trader is used for that person, who can be an investor, an agent, and stockbroker. Finally, the whole process of this type of trading is known as stock trading. Stock trading is not as simple as its name. That’s why a lot of sites are working on it which provides necessary information about stock trading business like guerilla stock trading . Stock trading basically depend on your skills and abilities to trade securities. Personal interest in this type of business matters most because to do this type of trading you cannot analyze things perfectly unless you do not pay perfect concentration or interest on your trade. To be patient is a requirement in this business because it is the type of business which can lead you towards success but patience is required to analyze the daily stock conditions and sometimes it consumes more time to make you profitabl
Read more

What is the Stock Market?

  The stock market refers to public markets that exist for issuing, buying, and selling stocks that trade on a stock exchange or over-the-counter.  Stocks , also known as equities, represent fractional ownership in a company, and the stock market is a place where investors can buy and sell ownership of such  investable assets . An efficiently functioning stock market is considered critical to economic development, as it gives companies the ability to quickly access capital from the public. Purposes of the Stock Market  –  Capital and Investment Income The stock market serves two very important purposes. The first is to provide  capital  to companies that they can use to fund and expand their businesses. If a company issues one million shares of stock that initially sell for $10 a share, then that provides the company with $10 million of capital that it can use to grow its business (minus whatever fees the company pays for an investment bank to manage the stock offering). By offer
Read more