Stock trading can be extremely daunting for beginners. Between all the jargon, rapidly changing numbers, and the overall complexity of the financial market, jumping in can be hard for a new trader. However, with a clear understanding of the basics of trading stocks, virtually anyone can dip their toes in and get started. This quick write-up will hopefully be useful for you if you’re looking to get started but have no idea how. From the absolute basics of setting up a brokerage account to developing a rock-solid trading strategy, here’s what you need to know.
The Basics of the Stock Market
Before we get into trading, it’s important that you first understand what the stock market is. The stock market is a platform where investors buy and sell shares of publicly traded companies. Think companies like Google and Microsoft, but note that other smaller companies are commonly traded on the stock market as well. There are thousands upon thousands of tickers (stock identifiers) out there. Some are easy to recognize, like MSFT for Microsoft or TSLA for Elon Musk’s Tesla.
The stock market operates through exchanges, like the New York Stock Exchange (NYSE) or the NASDAQ. Buyers and sellers come together on these exchanges to do stock trading among other things. Prices are determined through the simple metric of supply and demand, influenced by a variety of factors ranging from company performance to future economic indicators.
The simplest way to think about it is like one big open market, where people are selling Apples to those who want them or buying metal from those looking to get rid of it. It’s obviously slightly more complex than that, but once you boil it down to people buying and selling things, it gets a little less scary to look at.
Setting Up a Brokerage Account
Now that you have an idea of what the stock market is, it’s time to look at opening a brokerage account. Brokerage accounts are investment accounts that allow you to buy and sell securities. Securities is just an umbrella term that encompasses stocks, bonds, and mutual funds. You’ll need a brokerage account if you plan on trading indices and stocks.
Choosing a Brokerage Firm
This is the first step, and a very important one. There are hundreds of firms out there that let you open brokerage accounts. They’re not all built the same though. When you start looking at brokers, compare things like commission fees, what features they offer, customer service, and account minimums. All of these will help you decide where to begin your trading journey.
Developing a Trading Strategy
A well-defined trading strategy is paramount if you plan on making it in the world of stock trading. Your strategy needs to be based on your financial goals, risk tolerance, and overall time commitment. Here is a quick rundown of some common trading strategies.
Day Trading
If you’re brand new to trading, you might want to stick away from day trading until you get a grasp of things. Day trading can be extremely lucrative, but it can also be the riskiest form of stock trading. Day traders buy and sell stocks on the same day, aiming to profit from short-term price fluctuations. This type of trading requires a significant time investment and a deep understanding of market trends. You’ll also need a significant amount of capital, as there are limits on day trading for accounts under $25,000.
Swing Trading
Swing traders hold stock for several days or weeks, hoping to capitalize on short to medium-term trends. This strategy requires less of a time commitment than day trading but is still an advanced technique that requires an understanding of where the market is going.
Value Investing
Perhaps the simplest form of trading, value investing, involves picking stocks that you believe are currently undervalued but will grow immensely over time. Think of it as investing in Apple before the release of the iPhone. This is a great strategy if you strongly believe that a company has immense potential in the future, or currently does but it just isn’t seen by most traders.
Growth Investing
Similar to value investing but with a twist. Growth investing is where you pick stocks that have strong growth potential, even if their current price is high. This requires more capital to capitalize on the potential gains, but it can also be safer. Think of industry giants like Amazon that routinely prove that their business model is on a path of success with future growth secured.
Dividend Investing
Some stocks offer dividends, a passive payout for shareholders based on the number of shares they currently hold, similar to property passive income. This is a popular strategy for those looking at consistent passive income and long-term wealth accumulation.
Research and Analysis
There are two main types of research you should be doing as a stock trader: Fundamental analysis and technical analysis. Fundamental analysis requires you to evaluate a company’s financial statements and key metrics like earnings per share (EPS) and price-to-earnings ratio (P/E).
Technical analysis, on the other hand, requires you to look at historical price and volume data to identify any possible patterns or trends. Technical analysts use charts, moving averages, and various indicators to try and predict future price movements.
Both require an immense amount of data, but there are expert analysts out there that offer their own opinions, giving you insight you may not have been able to garner otherwise.
