How to Start Trading Stocks
Whether you want to start trading stocks actively or just want to invest for the long-term, there are things you need to know before starting. Knowing what to expect and what tools you need improves your chances of success. Here's how to start trading stocks.
Get to Know the Stock Market
Before you get started trading stocks, it's important to know how the market works. Here are key terms to know.
- Stocks: These are small pieces of a company.
- Shares: These are units of stock.
- Stock price: The price reflects the value of a company and its outlook, as determined by those trading the stock (traders and investors). Stocks don't have a set price. They continually fluctuate as they're bought and sold.
- Exchange: Stocks trade on an exchange, which has set hours. Most buying and selling of stocks takes place during these hours, although some trading does occur outside these hours. Trading outside of hours is called pre-market and after-hours trading.
- NYSE: The New York Stock Exchange is the largest stock exchange in the world. Seventy of the biggest corporations in the world are traded on the NYSE along with thousands of other stocks. Its hours are 9:30 a.m. to 4:00 p.m. Eastern time.
- Nasdaq: The Nasdaq is another stock exchange. All its trades are done electronically and its hours are also 9:30 a.m. to 4:00 p.m. Eastern time.
- Ticker symbol: These are a one- to five-letter code used to trade a stock. For example, the ticker symbol for Amazon is AMZN.
- Bid-ask spread: The price to buy a security is the ask price. The price to sell a security is the bid price. The difference between these two is the bid-ask spread. It's a measure of supply and demand for a given stock as well as a measure of liquidity. A tight bid-ask spread indicates that a stock has good liquidity.
- Market liquidity: Liquidity means that the stock can be bought or sold quickly at a stable price.
- Short selling: While many investors buy a stock and sell it later for a profit, it's also possible to sell first, then buy the stock at a lower price. That's called short selling. Investors can sell first by borrowing the stock.
Decide What Kind of Trader You Are
As you consider how to get started in the stock market, you also need to decide what kind of trader you are. Do you see yourself trading every day? Do you want to trade a couple of times per week? Or do you want to buy stocks and hold them for the long-term?
While there's no right or wrong way to trade, there are risks and rewards to different approaches. Common approaches include:
- Day trading: Day traders buy and sell stocks throughout the day. The Securities and Exchange Commission (SEC) defines pattern day traders as those who execute four or more day trades within five business days. Day traders often use borrowed money, which can lead to debt if the day trading isn't profitable. It has the potential for quick returns.
- Swing trading: This is a longer-term approach than day trading. Swing traders take trades that last from a day to several weeks. It offers relatively quick rewards and less potential for loss than day trading, but it's still a labor-intensive approach.
- Investing: This is when you buy and hold stocks for the long term, which could be months or even years.
Day trading is a stressful, risky approach to stock trading.
Consider Your Finances
If you want to day trade stocks in the U.S., you need to maintain a balance of at least $25,000 in your account. If that's not possible, it rules out day trading.
Swing trading doesn't have a minimum capital requirement, but to be able to trade stocks of varying prices as opportunities become available, you may want at least $10,000 committed to the endeavor. This helps keep your account balance from being whittled away by broker commissions and fees, which are what a broker charges for trading.
Investing requires less capital. Since trades are held for a long period of time, commissions aren't as much of a factor. You can buy stocks as soon as you can afford 100 shares (stocks typically trade in blocks of 100) of the stock you're interested in. Some brokers also allow you to buy fractional shares, so you could get started with even less.
Save money on commissions by making one trade instead of multiple trades. For example, instead of buying 100 shares every week, save the money for a month and make one large purchase.
Find a Broker and Trading Platform
A broker facilitates trading between market participants, allowing you to buy stocks from sellers and sell stock to buyers (there is a buyer and seller for every transaction). As a trader you want a broker that is:
- Low cost: Low commissions and fees
- Reliable: Can trade when you want with minimal system outages
- Honest: Won't steal your money or engage in risky behaviors with it
- Gives you tools for research: Least important, since there are many free tools available online
If you want to day trade, you may want a few more things in a broker.
- The broker should execute orders instantly with no intervention on their part. Even a one-second delay is too much.
- "Trade from chart" capabilities, and/or the ability to rapidly place, adjust, and cancel orders.
There are many brokers, some of which are better for investors and some which are better for day traders or swing traders. Spend time researching the above factors before choosing a broker.
Each broker offers a trading platform. This is the technology that allows you to view stock quotes, see charts, do research, and, most importantly, place orders. Test out various platforms by opening demo accounts with various brokers.
Practice Before You Start Trading
One way to test-drive potential brokers and practice your trading skills is to use a demo or virtual trading account. A virtual trading account simulates trading, but you're not actually spending any money. TD Ameritrade and TradeStation both offer virtual trading accounts.
While making a profit on a virtual platform doesn't necessarily mean real money profits will come just as easily, it's a valuable tool for learning how trading works and what style fits you the best.
The Bottom Line
Trading stocks is exciting because it involves risk and reward. Starting to trade is the easy part, though. Be prepared for losses, and don't trade more than you can afford to lose. Over time, you'll learn what works for you, your goals, and your financial situation.