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, will help prepare you so your entry into stock trading goes as smoothly as possible. Here are five things to do before you start trading stocks.
Acquaint Yourself With the Stock Market
Stocks are small pieces of a company.
The stock price (also called a "share") reflects the value of the company, and its outlook, as determined by the people trading the stock (traders and investors). Stocks don't have a set price, they continually fluctuate, each second of each day.
Stocks trade on an exchange, such as the New York Stocks Exchange (NYSE), which has hours of 9:30 AM to 4:00 PM Eastern time. Most buying and selling of stocks takes place during these hours, although some trading does occur outside these hours; it's called pre-market and after-hours trading.
To make a trade you'll need the stock's "ticker" symbol. Type the company name on Google Finance or other major financial portals, and the ticker symbol is provided. Tickers are a one to five letter code used to trade the stock.
You can buy stocks and then try to sell them at a higher price to make a profit or you sell first and try to buy it back at a lower price to make a profit.
This latter is process is called short selling; short-term traders do it all the time, while longer-term investors tend to shy away from it. Before you begin, acquaint yourself with the Bid/Ask Spread, as this is how prices move. Also, learn the basics of reading a stock chart and stock quotes.
Establish Your Purpose For Trading
Establish what you want out of your trading.
Is it something you want to do every day? Do you want to trade a couple times per week? Possibly doing research at night if you have a full-time job during the day. Or do you want to buy stocks and hold them for the long-term?
There is no right or wrong here. Do all of them or one of them. Day trading is taking trades that last less than a day and trades often only last minutes. Swing trading is taking trades that last from a day to several weeks. Investing is taking trades that last many months or even years. Before deciding which to pursue, consider your finances.
Consider Your Finances
If you want to day trade stocks in the US you need to maintain a balance of at least $25,000 in your account. If that's not possible, it rules out day trading (for some loopholes see How to Day Trade Stocks with Less than $25,000).
Swing trading doesn't have a minimum capital requirement, but to be able to trade stocks of varying price, as opportunities become available, it's recommended that at least $10,000 is committed to the endeavor. If taking regular trades, a smaller account than this is susceptible to being widdled away by commissions and fees (what the broker charges for trading, discussed below).
To invest requires less capital. Since the trade is held for a long period of time commissions are not as much of a factor. Therefore you can begin to buy stocks as soon as you can afford 100 shares (stocks typically trade in 100 blocks) of the stock you are interested in. 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 larger purchase.
This only applies if the value of the transaction is small, where the commission could represent a significant percentage of the capital being deployed (more than 1% is significant). On the other hand, if you are buying thousands of dollars worth of stock on each investment the commissions are largely inconsequential.
Find a Broker and Trading Platform
A broker facilities 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 loads of free tools available online)
If you want to day trade, there are a couple extra requirements:
- The broker must execute orders instantly. No intervention on their part. Even a one-second delay is too much.
- "Trade from chart" capabilities, and/or ability to rapidly place, adjust and cancel orders.
There are loads of brokers, some which are better for investors and some which are better for day traders or swing traders. Picking a broker is the biggest trade of all; all your capital is given to this company. Spend time researching the above factors before choosing a broker.
Each broker offers a trading platform. This is the technology that allows you 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 Depositing Money
As you narrow your selection of brokers by playing around in their demo accounts, practice placing trades. Get used to the various order types available. Begin formulating strategies and testing them on historical price charts. Place fake money trades based on those strategies and analyze the findings with statistics to see if the strategy is likely to produce a profit.
If you can't make a profit trading fake money there is little purpose in wasting real money. On the other hand, producing fake money returns doesn't necessarily mean real money profits will come just as easily. There are differences between demo trading and real trading. Demo trading is still a very valuable tool, though.
In the demo account practice proper risk management. Risk management is where you only risk a small amount of the account on any single trade. For more on risk management see Determining Proper Position Size When Day Trading Stocks.
Final Word On Starting to Trade Stocks
Trading stocks is exciting because it involves risk and reward. Going through this list will give you access to the stock market, but doesn't teach you how to trade. Starting to trade is the easy part, being successful is another story. Follow the guide above to get set up. You'll then be in a position to research strategies for the time frame you want to trade on (long-term or short-term).
For an example of a day trading strategy, see How to Day Trade Stocks in Two Hour or Less. For a longer-term trading strategy see the Dividend Growth Strategy. These are just examples; each individual must find a strategy that works for them, their goals and personal situation/constraints.