Trading stocks can be an exciting and potentially lucrative way for individuals to take advantage of the financial markets. Whether you are looking to potentially grow wealth, or generate income, getting started on trading stocks requires some level of fundamental knowledge and a certain strategic approach. In this article, we go into detail on how you can get started trading stocks.
Define tolerance for risk
One of the first things a trader needs to do before starting to trade stocks is define their tolerance for risk. This is the chance that a trader may end up losing money while trading or investing. As stocks are categorised in various ways, such as large capitalisation stocks, small-cap stocks, value stocks and aggressive growth stocks, they all have different levels of risk. Once a trader determines what their risk tolerance level is, they can set their investment sights on the type of stocks and trading strategy that complement it.
Decide on investment goals
Traders should also spend some time determining their investment and trading goals. This is because when opening a brokerage account, most online brokers will ask traders what their investment goals are, and the aforementioned level of risk they are willing to take. If a trader is at the beginning of their career, a suitable investment goal could be to increase the amount of funds in their trading account. If they are older, they may want to generate income as well as protect and grow their wealth.
Other popular investment and trading goals include buying a house, funding for retirement, or saving for college or university. That said, it is important to remember that goals can change over time – they are not necessarily static. Traders should therefore define and review them periodically so that they can stay focused on achieving them and see whether they need to pivot or not.
Determine investing style
Another thing a trader needs to consider is their investing style. This is because some traders want to take a more active hand in managing their investments, while others prefer to set it aside it and forget it. While a trader’s preference may end up changing, it is important to decide on an approach before getting started.
If a trader feels confident in their trading knowledge and capability, they can manage their financial portfolio all by themselves. Most traditional online brokers, allow traders to trade financial instruments such as stocks, bonds, index funds, exchange-traded funds (ETFs), mutual funds, and more.
On the other hand, working with an experienced broker or financial advisor can help traders make better financial decisions, monitor their portfolios, and make changes to them. This makes it a good option for novices who understand the important of trading and investing but may want an expert to help them on their trading journey.
For those looking to take a more hands-off approach to trading, it is possible to use a robo-advisor. It typically costs less than working with a human broker or financial advisor – the only thing a trader needs to do is input their trading goals, risk tolerance level, and other details. Once the robo-advisor has all this information, it will automatically execute trades on the trader’s behalf.
Learn to diversify and reduce risk
When it comes to trading, diversification is an important financial concept to understand. This is because investing in a range of assets can reduce the risk of one financial asset not performing well. In this case, a trader’s other instruments can help keep their overall portfolio steady. In layman’s terms, it is not putting all eggs in one basket.
Open a trading account
In order to begin trading, one must first gain access to the financial markets. This is usually done through a broker. To open a trading account, a trader only needs to follow the account opening process provided by their chosen brokerage firm. This typically involves completing an application form, providing various identification documents (such as proof of identity, proof of address and more), and funding their account. These particular steps will vary depending on the brokerage firm a trader works with, though there most likely will be instructions on the broker’s website. Make sure to meet the trading account’s minimum deposit requirement, as only then will traders gain access to live trading.
Decide what to trade in
Before trading stocks, it is best that traders conduct thorough research on companies, industries, and current market trends. This way, traders can gain a better understanding of the company, and whether it is currently doing well or not. Traders can analyse documents such as financial statements, news, and analyst reports to help them make informed trading decisions. Other tools that traders can use to help them include fundamental analysis, technical analysis, or using a combination of both.
Develop a trading plan
It is highly recommended a trader create a trading plan before executing their trades. A trading plan should outline an individual’s trading strategy, including entry and exit points, risk management rules, and position sizing. It should also take into account the risk tolerance level, and how much funds a trader can afford to lose. It is advised that traders stick to their plan throughout their trading journey to avoid making impulsive decisions based on emotions or short-term market fluctuations.
Practice with a demo account
If a trader is new to stock trading, they should consider practising with a simulated or paper trading platform. Fortunately, most brokers offer demo accounts for people to try. In effect, it functions on the ‘try before you buy’ principle. While a demo account may look remarkably similar to a live trading account, there are a few fundamental differences. The first is that everything takes place in a simulated or virtual environment. This means traders can only paper trade with it. While a demo account is a great place for traders to practice their trading skills and fine-tune their strategies, the account does not offer any monetary rewards. On the flip side, there is no risk that comes with using a demo account either.
Once a trader is ready to trade, they can log into their brokerage account and access their trading platform. Then, they must select their desired stock, enter the quantity, and then specify the order type (for instance, if it is a market order or a limit order). Before submitting the trade, it is essential that traders review all the details, to protect themselves in case errors occur.
Monitor and manage positions
While most people are under the impression that the only thing a trader needs to do is to execute their trades, this could not be further from the truth. After entering a trade, a trader must monitor their positions regularly in case the market fluctuates. As such, traders should stay on top of any market news, company announcements, and other relevant information that may end up impacting their investments, the market, and the sector. To protect against risk, consider using stop-loss orders to limit any potential losses.
Continue to learn
Stock trading is not a one-and-done thing. In fact, it is a continuous learning process. Traders should stay in the habit of keeping up to date with market trends, economic indicators, as well as industry news. As such, they should read books, attend seminars, and join online trading communities. Keeping in touch with other traders will not only give traders a sense of community but also allows them to expand their knowledge and refine their trading skills in the long run.
Overall, it is important to note that trading stocks always involves some level of risk, and there is no guarantee of making a return. As such, it is recommended traders start with a small amount of capital and then later gradually increase their investment as they gain the necessary experience and confidence in trading. As a trader progresses, they should also consider seeking guidance from financial professionals or attending educational programs to further hone their trading skills.