When it comes to the stock market, there are different ways to make money from it. Generally, there are two ways to approach the market and that’s to trade or invest.
I personally choose to invest my money just because I don’t really have the time (and energy) to look at charts and market movements frequently. But that won’t stop me from sharing my knowledge when it comes to trading! ?
I know a few people who have made banks trading stocks (and a few who have lost some too!) so who knows, maybe this style is more appropriate for you.
If you have no idea of how trading works, consider this as your introduction! In this post, I’ll be discussing on how to trade stocks for beginners,
If you’re curious about what trading is, then read on! 🙂
How To Trade Stocks For Beginners
Investing vs Trading Stocks
First, let’s differentiate what’s investing and trading.
Investing is spending your money on something with the hope of achieving a profit over time. This is what they call in the investment world as the buy and hold strategy – you buy stocks of the company and hold it for a long time. Serious investors hold stocks for about 5-10 years
Traders, on the other hand, wants a faster way to get a return on their investment.
So instead of buying and holding the stock, they buy and sell it after a few hours or in the next couple of days, weeks, and sometimes months.
The main difference between the two would be their time horizon.
1. Choose An Online Broker
As I’ve mentioned on how to invest in stocks online post, choosing an online broker is important.
Why? Because they will be your partner when you trade stocks of a company.
As a newbie in the stock market, you need to choose an online broker that will help you along the way. It’s also the broker’s job to make your trading experience as smooth as possible.
A feature that you’d like to look at when you’re starting out would be whether the online broker provides a virtual trading account.
Virtual Trading Account
Virtual trading or also called paper trading simulates the movement of the stock market or a single company. This allows the trader to have a “feel” of how trading is done.
Virtual trading allows them to trade virtual money, so when the time comes for them to trade with real money, they’ll be more familiar with the process and the platform.
Another thing that you should look at when it comes to trading stocks is the broker’s commission.
Since you’re going to buy and sell frequently, you don’t want commissions to eat up your trading gains or add up to your losses!
NerdWallet recently released their best online brokers for stock trading! Almost all of their recommended brokers have zero commissions per trade!
2. Know Your Orders
When you’re going to buy and sell in the stock market, you will notice that there will be additional options to choose from – these will be your orders.
Market orders are like instructions to your broker on how to execute a trade.
The most basic stock market orders are Market orders and Limit orders.
- Market Orders – this is the most basic and widely used order when it comes to buying and selling a stock. It’s like telling the broker that you want to buy or sell a stock immediately. You’re buying or selling a stock on what it’s currently being traded for.
- Limit Orders – you choose this order when you want to buy or sell at a better price than what it’s currently being traded for.
For example, Amazon is currently at $500. And you’re only willing to buy it at $450. So you put a limit order at $450. That order is only executed when Amazon’s stock price goes to $450 or below.
For selling, let’s say Amazon is currently trading at $700 and you want to sell your shares if it goes up at $710. So you put a limit order at $710. That order is executed if Amazon hits $710 and higher.
Easy peasy, right?
To see a more detailed explanation on what orders are appropriate for you and your style, you can check out this video below:
3. Know Your Trading Style
When trading the stock market, there are different styles that you can use to try and earn some money.
There are two schools of thought when it comes to the stock market – Technical Analysis and Fundamental Analysis.
1) Fundamental Analysis is the process of studying a company’s business, financial records, their sector, their future plans, and it also includes looking at the global and economic news.
2) Technical Analysis is a methodology of interpreting what the current stock chart is showing. They use the chart to determine the future action of the stock – will it go down, go up, or go sideways.
Most stock traders use technical analysis as their approach. In technical analysis, there are a lot of things to consider as well. Traders look at the:
- price chart,
- patterns on the price chart,
- the order flows,
- the bigger picture of the chart, and
- the number of shares being traded.
An example of a pattern that traders look out for would be the Head And Shoulders pattern. This chart formation or pattern consists of three peaks. Wherein the middle peak is the highest (the head) and the two peaks at the side are of the same length (the shoulders).
In an hourly chart of Tesla way back August 2018, it formed a head and shoulders pattern:
According to technical analysis, if this pattern appears and the stock goes below the neckline (the dotted line), it might signify a change of trend. Which in this case, it did. The stock went from an uptrend to a downtrend.
To put it simply, fundamental analysis mainly looks at the sales and earnings of a company. While technical analysis mainly focuses on the price and volume of a company’s stock chart.
Why Do Traders Use Technical Analysis?
Because traders believe that price leads and fundamentals follow. So if you want to be the first one who’s buying before a big move to the upside, you need to follow the price.
And technical analysis has different methods to tell you what the price is currently doing and what’s the probability of the stock of going up or down.
Traders use different price patterns, oscillators, and trends to determine what the stock will do in the future. Just like the example above.
I could write a whole blog post about technical analysis – so let me know in the comments if you’re interested to know more about it ??
The Most Common Trading Styles
Day Trading – it’s the act of buying and selling stocks within the day. Day traders usually don’t hold any stocks in their portfolio overnight. They sell all stocks on the same day.
Position Trading – this is a trading style that’s closest to investing. Because traders use the buy and hold strategy when using this style. They look at the bigger picture.
Position trading allows you to hold stocks from weeks to months. But unlike serious investors who don’t look at the daily market swings, position traders keep an eye on their investment from time to time. They want to get out of a trade before the stock goes down.
Swing Trading – these types of traders just want to ride the market swings and get out immediately before the trend reverses.
Scalping – traders who use this style have the shortest timeframe of them all. They can buy and sell a stock in only seconds or minutes. They try to make money off the micro-movements of the market.
How Much Money To Start Trading
Since you’re still starting and just want to have a feel of the process, a couple of hundred dollars will be fine. Make sure that money is an amount you’re willing to lose. Because in the stock market, making money is not guaranteed. That is why risk management is important.
Treat Trading Like A Business
Just like starting a business, trading is risky as well. It can be an investment that can go bust.
You should do everything to keep your trading account alive. So do your research, study different styles and try it out, and practice risk management.
When you’re looking to try out different styles, you can use a virtual account first. This is one of the advantages that a virtual account can bring you.
In business, you write down your inventories, your sales, your overhead costs, and the likes. In trading, you write down your trades, at what price did you buy, what price did you sell, what made you buy and sell the stock, and what style did you use.
A trading journal is important because that’s where you’ll see your statistics, and gauge how you’re doing.
You can’t improve something you can’t measure. If you want to be great at something, you need data to know you’ve improved.?
Practice Risk Management
To be able to trade, you need to have money in your account. There are a lot of things that you can’t control in the stock market, but if there’s one thing you have control over, that’s how much money you’re going to lose.
Risk management is what makes a trader keep on going.
Learn Before You Earn
It’s always a good rule to know what you’re getting yourself into. Study and research about it first.
Just like in business, you don’t set up a store right away. You conduct research and study if your business idea is feasible.
The same goes for trading, you don’t enter the stock market with zero to little knowledge. Invest in yourself first. Learn the ins and outs of trading and what makes a trader successful.
So, now that you have a bit of knowledge in trading, do you think its for you? Or would you rather stick to investing? Let me know below! 🙂