Stock trading is a type of investing that prioritizes more on short term profits over long-term gains. If you do not have proper knowledge, it can be risky to enter the trading world. Not everyone who purchases stocks is a stock trader, a good trader is well versed with trading skills and knowledge. Traders and investors are divided into two categories depending on the frequent selling and buying of stocks. Trader scrolls the ticket and buys and sells stocks online throughout the day. Whereas the investors buy at regular intervals and sell much frequently till retirement.
Stock trading is not just what you find on the New York Stock Exchange floor, but it can be comfortably done from your home. Before placing your first trade, you should know all about trading.
What is Stock Trading?
Stock traders purchase stocks to capitalize on daily price fluctuations. Short-term traders can make good bucks in an hour, day or month than buying stock in blue-chip companies. There are two types of stock trading-
- Active Trading– Traders who do 10 or more trades per month by using a strategy that depends heavily on the market fluctuations and timing, tries to take advantage of short-term events so that in the coming weeks it turns out to be a huge profit.
- Day Trading– It includes the strategy which is employed by the investors who buys, sells and closes their positions of the stock in a day. The main motive of the day trader is to generate a few bucks in the next coming hours or days that are based on daily fluctuations.
How to Trade Stocks?
If you are trading for the first time, you must know that most of the investors keep things simple and diversified, a mix of low-cost index funds to get long term outperformance.
The logistics of trading stocks can be divided into 6 steps-
- Open a Brokerage Account
Trading stocks need funding a brokerage account which is specially designed to hold investments. If you don’t have one, within minutes you can open a brokerage account online. Having an account doesn’t mean that you need to start investing money, you have the option to start your investment whenever you want to do so.
- Set trading budget for stocks
If you are an experienced trader, it doesn’t mean that you allocate more than 10% of your portfolio to individual stocks as it can expose your savings to volatility. There are several things that should be taken care of while investing your hard-earned money-
- Set a particular amount of money that you can afford to lose.
- Don’t use the money which is kept for other important expenses, don’t forget to pay expenses like down payment etc.
- Make sure to secure 10% of your income for an emergency fund, 15% into a retirement saving account.
- Know about market orders
Once you are ready with your brokerage account and budget, use your trading platform to place your first trade. You will be available with several options for order types which helps you be aware of your trading status. There are two most common types to guide you on how to buy stocks-
- Market order– Purchase and sale of stocks are made ASAP at the best price available in the market.
- Limit Order– Purchase and sale of stocks are made only when you get the same or better than a specific price you have set. While setting buy order, the limit price will be the most you wanted to pay. The order will go through if the price of the stock falls down.
- Practice with your virtual trading account
It’s always better to experience beforehand to make the trading easy. Investors can get a virtual trading experience through various tools offered by several stockbrokers online. Paper trading allows customers to test their trading capabilities and create a track record.
- Measuring returns
Not only for active traders, but all types of traders should implement this strategy while trading stocks. The primary objective for picking stocks is always to be ahead of a benchmark index. That could be the S&P 500, the NASDAQ composite index or any other smaller indexes. If an investor is unable to perform the benchmark then it is good to invest in a low-cost index mutual fund or ETF.
How to Survive Stock Trading?
While trading, there are some points that can be considered to ensure the trading process goes safe and smooth.
- Lowering risk by developing positions gradually
- Keep a good record for the IRS
- Selection of professional brokers for your trading.
On a closing note
The above-described points will help you begin your trading journey with ease. The best thing while learning to trade stocks is you will have new things to learn every day. However, consider all the risk factors and important things before putting hard-earned money anywhere.