If you are at all serious about making money in the stock market, then you cannot afford to not learn how the stock market works. Learning the ins and outs of the stock market game will be to your utmost advantage.
The reality is knowing how the game works does not guarantee you results. To ensure successful trading, having a system is necessary.
Decide if this is the right strategy for you
You might consider trading stocks if:
- You’ve maxed out 401(k) matching dollars from your employer. Most 401(k) plans don’t allow participants to purchase individual stocks — instead, investors choose from a selection of mutual and index funds. But you can typically buy and trade stocks within an individual retirement account. Trading within an IRA can be beneficial: Because these accounts are tax-advantaged, taxes on capital gains may be deferred or avoided completely.
- You’ve contributed the annual maximums to a 401(k) and an IRA and are likely on track to meet retirement goals. You’re also willing and able to take on more risk by stock trading. In this case, you might want to open a taxable brokerage account with an online broker and trade within that account.
If you’re not yet steadily saving for retirement, you’ll want to start doing so before you start trading online. Maxing out a 401(k) and contributing what you can to an IRA is one of the most effective ways to build long-term wealth. Learn how to open an IRA.
Trading individual stock not only carries more risk, it requires more effort than investing in mutual or index funds. You need to actively watch your positions and understand whether and how to react to market moves. (Read more about the basics of buying stocks here.) This is not the kind of risk most retirement investors want to take on.
» Stock trading: How to begin and how to survive
If you’d rather stay largely hands-off after all, then investing in a portfolio managed by a robo-advisor might be a better fit than trading individual stocks.
Get an education
Before you trade anything, learn everything you can about investing and the markets. Mistakes can be costly.
There are a lot of free educational resources that teach how to trade through an online broker. Consider Morningstar’s Investing Classroom or one of the investing courses on Udemy.com.
Also, most stock brokers offer their own educational centers and a staff of former traders or investment advisors who can guide you. Some brokers, such as TD Ameritrade, offer their clients paper trading, a simulation of trading that is a great way to practice without money or risk involved.
While accessing learning material and staying knowledgeable and updated is non-negotiable, being able to analyse all that wealth of information is equally key. It might look like an information overload but no smart player in the stock market will overlook at the fundamentals for technical analysis.
Whether it is the company spread sheets or the balance sheets or the price charts, the insights that emerge from these are the foundation for the decisions a trader will need to make.
There will be occasional variations in the price movements that may not be grounded in the fundamentals but these are the results of short term volatility. Prices can stagger both ways in a choppy market or as the result of a sudden development in a particular stock. But it is, ultimately, the ability of a trader to analyse and interpret the technicals and charts that make him astute enough to predict the market and the stock movements.
An experienced trader will have the ability to handle data and trends to anticipate price movements across short, medium and long term and create opportunities between these intervals. It is important to be able to analyse a stock using charts that cover these in timeframes like hourly, daily and weekly movements.
Practising the Art of Trading Through Simulation
Finally, after all the theoretical stint at studying the markets and learning how to analyse, it will be time to put your knowledge to the task.
There are facilities like virtual or paper trading that eases in a beginner onto the reality of a stock market without actually running any real risks. There are stock market simulators that mimic the actual trading arena that can be used to make mock buy and sell decisions and to get a feel of trading.
Working on these software that are actually sophisticated games help aspiring traders gain confidence by making trades and analysing their actions and ensuring proper use of the software.
While entering the real world of stock trading will not allow for mistakes the way a simulator does, this mock environment is a great way to prepare you to balance your risk-reward judgment and decisions.
Select an online broker
Choose an online broker with the tools and support to match your needs. In general, beginner traders should prioritize customer support, educational resources, and account and trade minimums. In addition, consider the online broker’s stock trading software. New traders will want a platform that is streamlined, easy to navigate, and incorporates how-to advice and a trader community of peers to help answer questions.
As a stock trader, you should start by opening a trading account. For this, it is best to identify a reputed online stockbroker and get an account opened with them.
Because there are many good options, it makes sense to do a bit of research and read up on reviews and feedback of their product and services before finalising one. Also, study their terms and conditions and their service fees and charges and compare them with the competition.
Many of them offer an impressive array of features like trading tools, research material that is constantly updated and even virtual trading that can be useful for those starting out.
» Learn more: What to look for in a brokerage account
4. Start researching stocks
Your account is open, and you’re ready to start investing. What’s next? Picking stocks, of course, and that’s the hairy part.
Most traders start by doing a thorough analysis of a company, looking at public information including earnings reports, financial filings and SEC reports, as well as outside research reports from professional analysts. Much of this should be provided by your broker, along with recent company news and risk ratings.
The stock market can be really complex and demanding for even experienced professionals. To start trading, you need to take learning seriously. There is no shortage of information and tutorials online and many of these are even free. There is also a wider and specialised body of educational material in the form of financial newspapers, journals, books and online courses.
Similarly, a serious trader will ensure that he is constantly updated on a day to day and even hourly developments and trends. The stock market can be extremely fluid and volatile and keeping abreast of the latest news and updates is just as important.
News websites that have useful content related to finance and stock markets include Google Finance, Yahoo Finance and CBS MoneyWatch, to name a few. But to stay updated with more specialised content, there are sources like Bloomberg Markets, Wall Street Journal, CNN Market, Forbes Money, among others.
Then there’s essential reading for those who want to understand the stock market and its functioning. Here are a few titles that aspiring traders will hugely benefit from:
- Reminiscences of a Stock Operator by Edwin Lefevre
- The Intelligent Investor by Benjamin Graham
- Market Wizards by Jack Schwager
- Trading for a living by Dr Alexander Elder
- Winning on Wall Street by Martin Zweig
- The Nature of Risk by Justin Mamus
With the financial markets no longer working in silos and global trade impacting all stock exchanges, a serious trader must track overnight action to monitor trends and implications all around.
» Access stock research: Read our review of Morningstar
Start slowly, picking one or two stocks and investing a set amount of money that you are prepared to lose. You can plow gains back into the stock — or into other companies — but don’t add more money to the pot until you know what you’re doing and can put research into other companies.
» View our list: The best-performing stocks
Make a plan and stick to it
Investing can be emotional, particularly for those new to the game. Losing money doesn’t feel good, and it’s easy to panic and pull out at the wrong time. It’s also easy to get swept up in the excitement of what feels like a winning stock.
That’s why it’s important to plan how much you want to invest at what price, and determine how far you’re willing to let a stock fall before you get out. Using the right type of trade order can help you stay on plan and avoid emotional responses. For example, stop-loss orders trigger a sale if a stock drops to a certain price, which can minimize risk and losses. Learn more about the different types of market orders.
Open a demat account
To enter the share market as a trader or investor, you must open a demat account or brokerage account. Without a demat account you cannot trade in the stock market. The demat account works like a bank account where you hold money to use for trading. The securities you buy are maintained electronically in the demat account .
Understand stock quotes:
The price of a stock moves on the basis of any news, fundamentals, technical analysis, and so on. By gaining knowledge about these aspects, you can enhance your knowledge of stocks and stock markets. This will help you to figure out the right price to enter or exit a trade.
3) Bids and asks:
A bid price indicates the maximum price you are willing to pay to buy a stock. The ask price is just the opposite. It represents the minimum price at which the seller is willing to sell the stock. To ensure a profitable trade, it is important to decide on the correct bid and ask price.
Read more: Share market timings
4) Fundamental and technical knowledge of stock:
Study the fundamental and technical analyses of the stock to plan your trading. Fundamental analysis evaluates a security by measuring its intrinsic value. It considers various dynamics including earnings, expenses, assets, and liabilities. Meanwhile, technical analysis evaluates the stock based on the past price and volume chart of the stock to predict future potential.
5) Learn to stop the loss:
Volatility is an implicit characteristic of the share market. So, it is important for a beginner to understand the way of preventing heavy loss. While executing a trade, you need to set a stop loss price to minimise the loss. Failure to put a stop loss may damage your capital heavily.
6) Ask an expert:
The share market is unpredictable. Nobody can predict a stock price accurately. But taking advice from an expert helps beginners make the right trading decision. It guides you to make the right choice.
Read more: Day trading options
7) Start with safer stocks:
A big capital loss in the beginning may bring your confidence down. A wise choice is to start with the less volatile stocks. That may give you a slow start. But those stocks are more likely to sustain a good performance even in adverse conditions.
Share market investments can be tricky. You can take the first step to trading success by opening a demat account. Next, work on developing adequate knowledge of the stock market. This will help you to work against the odds and beat stock market volatility.