Stock trading, once the sole domain of Wall Street, has become easily and affordably available to all in the last 20 years, thanks to online brokerages. Prior to online trading, people relied on the services of a stock broker, who would make buy and sell orders on the customer's behalf. Today, individuals are able to execute buy and sell orders themselves in a fraction of a second using computerized trading services.
While buying and selling stocks — which are shares of ownership in a company — can make you a fortune, it's just as easy to lose that money. To become a successful trader, it is crucial that you become familiar with the tools of trading, the theory behind it and the daily reports that drive market shifts.
Stock market basics
Like all businesses, the stock market operates on a system of supply and demand. When you purchase stock, your hope is that other traders become more eager to own a share of that company over time. When the stock's popularity increases, traders will compete to own it and bid up the sale price. In theory, a rising share price is the result of improvements in the firm's value and potential, also known as its fundamentals. In reality, stock prices change for any number of reasons, only some of which investors are able to predict. [What is NASDAQ?]
Researching and choosing stock
There are two main schools of thought regarding how to choose stocks. The first, called fundamental analysis, relies on the use of a company's financial reports and public statements to analyze the health of the business. Balance sheets, income statements, yearly and quarterly earnings, and news releases from the company are all important tools for a fundamental analysis. Fortunately, those reports are easily searchable online, as are tutorials on how to read them, such as those offered by the SEC. Market and industry trends, media publications and historical analysis also play a role.
The second school of investing is called technical analysis. Technical analysts believe that swings in stock prices follow patterns that traders can learn to detect and profit from. Technical analysis is not as widely accepted or practiced as fundamental analysis. However, many traders use a combination of the two techniques to choose stocks. Choosing a company with sound fundamentals and then occasionally trading on a technical indicator is a safer strategy that relying only on technical indicators.
Before deciding to buy or sell any stock, you should thoroughly research the company, its leadership and its competition. Sites such as Yahoo! Finance offer excellent compilations of news stories, financial statements and stock price histories (called charts) that provide insight into the company. Stock sites also display professional analysts' ratings of a given stock, indicating whether that analyst advises a trader to buy, hold or sell a stock. Examining the records of those analysts may help you assign value to their opinions.
Personal stock-trading services
Before you can begin buying and selling stocks, you need to decide which online trading service you want to use. Rob Beauregard, director of public relations for Fidelity Investments, says choosing your brokerage partner carefully can directly affect your bottom line.
"The best piece of advice for an online trader is to choose your brokerage partner with open eyes," Beauregard told Business News Daily. "Know their pricing, service, investment choices, education and research resources, and securitypractices. No one should just rely on their gut instincts or the tip from their friend or neighbor anymore. The resources easily accessible to them to generate and validate investing decisions are too valuable not to utilize."
As a beginning trader, you may wish to start with a company that can provide personal advice for your investments. As your skills grow, you may wish to ensure that the brokerage offers tools to engage in advanced trading, including short selling and margin trading. The following are popular services known for the quality of their services and support:
- TD Ameritrade
Some companies, such as ShareBuilder, also offer functions similar to banks, with ATM cards that give you access to noninvested money, or the option to invest your cash in a money market fund to earn a slightly higher return than a traditional savings account.
If you prefer to be a do-it-yourself trader, you can make use of discount online broker services. These services allow you to buy and sell not only stocks, but also options, mutual funds, exchange-traded funds, fixed income funds, bonds, certificates of deposit, retirement accounts and more. You ultimately get to make the final decision on each investment and whether or not to buy or sell, and you don't need a large sum of money to start.
Practice your skills
Learning to trade begins with education. Reading the news and financial websites, listening to podcasts and watching investing courses are all excellent ways to gather information. Joining a local investment club will give you the opportunity to discuss your education with more experienced traders. A list of some recommended resources is available at the end of this article.
However, reading is no substitute for experience. A zero-risk way to practice your new skills is with an online stock simulator, such as those available through Investopedia, MarketWatch and Wall Street Survivor.
Another option is to practice trading in the penny stocks market. Many companies offer stock shares valued at a penny a share, which makes it easier to practice leveraging the trends of the market and making a profit.
Tips for beginning investors
Online stock trading may be daunting for beginning traders, but with the right foundation and a gradual investment of funds, you can expect to see significant returns. Here are a few tips to help you make smart investment decisions.
Do not invest money you cannot afford to lose. Make intelligent decisions about what you can afford to invest, and begin slowly. Once you have realized gains from one or two stocks, you can begin to reinvest those gains — which have now become your principal — into other stocks and funds.
Diversify your investments. While stocks offer the attraction of seemingly easy money, they are unreliable sources of income. Consider investing at least a portion of your money in an electronically traded index fund, which holds many stocks. ETFs can be purchased and traded like stocks, but because they are diversified, losses in a given sector may be cancelled out by gains in another.
Don't trade if you don't have time to research. Stock trading should be approached as a part-time job. Like any job, your skills will suffer if they are not frequently practiced. In this case, "practice" means reading the latest news and financial reports on companies in which you are considering investing. If you do not have time to practice, consider investing in an index fund instead, or hand your investments over to a qualified professional.
Make a plan. Irrationality is the enemy of stock trading. Before buying a stock, consider what circumstances would lead you to sell it. For example, you can decide that you cannot risk more than 20 percent of your investment. Many brokerages have the ability to schedule buy and sell orders based on predefined criteria, such as a percentage drop (or increase) in your original investment. Scheduling limit orders takes the emotion out of your finances.
"Have a plan and stick with it," Beauregard said. "Know why you are buying a particular security, how much to invest, what your expected return is, and have an exit strategy."
Don't buy high. Stock may be trending upward at an extreme pace, in which case you shouldn't always jump to buy stock. Wait for opportunities to get a lower entry point.
Don't give in to fear. Something many beginning stock traders deal with on a daily basis is the fear of losing money invested. While you may see stock values plunge for a company, don't despair or pull your money out. Stock trading is a long-term investment and requires patience and perseverance.
Remember, reading online articles does not make you qualified to trade. Set aside six months to practice trading with real-world data before investing your money. Read the classics of investment literature. Watch or participate in a class on finance and investing on YouTube or through a massive open online course (MOOC). Further information for beginning traders can be found in the following books and articles:
- "The Intelligent Investor" by Benjamin Graham (HarperBusiness, 2006)
- "What You Need to Know Before You Invest" by Rod Davis (Barron's Educational Series, 2003)
- "Contrarian Investment Strategies" by David Dreman (Free Press, 2012)
- "The Art and Science of Technical Analysis" by Adam Grimes (Wiley, 2012)
- Investment MOOCs (MOOC List)
- Stocks and Bonds: Risks and Returns (Stanford)
- 5 Mutual Funds for Socially Responsible Investors (Kiplinger)
Additional reporting by Ryan Goodrich, Business News Daily contributor.
Originally published May 17, 2013. Updated March 19, 2015.