How To Start Trading Stocks- A Complete Guide For Beginners
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Which trading is best for beginners?
Trading gurus say that ‘anyone can trade stocks, but a few can do it right.’ It is a form of investment that prioritizes short-term profits over long-term gains and involves a tremendous amount of risk.
Stock trading demands in-depth knowledge, without which you’ll dive head-on into a ‘risky’ business. Many people like you are eager to trade stocks but fall in the category of high losers just because you believed a ‘hot-tip’ from a trading guru.
So how do you begin and survive stock trading where thousands of people face losses every day? How do you keep yourself from blatantly throwing money away for nothing? Get your head straight and let’s embark on learning how to trade stocks.
What is Stock Trading?
Stock trading capitalizes on daily price fluctuationsof stock by buying low and selling high. Stock traders are short-term traders who bet on stocks and make profits in the next minute, day, or even month. It is different from buying stocks of a blue-chip company and holding them for years to garner profits.
What Type of A Stock Trader Am I?
If you’re an active trader, you use a strategy that relies heavily on market timing to place 10 or more trades per month. You are looking to use price fluctuations to turn a profit to survive in the coming days or months.
If you’re a day trader, you employ a strategy to sell, buy, or close your position (amount of particular stock you own) of the stock on the same trading day. You don’t care much about the inner workings of the market and focus on daily price fluctuations.
How Can I Start Trading Stocks?
To achieve long-term performance, invest in a mix of low-cost index funds and keep things simple. We simplify the logistics of trading stocks for you in 5 easy steps.
Step-1: Open an Online Brokerage Account
You can open an account with any broker in a few minutes. We recommend you to focus on asking yourself these key questions when opening a brokerage account:
- What do you want to invest in?
- What is the minimum amount an account can have?
- Is there any penalty if I go below the bare minimum amount?
- How much commission does the admin charge?
Step-2: Set A Budget
How can you avoid exposing your savings to too much volatility despite having a knack for trading stocks? We recommend you to use the tried-and-tested 10% rule. Don’t invest more than 10% of your portfolio in individual stocks to ward off unnecessary risks.
Remember three thumb-rules when setting your budget for the first time:
- Invest only the amount that you can afford to lose.
- Start funnelling 10-15% of your income into an emergency fund or retirement funds.
- Don’t use money that has been earmarked for near-term expenses or bills.
Step-3: Learn How to Use Limit Orders and Market Orders
Having a brokerage account and the budget in place, you can easily use the trading platform to place your stock trades. Order types dictate how your trade eventually goes through, hence it’s important to nail them down. The two most common type of orders are:
When you use a limit order, you set a specific price (limit) for buying or selling the stock. For buying order, the limit is the maximum amount you’re willing to pay and the order will only get through when the stock prices fall below that amount.
When using the market order, you should look to buy or sell stocks ASAP at the best available price in that instant.
Step-4: Practice with a Virtual Trading Account
What’s better for beginners than to trade in a low-pressure, hands-on experience via the virtual trading tools offered by many online brokers. Usually referred to as paper trading, it lets you test your trading acumen and build up a track record before the actual investment.
Use this time to learn about the intricate details of the market like company analysis, risk rating, earning reports, financial filings, and SEC reports. Don’t be afraid to use the online broker’s FAQ section for the views of professional analysts.
Step-5: Measure Your RoI
Whether a day trader or an active trader, pick a stock that gets you ahead of a benchmark index. These indexes could be the Standard & Poor’s 500, the Nasdaq composite index, etc. composing of companies based on the size, geography, and industry.
Measuring your returns against the benchmark lets you know when you’re outperforming or underperforming. When your stock’s financial performance is subpar, it makes financial sense to reassess your stock investments and invest in low-cost index mutual funds or ETF.
Tips That Every Beginner Should Follow For Safety
1. Ignore Trading Pundits and ‘Hot Tips’
Folks who pay for sponsored ads on websites promoting sure-thing stocks are not your well-wishers. Most hot tips are usually pump-and-dump rackets targeting soft victims, which is beginners like you.
2. Build Positions to Lower Risk
To avoid investor exposure to price volatility, you should take your time to buy positions by either buying in thirds or via dollar-cost averaging.
3. Keep Clear Records for Taxes & Audits
Taxes on investment gains and losses can get pretty complicated, especially when you’re not using an account with tax-favoured status. There are different rules and require you to fill out a whole lot of forms. Keeping clear records can help you in ‘tax-loss harvesting’, where you use loser investments to offset the tax paid on income.
4. Select A Broker Wisely
Pick a broker wisely based on the commission, order execution, investing style, and trading tools. A high priority for selecting a trader would be low commission if you’re an active trader, and fast order execution if you’re a day trader.
What Should You Do Next?
Don’t forget to have a proper plan in place before you delve into the world of stock trading. Remember, heavy profits in a short time always carry risks, and our pro tips will help you mitigate them.
Start your stock trading journey with intricate knowledge about the financial markets. You can just open a free account in AI Stock Profit and start trading like a pro- trader. Learn to read charts, watch price actions, and build strategies based on your observation. This helps you predict the market behaviour, apply them with paper trading, and analyze the results.