Education Articles
How to Start Trading Stocks |
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As with any new venture, your first step before stepping in the trading foray should be research and education. This article will help
you identify what you should know and the questions to ask yourself before you begin.
Step 1: Learn the language.
Trading can be exciting and very rewarding. It can also be very complicated. Before you start trading or talk to a broker, you need
to have a solid understanding of finance terminology and stock trading terminology. Do some online research, take a seminar or class
on investing and review online financial sites. You'll need to understand common terms such as ‘price-earning (PE) ratio,' ‘margin,' ‘option,' ‘earnings
per share,' ‘leverage,' and much more before you can trade responsibly. Sites such as Investopedia.com, TheStreet.com, and
Stocks.about.com could be good resources for getting started.
Step 2: Select a broker.
As a beginner, your most important decision is likely to be your choice of broker. You will need to work with a broker to purchase
stocks, bonds, mutual funds and other investments. By opening an account with a brokerage firm, you'll be able to execute your buy
and sell orders quickly and efficiently.
Before you open an account, you'll need to compare stock brokers and decide what type of broker is best for your needs. Brokers
are typically categorized as traditional (full-service) or discount. Traditional brokers provide a wider range of services that usually
includes one-on-one access to a personal stock broker. This person will typically provide investment ideas and advice, prepare reports
about your portfolio, give you a run-down of how well your investments are doing and generally be available with a single phone call
or email to buy or sell. If you are just starting out, this may be the best option for you.
Discount brokers are a good option if you are a "do-it-yourself" investor. This type of brokerage generally does not offer
investment advice or provide personalized service. A discount stock broker will simply execute buy or sell orders you designate.
Most of your trading will be done online, or by the first available broker if you decide to trade by phone.
All brokers will charge a commission or fee to conduct your business. You should not fear commissions or fees, but you should thoroughly
understand them. What you pay will vary by type of broker (traditional vs. discount), as well as vary significantly between similar
brokerages. Ask yourself the following questions before you sign an account agreement:
- What services do I need or want from my broker? (i.e. investment advice, stock research, quick response to buy and sell orders,
telephone or online service, frequent or infrequent status reports, etc)
- What are my financial needs and performance expectations? Be honest. A broker providing guidance will need honest expectations
to properly advise you.
- How much cash do I have available for a minimum investment?
- What is my risk tolerance?
Be sure you know your personal investment needs and understand all fees and commissions required by your broker before you sign.
Make no assumptions and do not settle for verbal assurances. If it's not in writing, it's not guaranteed. Remember, two brokers seldom
offer the exact set of tools, research and services. Be sure your selected broker offers what you need and want, and their resources
are easy for you to understand, access and use.
Step 3: Open a Brokerage Account.
Once you have done your homework and selected your broker, you are ready to open an account. Minimum investments will vary by brokerage,
but can range from a few hundred to a few thousand dollars. Determine how much you can afford to invest. Keep in mind this good rule
of thumb from famed money manager Peter Lynch: If you will need the money in the next six months, you probably shouldn't invest it
at this time.
There are three typical account types available: Cash Accounts, Margin Accounts, and Discretionary Accounts.
- Cash Accounts: A cash account is the simplest type of brokerage account and is likely the first you will open. Most brokers
will require you make a deposit with enough money to cover your first trade before they will open the account. Most will place
this in an interest-bearing account until you are ready to make your first trade. When you place a buy order, the money will be
transferred to the brokerage account to cover the trade. When you sell a stock, the broker will deposit the proceeds in the account
so cash is available for the next purchase (unless you direct them otherwise). Tip: Even if your broker allows you to pay
for trades with a credit card, avoid this option. Very few stocks can overcome the interest rates charged by credit card companies!
- Margin Accounts: Buying stock margin loans allows you to borrow up to 50% of the value of the stock from your broker when
you make a purchase. Be wary of purchasing on "margin." If the stock value falls below the value borrowed, you will be
responsible for paying back the entire loan at one time. You then need to deposit cash into the account to raise the value or sell
the stock immediately and pay off the loan.
- Discretionary Accounts: Discretionary accounts give a broker or financial advisor the right to buy and sell your stocks
without notifying you. For the average person, these types of accounts are inappropriate and very risky. Essentially, you have
signed over control of your finances to another person.
When you open a personal brokerage account, you will need to sign a new account agreement. Carefully and fully review this agreement—it
determines your legal rights regarding your account. Don't be afraid to ask questions. Do not sign unless you thoroughly understand
it and agree with the terms and conditions it imposes on you. Again, make no assumptions. If it is not in writing, it is not guaranteed. TIP:
Ask for a copy of everything your brokerage prepares for your account. (For more information on opening a brokerage account, read How
To Open a Brokerage Account.)
You may also be asked to sign a legally binding contract to arbitrate any future dispute between you and the firm or your personal
broker. By signing this agreement, you give up the right to sue the firm or your personal broker in court. Refer to the Securities
and Exchange Commission at www.sec.gov for more information.
Step 4: Prepare to trade.
By now, you are well on your way to begin trading. Before you make that first purchase, be sure you have decided how you will select
your trades. There are quite a few methodologies out there, so familiarize yourself with all available resources.
At Trending123, we recommend technical analysis of stocks and commodities. Stock market technical analysis is a method of analyzing
a tradable security, such as stock, by looking for patterns and relationships in statistics like price history and trading volume
in order to predict future market trends for that security. It does not look at "fundamentals," e.g., a company's earnings,
assets, and debts. In a nutshell, it does not care whether a stock is overvalued or undervalued, but only where its price will go.
The other most common analysis method is fundamental analysis, which looks at everything behind a tradable security. For example,
a fundamental analysis looks at the underlying company's balance sheet in order to determine its future potential in light of the
company's financial condition. It doesn't care about market price in and of itself, but rather whether the price reflects the intrinsic
value of the company.
Whether you do the research yourself, or rely on brokerage research, know what you are buying and why before taking the plunge.
No matter your trade picking strategy, be sure that you never invest in a product you don't fully understand.
Remember, your money is important to you and decisions regarding your financial future should not be taken lightly. Educate yourself,
align with a broker who best fits your needs and goals, and monitor your investment regularly. Click here for advice on avoiding
the Top 10 Novice Trading Mistakes.
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