The Complete Beginner's Guide 2019 to Stock Trading

 

Not everyone who buys and sells stocks is a stock trader, at least in the nuanced language of investing terms. Most investors fall into one of two camps. Depending on the frequency in which they transact and the strategy driving their actions, they’re either “traders” (think Gordon Gekko in the movie “Wall Street”) or “investors” (as in Warren Buffett). It's crucial to learn how to trade stocks online before you wade into any type of investment or investment strategy. This "how to trade stocks for beginners" guide will give you a starting point and walk you through several processes. 

Summary:

  • What is Stock Trading
  • How to Start Stock Trading
  • How to Trade Stocks for Beginners
  • How to Trade Stocks with Small Capital


What is stock trading?

The term stock trader typically refers to someone who frequently buys and sells stocks to capitalize on daily price fluctuations. These short-term traders are betting that they can make a few bucks in the next minute, hour, days or month, rather than buying shares in a blue-chip company to pass along to their grandkids someday.

Stock trading can be further refined based on certain criteria:

  • Active trading is what an investor who places 10 or more trades per month does. Typically, they use a strategy that relies heavily on timing the market, trying to take advantage of short-term events (at the company level or based on market fluctuations) to turn a profit in the coming weeks or months.
  • Day trading is the strategy employed by investors who play hot potato with stocks — buying, selling and closing their positions of the same stock in a single trading day, caring little about the inner workings of the underlying businesses. (Position refers to the amount of a particular stock or fund you own.) The aim of the day trader is to make a few bucks in the next few minutes, hours or days based on daily price fluctuations.


How to start stock trading?

If you’re trying your hand at stock trading for the first time, know that most investors are best served by keeping things simple and investing in a diversified mix of low-cost index funds to achieve — and this is key — long-term outperformance.

That said, the logistics of learning how to start trading stocks comes down to three steps:

1. Open a brokerage account

Stock trading requires funding a brokerage account, a specific type of account designed to hold investments. If you don’t already have an account, you can open one with an online broker in a few minutes. If you’re going to be trading stocks frequently, you’ll want to pay close attention to the costs associated with each trade — called the broker’s stock-trading commission.

There are 2 types of accounts available:

  • Individual stock trading account: offers your quickest and least expensive path to buying stocks, funds and a variety of other investments. With a broker, you can open an individual account that offers access to the largest stock exchanges in the world and different asset classes, from individual stocks to stock indexes and exchange-traded-funds, but also commodities, currencies, and cryptocurrencies. 
  • Managed and/or social account: offers the benefits of stock investing but doesn't require its owner to do the legwork required to pick individual investments. All trades made by the manager are reflected proportionally in the investors' accounts.

2. Set a budget for stock trading

We have some advice if you'll ever want to learn how to trade stocks online: Even if you find talent for trading stocks, allocating more than 10% of your portfolio to individual stocks can expose your savings to too much volatility. Other ground rules to manage risk: Invest only the amount of money you can afford to lose, don’t use money that’s earmarked for near-term, must-pay expenses (like a down payment on a house or car, or tuition money) and ratchet down that 10% if you don’t yet have a healthy emergency fund and at least 10% of your income funneled into a retirement savings account.

The amount of money you need to begin day trading depends on the type of securities you want to buy.

Stocks typically trade in round lots, or orders of at least 100 shares. To buy a stock priced at $60 per share, you will need $6,000 in your account. A broker may let you use only collateral, but you still need to come up with the other $600.

 

Wondering how much capital you need to trade stocks? Open a risk-free demo account accessible from any device and operating system and practice trading strategies before you learn how to trade stocks in the real market. 

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3. Get familiar with order types

Once you have your brokerage account and budget in place, you can use your online broker’s website or trading platform to place your stock trades. You’ll be presented with several options for order types, which dictate how your trade goes through. We go through these in detail in our guide for how to invest in stocks, but these are the few most common types:

  • Market order: The simplest and most common way to buy shares online is a market order. Market orders simply tell your broker that you are willing to take whatever price is presented to you when your order is executed. These orders are often subject to the lowest commission since they are the easiest to execute.
  • Limit order: limit order allows you to limit either the maximum price you pay or the minimum price you are willing to accept when buying or selling a stock. The primary difference between a market order and a limit order is that your stock broker cannot guarantee that the latter will be executed. Imagine you want to buy 300 shares of ABC stock. The current price is $55 per share. You do not want to pay more than $52, so you place a limit order set to execute at $52 or less. If the stock falls to that price, your order should be executed.
  • Stop order: A stop order automatically converts into a market order when a predetermined price is reached (this is referred to as the “stop price”). At that point, the ordinary rules of market orders apply; the order is guaranteed to be executed, you simply don’t know the price – it may be higher or lower than the current price reported on the ticker symbol.
  • Trailing stop order: A trailing stop order can be used to lock-in profits while potentially benefiting from the increased rise in stock price. Imagine you purchased 500 shares of ABC at $50 per share.  The current price is $57. You want to lock in at least $5 of the per-share profit you’ve made but wish to continue holding the stock, hoping to benefit from any further increases. To meet your objective, you could place a trailing stop order with a stop value of $2 per share.


How to trade stocks for beginners?

Wherever you fall on the investor-trader spectrum, these tips for how to trade stocks can help ensure safe trading:

1. Practice, practice, practice to learn how to trade stocks online

But not with real money. There’s nothing better than hands-on, low-pressure experience, which investors can get via the virtual trading tools offered by many online stock brokers. Paper trading lets customers test their trading acumen and build up a track record before putting real dollars on the line. You'll need a stock market simulator or stock market application like MetaTrader 5 that will allow you to connect to your stock trading account from any device: desktop (MAC or Windows), mobile (Android or iOS) or browser (Chrome, Internet Explorer, Firefox, Safari and many other).  

2. Learn how to read the charts

Learn the basic charting rules that will help you understand when and how to trade stocks:

  • Only buy stocks at the major long-term support area. We want to buy stocks at relatively cheap prices (compared to historical values), not expensive prices. Investment trades don't require a stop loss, but you should have a price in mind where you get out if conditions don't improve for the stock. An investment doesn't mean you hold it forever if it doesn't do what you expect. Have a low tolerance for stocks that keep dropping.

Also, have an exit plan for how you will exit a profitable trade. Define how and why you will exit. Since we used support to get into the trade, you may consider exiting just below a long-term resistance level. Once you are out of your trade, don't worry about what the stock does after. Take the money and invest in other stocks, going through the same process again, as discussed above.

This brings us to another technical advice on how to trade stocks for beginners:

  • If buying at support, and planning to exit just below resistance, the upside potential should outweigh the downside risk (to $0) by at least 2:1. That means that if you buy at $5, you should be reasonable able to get out of the stock at $15 or higher. In an absolute worst case you lose $5 a share (but since we don't hold losers forever, this is highly unlikely), but based on the historical chart it is quite feasible to make $10/share or more. This is known as the risk/reward ratio.

3. Measure your returns against an appropriate benchmark

This is essential advice for all types of investors — not just active ones. The bottom-line goal for picking stocks is to be ahead of a benchmark index. That could be the Standard & Poor’s 500 index (often used as a proxy for “the market”), the Nasdaq composite index (for those investing primarily in technology stocks) or other smaller indexes that are composed of companies based on size, industry and geography. Measuring results is key, and if a serious investor is unable to outperform the benchmark (something even pro investors struggle to do), then it makes financial sense to invest in a low-cost index mutual fund or ETF — essentially a basket of stocks whose performance closely aligns with that of one of the benchmark indexes.

4. Choose your stock trading partner wisely

To trade stocks you need a broker, but don’t just fall for any broker. Pick one with the terms and tools that best align with your investing style and experience. A higher priority for active traders will be low commissions and fast order execution for time-sensitive trades (like our picks for best online platforms for active traders/day traders). Investors who are new to trading should look for a broker that can teach them the tools of the trade via educational articles, online tutorials, and in-person seminars. Other features to consider are the quality and availability of screening and stock analysis tools, on-the-go alerts, easy order entry, and customer service.


How to trade stocks with small capital?

Take into consideration to trade stocks in Margin: Borrowing for a Chance at Bigger Returns, the best answer to how to trade stocks with small capital.

margin account amplifies an investor’s buying power by allowing her to borrow money to trade stocks. Through leverage, an investor can attain higher gains. Without it, an investor’s spending is limited to the amount of money deposited. On the flip side, margin trading exposes traders to losses. 

Leverage is actually a very efficient use of trading capital and is valued by professional traders precisely because it allows them to trade larger positions (i.e. more contracts, or shares, etc.) with less trading capital. Leverage does not alter the potential profit or loss that a stock trade can make. Rather, it reduces the amount of trading capital that must be used, thereby releasing trading capital for other trades. For example, a trader that wanted to trade stocks at $20 per share would only require perhaps $5,000 of trading capital, thereby leaving the remaining $15,000 available for additional trades.

In addition to being an efficient use of trading capital, leverage can also significantly reduce the risk for certain types of trades. For example, a trader that wanted to invest in ten thousand shares of an individual stock at $10 per share would require $100,000 worth of cash, and all $100,000 would be at risk. However, a trader that wanted to trade stock with exactly the same potential profit or loss (i.e. a tick value of $100 per 0.01 change in price) using the stock CFDs (highly leveraged markets), would only need a fraction of the $100,000 worth of cash (perhaps $5,000), and only the $5,000 would be at risk.

Understanding how to trade stocks online is important, but if you need some help MetaTrader 5 AM Broker provides access to the most popular stock market simulator, as well as advanced research and charting tools to learn stock trading for beginners. 

Wondering how to trade stocks without capital also? Open a risk-free demo account accessible from any device and operating system and learn how to trade stocks online without capital.

 

>> Let's get you started!

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Categories:  Investing