I started trading my first stock a few years ago, but I didn’t really know what I was doing. It took me several months before I felt like I had the hang of it, and even longer before I was consistently profitable with my trades. But as time went on, I learned from my mistakes and developed some habits that made my trading so much more effective and easier to manage. If you’re just starting out or you want to improve your trading skills, here are eight things I wish I knew when I was first starting out.
1) What Is a Stock?
A stock is a unit of ownership in a corporation or financial asset. It represents fractional ownership of that entity and can be sold individually on an exchange, similar to how shares of a company are bought and sold through a stock exchange. There are many types of stocks, such as common and preferred stock; but they’re all designed to reflect ownership in their underlying company.
2) How Do I Start Trading Stocks?
As someone who traded stocks for more than 25 years, I can tell you that there are a few simple rules that will lead to successful stock trading. Start by evaluating your investment goals. If you’re looking to build wealth over time or looking for a way to supplement your income, you should consider investing in stocks. If, on the other hand, you’re looking for something with a quicker return (and less risk), it might be worth exploring high-yield savings accounts or bonds instead.
3) Top Questions to Ask Yourself
Choosing a stock trading platform is an important first step for most beginning investors. If you don’t want to spend your time trading stocks and want someone else to do all of that legwork for you, then you’ll probably be better off with a robo-advisor. But if you want to manage your own portfolio of stocks, here are some top questions to ask before deciding on a broker
4) What Should I Know About Trading Fees?
Trading fees will vary among brokers, but they are typically between $5 and $10 per trade. The more transactions you make in a month, on average, the cheaper each trade becomes. It’s important to look at every aspect of a brokerage’s service because it might be free to trade stocks online but have other fees that erode any benefits you may receive from reduced trading costs.
5) What Are Stop Losses and Limit Orders?
A stop loss is an order placed to sell a stock at a set price. This price can be triggered by a number of factors. For example, if you are long on GOOG, you could set your stop loss for -$10 to ensure that you don’t lose any more money if it drops further. A limit order is an order that allows you to buy or sell a stock when it reaches a certain price point.
6) Advanced Order Types
When you’re starting out, don’t do anything fancy with your order types. Stick to market and limit orders and you should be fine. That said, it is important to understand what those two basic types of orders are because they’ll form the foundation for more advanced order types like stop loss and trailing stop loss orders. Here’s a quick rundown: A market order is an instruction given to your broker that you want a stock or ETF bought or sold at whatever price it can be bought or sold at when your trade hits their books. If there isn’t a buyer (or seller) available at that price, then no trade will occur. A limit order allows you to set a specific price at which you are willing to buy (or sell) a stock or ETF from (or to) another investor.
7) What Are Margin Requirements?
When you want to trade on margin, which means borrowing money from your broker to buy a stock (or other investment) using part of its price as collateral, you need to maintain a minimum amount of equity in your account. To do that, an online brokerage firm generally requires that your share balance is worth at least 25 percent of what you’ve borrowed. This is known as a maintenance margin or equity requirement. The equity requirement must always be higher than your initial deposit amount.
8) Who Do You Trust?
You don’t need to be a professional investor to trade stocks online. In fact, you don’t even need to know that much about how stocks work—many of today’s best brokers will do most of your homework for you.
You shouldn’t trade stocks if you don’t know what you’re doing. There, I said it. But there is a world of difference between knowing your way around a stock quote and mastering stock trading. So if you are not yet ready to trade on your own, use our guide to selecting an online broker that can help you get ready for when you are—and who can provide additional research and insight as well as make trades for you when it comes time to take things live. Happy hunting!