Every trader and investor should learn to trade stocks. Whether you hold shares for a few minutes or a few years, knowing the basics will save you money.
Most people never learn to manage their 401K’s selections, let alone trade individual stocks. They have it drilled into their heads that you cannot beat buy and hold. Day trading is a scam. You will lose money.
Trading isn’t for everyone. Some people don’t have the time or patience to learn the skills. And it is a skill. Thing is you don’t have to be a day trader to benefit from learning how to trade. Trading stocks allows everyone from Warren Buffet to the guy with one share to do just a little bit better.
Let’s knock off some of the common myths you hear about trading stocks.
- It requires a lot of time. Actually, you’ll find the basics in this article. You can do more, but it isn’t necessary.
- You can’t beat buy and hold. In the long run, investors won’t beat it by much. But even shaving a few pennies per share will put some money in your pocket. Do it enough times with compound interest, and you’ve got a few extra fancy meals.
- Trading = Day Trading. Definitely not true. Trading just means you control the way you enter and exit positions. Mutual Funds give you the closing price at the end of every trading day. With some basic techniques, you can get better prices during the active session.
- Only Brokers Trade Stocks. Technically that’s true. However, you can use online brokers to execute your orders for you. This effectively makes you the trader.
One of the best benefits of trading is control. By learning to trade, you control what price you enter and exit a position. This allows you to put time on your side. You can wait for the market to come to you rather than taking what it gives you.
Steps to Trading Stocks
When you’re ready to start trading stocks, you can follow these easy steps.
- Choose a broker – Many online brokers offer competitive platforms, fees, stock selection, and customer service. Pick the one most appropriate for you. Make sure it works with the account you plan to use.
- Fund the account – With new accounts, you can fund them a few ways. Brokers will allow you to roll over old 401Ks into self-directed accounts. You can also use paycheck deductions through your employer if they offer self-directed accounts. Lastly, you can fund accounts through good-old-fashioned bank transfers
- Select a stock – Do your research on which stock you want to trade. Decide whether you want to buy a stock or sell a stock short. Short selling requires your account to be margin eligible.
- Size your position – One of the most critical elements of trading is risk management. This starts with sizing your trade. Make sure you don’t hold so much of one position it could wipe out your account. If you don’t have a specific plan, you can use a rule of thumb such as no more than 5%-10% of your total funds.
- Place an Entry Order – You have a few options for orders. You can place a limit, market, or stop order. A limit order only fills at your price or better. Market orders fill at the best price at that moment. Stop orders trigger either limit or market orders once the stop price has been breached. You can also scale your trade by buying in at regular intervals. This is known as dollar-cost-averaging.
- Exiting your trade – When you’re ready to exit your trade, you will sell your long positions and cover short positions. You don’t have to exit all of your shares at once. Many traders will often sell at regular intervals to scale out of a trade.
- Managing your trade – Sometimes your trade will go against you. You need to know where you plan to be wrong. Before every trade, you must have an exit strategy. Know your targets and where you take a loss.
Stock Trading For Wealth
Many traders have found success with trading stocks over the years. It’s true. 90% of retail trading accounts blow up within 6 months. This doesn’t have to be you. All seasoned traders work on their skills. They treat trading as a business, not simply a pastime.
To be a successful trader, you need to define your style. Figure out which method of trading works best for you. The trading style should match how much time you can dedicate, your skill level, and your interests.
Additionally, you need to practice. There’s no shame in working with a demo account to learn the ropes. Even if you have never placed a trade before, demo accounts can help. You can make mistakes without spending any of your own money. Once you build up some success and confidence, you can trade for real.
Above all, have patience. Learning to trade successfully doesn’t come overnight. Many traders take years before they turn a profit. Some even blow up several accounts. Manage your expectations, practice, and do your homework. Realize that even making a few hundred dollars on a $2,000 account is incredible in one year.
Stock Trading Risks
No matter how many times you get a trade right, you will have some losers. You need to be prepared for potential losses. Sometimes they come in strings. Anything you trade can be lost. You shouldn’t be trading with money that you can’t afford to lose. Don’t let one bad trade cause you to have cascading failures. Poker players call this going “On Tilt.” Traders call it “revenge trading”
As noted above, the biggest mistake traders make is overleveraging. They take too large of a position in hopes of a big payout. Instead, they take a major loss that wipes them out. If your position keeps you up at night, then you’ve overleveraged.
Trading stocks can be both fun and exciting. If you don’t trade stocks with a plan, then you’re simply gambling. By first practicing, you give yourself a chance to test out ideas. This lets you find what works without costing you a dime.
Even if you just want to make your investments a little better, trading will help. Learning how to place limit orders will allow you to enter positions a few pennies better than you might have gotten otherwise. Over time, these pennies will add up.