How To Trade for Beginners

So you want to start trading. Where do you start? This article will outline some basic steps to getting started in the stock market.

 

Step 1: Open a brokerage account
The first question we’ll want to explore is, where do I buy stocks? You may have seen movies with stock traders frantically shouting on the New York Stock Exchange floor, waving clipboards and yelling over each other. Very little trading actually occurs this way any longer. Today, the easiest option is to buy stocks online through a brokerage.

Opening a brokerage account is a simple process, much like opening a bank account: You fill out an account application, provide proof of identification, and choose how to fund the account (typically you can mail in a check, or fund the account electronically).

How do you choose a broker that’s worthy of your hard earned money? Although finding lower trading commissions is something to keep in mind, if you’re a beginner trader it may be worth a higher commission to choose a brokerage with high-quality customer service or educational tools. Finding a broker who will improve your trading skill level could certainly pay off higher commissions in the long run.

Some other things to consider:

  • How much money do you have to invest? Many online brokers have a $0 minimum requirement to set up a traditional individual retirement account or Roth IRA, which would be preferable if you don’t have a lot on hand to start with. For a regular brokerage account, the minimums can range from $0 to $2,000 or more.
  • How frequently will you trade? At most brokers suitable for new investors, stock trading commissions run between $5 and $10. Low commission costs will be more important to active traders, those who place 10 or more trades per month. If you won’t be trading a lot, make sure you choose a broker who doesn’t have inactivity fees.
  • How much support do you want? Some brokerage accounts have offerings of educational tools, investment guidance, stock-trading research and access to high-quality customer service via chat, phone, or email.

Be certain to do your research and compare no fewer than three brokers before making your decision. There are also some online brokerage comparison tools that can help lay out the options in easy-to-understand charts.

 

Step 2: Pick your stocks
Once you’ve set up and put some funds into your brokerage account, it’s time to dive into the business of selecting stocks. You can start by researching companies you already know and love as a consumer. If you need some information about different investing sectors, check out our sector overview pages. It’s a good idea to diversify as you invest, by choosing stocks in several different industries.

As you conduct your research don’t let unfamiliar terms and data overwhelm you. Keep the objective simple: You’re looking for companies that you’d like to become a part owner of. Warren Buffett famously said, “Draw a circle around the businesses you understand and then eliminate those that fail to qualify on the basis of value, good management and limited exposure to hard times. … Buy into a company because you want to own it, not because you want the stock to go up. … People have been successful investors because they’ve stuck with successful companies. Sooner or later the market mirrors the business.”

The company’s annual report is a good place to start. Management’s annual letter to shareholders will give you a general overview of what’s happening with the business and provide context for the numbers in the report. Then, turn to your broker’s website for information and analytical tools. SEC filings, conference call transcripts, recent news, and quarterly earnings updates should be accessible through your broker’s site. They may also have tutorials on how to use their tools, or educational resources on picking stocks.

This step is one of the most vital to successful investing. Be sure to spend the time to research and educate yourself before making a purchase.

 

Step 3: Choose how many shares to buy
Consider starting small, even really, really small, by buying just a single share to get a feel for what it’s like to own individual stocks. You should feel no pressure to buy a big bundle right off the bat. Feel yourself out, and give yourself permission to take it slowly, especially at first.  You can add to your portfolio over time as you build your confidence and become familiar with the game.

 

Step 4: Choose your order type
Don’t be put off by all those numbers and nonsensical word combinations on the order page. Refer to this cheat sheet:

BASIC TRADING TERMS
Ask For buyers: The price that sellers are willing to accept for the stock.
Bid For sellers: The price that buyers are willing to pay for the stock.
Spread The difference between the highest bid price and the lowest ask price.
Market order A request to buy or sell a stock ASAP at the best available price.
Limit order A request to buy or sell a stock at a specific price or better.
Stop order (or stop-loss order) Once a stock reaches a certain price, the “stop price” or “stop level,” a market order is executed and the entire order is filled at the prevailing price.
Stop-limit order When the stop price is reached, the trade turns into a limit order and is filled up to the point where specified price limits can be met.

And of course, there are plenty of other trading moves and complex order types. Don’t worry about any of that in the beginning (or possibly ever). Investors have built wealth relying solely on the two basic order types: market orders and limit orders.

 

MARKET ORDERS a market order means that you’ll buy or sell the stock at the current market price (the best available price). Because no price parameters are put on the trade, your purchase is completed immediately and fully filled.

Remember: Bid and ask prices fluctuate constantly throughout the day, so the quoted price may change minutes or seconds after your request. In saying this, a market order is strategic when buying stocks that don’t experience wide price swings, steady “blue chip” stocks. Volatile stocks in newer or more radical companies can be tougher to nail down a price that you’re happy with.

Keep in mind:

  • This is the type of purchase you’d use if you consider yourself a buy-and-hold investor. If small differences in price are less important than ensuring that the trade is fully executed, consider a market order.
  • “After hours” market orders (trades requested when the markets have closed for the day) are placed at the prevailing price when the exchanges next open.
  • Be familiar with your broker’s trade execution disclaimer. Some low-cost brokers bundle all customer trade requests to execute all at once, either at the end of the trading day or a specific time/day of the week. This could cause large fluctuations in your intended purchase price if the stock is more volatile.

 

LIMIT ORDERSIf you want more control over the price of your trade execution, a limit order is right for you. If a given stock is trading at $50 a share and you think a $45 per-share price better reflects what you think the company’s value is, your limit order tells your broker to wait and execute your order only when the ask price drops to that level. Limit orders can also be placed on the selling side, telling your broker to sell the shares once the price rises to the level you set.

For companies with stocks that experience wider spreads, typically smaller companies, limit orders are a good tool for buying and selling. Additionally, during periods of short-term stock market volatility, limit orders can be good ways to manage risk.

Some additional conditions you can place on a limit order allow you to determine how long you’re willing to wait for the set price to be reached:

  • “All or none” (AON): Execute only when all the shares you wish to trade are available at your price limit.
  • “Good for day” (GFD): Expires at the end of the trading day.
  • “Good till canceled” (GTC): Order is in play until you cancel it, or the order expires based on the broker’s limits.

Keep in mind:

  • Limit orders are placed aftermarket orders are filled on a first-come-first-served basis, and only if the stock stays in your set price parameters long enough for the broker to execute the trade.
  • Limit orders can have higher commissions costs than market orders. This is because a limit order that can’t be executed in full during a single trade day may continue to be filled in following days, with transaction costs charged each time.

 

Step 5: Refine and optimize your strategy
By purchasing your first stock, you are beginning an exciting journey as a trader. We at MoneyWorksMagazine hope this is the beginning of wild success! But if things get difficult, keep in mind that even the best investors go through rough patches. Keep your perspective and concentrate on what you can control when hard times hit.

The things within your control:

  • Making sure you have the right tools for the job. Refer to MoneyWorksMagazine for up-to-date market news and insights, and leverage any resources that you have to stay educated and informed.
  • Staying mindful of investing fees. Higher fees can significantly erode your returns.
  • Feeling yourself out. If you’re still unsure about picking individual stocks, you could consider mutual funds and give yourself more peace of mind.