Stock trading is all about short-term investment and profits rather than long-term gains. Traders buy and sell shares in companies in a bid to make a profit on daily changes in price.
There are two main ways to go about stock trading: active trading and day trading. Active trading is where a trader takes ten or more positions a month. The strategy of traders using this method typically relies heavily on timing the market in an attempt to make a profit from changes precipitated by short-term events.
Day trading is where investors buy, sell, and close their positions over the course of a single trading day, taking advantage of daily price fluctuations. It’s possible to see profits in mere minutes using this strategy – although it’s also possible to lose your capital just as quickly.
How to Get Started with Stock Trading
It’s really important to learn as much as possible about the mechanics of stock trading before you get started, to help you manage your risk and create an effective trading strategy. There are plenty of online courses available that can give you the information and skills that you need to begin trading.
Making a Trading Plan is something that even seasoned investors do: use it to clearly define your motive for trading and your goals, and to set the level of risk you’re prepared to expose yourself to and the daily (or weekly, or monthly) schedule you’re planning to spend undertaking trading activities and monitoring the market.
When you’re ready, it’s time to open and fund a brokerage account. This is an account specifically designed to hold your investments. Opening an account with an online broker is usually quick and easy – although it’s vital to take some time to research the broker to ensure that they are legitimate and fully regulated by a stringent, highly regarded financial overseer. Getting recommendations is a good way to assure yourself that you’ll be dealing with a credible broker.
Next, set your stock trading budget. It’s crucial to only invest what you can afford to lose, and remember that investing more than 10% of your overall portfolio in an individual stock is unwise, as it could expose your funds to too great a level of volatility.
You also need to ensure that you fully understand market orders and limit orders. A market order is where the buying or selling of the stock occurs as soon as possible at the best possible price. Limit orders concerns the buying or selling of stock only when it reaches or exceeds a specific price you’ve set. Becoming fully conversant with these orders is vital.
Different Types of Stocks
There are many different types of stocks, but the three most popular ones, in terms of stock trading, are:
Penny stocks, with their low entry point, are a good place to start for beginner day traders. This type of stock’s value tends to rise and fall quickly with speculation, and if you can exit a position before the value falls again, you could potentially make a profit.
Medium-Cap and Large-Cap Stocks
Although their entry point isn’t as low as penny stocks, medium and large-cap stocks are usually viewed as being more stable and yet can still provide some exciting trading opportunities for new and experienced traders alike.
Again, these are a good choice for beginner traders. These stocks are viewed as those that are undervalued, and trading in them is all about watching the market for signs of an imminent shift that will uplevel their value.
Assess What Type of Trader You Are
The key to potential success lies in identifying the type of trader you are. For example, will you be trading every day? How many hours will you schedule in for watching and monitoring the market? Day traders tend to watch the market all day, from the open to the close.
If you prefer to make slightly longer trades, then swing trading or position trading might well suit you best as a style.
Tips for Successful Stock Trading
Before beginning to trade for real, it is highly recommended that you practice using a paper trading account. To do this, pick a stock and then monitor the market, noting how it performs over a set period of time, three months, for example. Many online brokers also offer paper trading tools or simulators so that you can get an idea of how stock trading works in practice and to help you learn the ropes before investing funds.
Another pro tip is to measure the returns you achieve against a reliable benchmark; this could be the Standard and Poor’s 500 Index, or the Nasdaq, for example. This will allow you to assess the likelihood of your positions being able to outperform the relevant index.
As with all types of trading, it is absolutely crucial to keep your perspective and not let emotions sway your trading decisions. Self-control and self-discipline are vital.
Ways to Manage Risk When Stock Trading
Effectively managing your risk is important when stock trading, and there are several ways to do this. Firstly, it’s a good idea to build up your positions gradually, such as buying in thirds, rather than immediately investing a significant sum. This will help mitigate you against the effects of market volatility. Secondly, it’s wise to ignore any ‘sure thing’ tips advertised on the internet or being touted on social media platforms. ‘Hot tips’ should be viewed with extreme caution and, in most – if not all – cases, totally steered clear of.
It’s also a good idea to specify a set upper limit when it comes to what you are willing to invest on a daily basis and stick to this rigidly.
How to Choose a Broker
You’ll need a broker to enable you to trade stocks, and it’s important to choose with care. Firstly, ensure that the broker you’re considering is legitimate, professional, and reputable and is registered and regulated by the necessary financial bodies.
If you are new to trading, then it’s a good idea to find a broker who is prepared and able to support you as you learn the ropes and who can provide you with high-quality advice or educational tools to help you.
Take into consideration, too, the broker’s commission amount and the speed of their order execution – this last is especially important for day trading, where positions need to take place quickly. You may also want to think about the screening, stock analysis, and other tools that the broker can provide you with.
What Are the Risks Associated with Stock Trading?
Stock trading is inherently a risky investment proposition: it’s fast-moving and prioritizes short-term profits over long-term gains, and there will always be the inherent risk to traders of losing a large sum of money.
Apart from this, a major risk of stock trading is getting pulled into a scam or fraud – schemes like this are common, and even experienced traders have fallen victim to them. One of the most well-used cons by scammers is the so-called ‘Pump and Dump’ scheme. With this scam, con-artists or scam organizations will inflate the value of a stock via recommendations that are based on false or misleading information. Once the surge of interest in this stock – that they hold – reaches a high value, the scammers sell the lot.
Social media platforms or cold calls and emails are the main ways that these schemes are disseminated, and its promoters are usually highly effective at generating rumors, ‘hot tips,’ and false information designed to make the stock price skyrocket in value through the investment of the marks recruited.
So-called ‘Boiler Room Scams’ are also widespread. This con is typically run by fraudulent stockbrokers who deploy high-pressure sales techniques to persuade investors to buy stocks in dodgy companies. The scammers make money by earning a fee or commission on the stocks that they sell.
Finally, beware of ‘Churning’ scams. This is where illegitimate stockbrokers persuade investors to sell off certain shares or stocks they hold in large quantities, regardless of whether this is a sensible action to take or not. The scammers make money due to the generation of higher volumes of buying and selling (known as churn) taking place in their brokerage accounts, thereby generating big profits for themselves.
What To Do If You’ve Been Scammed?
If you’ve got caught up in a stock trading scam, then it’s important to take action quickly for a chance of recovering your investment. The recommended course of action is to get in touch with a reputable and professional firm that specializes in getting back money for their clients who have fallen victim to a scam, such as Worldwide Recovery. The team can support you through the process and have the expertise and experience necessary to track down and, in many cases, secure a refund for you.
Making contact with a trusted chargeback company promptly is the best way to get justice and have your funds returned.