How to Trade Stocks for Beginners
More than two-thirds of millennials surveyed said they are interested in learning how to invest. Sixty-one percent think it's a good time to start investing, while 20% plan to begin investing. Nearly 30% are already playing the stock market.
First of all, to invest, you should have spare money that you don’t need for living expenses. I am talking about money you have saved specifically for investment.
DO NOT use it to trade in the hope that you will win a big ticket like in the lottery if you did not pay for your main expenses, yet (insurance, mortgage, loan, food, utilities, services).
To see a sizable return on your investment money, you have to have at least $5,000-$10,000. Why is that? It’s simple math.
Let’s say you bought the stock and spent $500. If you did some research and have chosen the right stock in the right market condition, the stock is up 10%. You have an unrealized gain of $50. Will $50 make a big difference in your budget if you sell it? Probably not. However, if you bought the same stock and spent $5,000. You can sell it and have a 10% gain on your investment. In this case, it is $500.
Buy, sell, or hold?
The process of trading stocks is fairly straightforward. It starts with a stock’s ticker symbol, which is a 1-5 letter code that uniquely identifies each stock. For example, Apple’s ticker symbol is AAPL.
TIP: AN EASY WAY TO FIND A STOCK’S TICKER IS TO GOOGLE OR YAHOO A COMPANY’S NAME FOLLOWED BY THE WORD “TICKER.”
When you’re ready to buy a stock, you’ll get a quote of the stock’s current price from your broker or Google/Yahoo Finance. With online brokers, you’ll pull up the broker’s trading page and enter the ticker symbol, how many shares you want to buy, and using what method.
Find the best brokerage account for beginners. I found that eTrade and TD Ameritrade are suitable trading platforms. Other people like Schwab or Interactive Brokers (I found it problematic), and many youngsters like Robinhood which I DON’T recommend. There are more sophisticated platforms but they are not for beginners.
Look at the online trading app Robinhood, which tends to attract new, younger investors, which has swelled to 13 million over the past year, up from 10 million at the end of 2019.
But Robinhood investors might want to review the Best Online Brokers list. Robinhood is rated highly in two categories: Mobile Trading Platforms/Mobile Apps and Margin Investing/Margin Interest Rate. But it ranked last in Overall Customer Experience.
TIP: IN THE U.S., THE STOCK MARKET OPENS AT 6:30 AM, PST / 9:30 AM, EST AND CLOSES AT 1 PM, PST / 4 PM, EST.
Buying methods include:
- at a current market price (called a market order) or when the stock reaches a specific price (called a limit order).
For example, say you have $500 in your brokerage account and your analysis indicates Apple’s stock is poised to rise and you decide to buy three shares.
At your online broker’s website or app, you sign in and press “Trade.” On the trade page that appears, you enter the ticker symbol AAPL and 3 shares for the number of shares you want to buy. On that same page, you’ll see that AAPL’s quote is at, perhaps, $150 per share. So, your investment would amount to about $450 and with $50 of cash left in the account.
If you choose the market order option, you will pay whatever the stock's current price is. With a market order, you lose the difference between the price the sellers want and the price the buyers offer because, with the market order, you are essentially buying for the price that sellers want in most cases. Sometimes the difference could be significant depending on trading activity. So, what is a better way?
- I am buying stocks using a limit order. For instance, I see the current market price of AAPL is $150/share. If I buy cheaper, I might have a higher profit. Considering that the price of each stock is not constant during the day, I assume it might fall a little, I place the limit order for $145/share. If I was right, the broker will buy it as soon as it is $145 or less per share. If I was wrong, and the stock did not fall, I will wait until it will (maybe in the next few days).
You can place an order for TODAY only or until a specified date (duration). If you have specified “today only”, and if the stock was not traded today, your order will EXPIRE. So, I prefer to set at least 60 days duration.
Most brokers give you a chance to review your trade order before execution to make sure you got it right before hitting the trade button. Once you hit the button to activate the trade, your order goes to market makers who match your buy order with the nearest price at which investors are willing to sell Apple stock.
Confirmation that your buy or sell order is filled, or completed, comes in a matter of seconds.
Now you own 3 shares of Apple that you bought at about $150 a share. You’ve now got about $450 invested in Apple stock and $50 left in your account to buy other stocks.
Step Two: Hold
Once you own a stock, you can regularly monitor its progress in the stock market. It only takes seconds to check how the market is doing and determine if your stocks are rising or falling.
If Apple’s stock price rises the next day to $155, the value of the 3 shares you own increases by $15 to $465. That’s a 3.3% increase from the day before, and that’s the amount of profit you have on paper.
Keep in mind, you don’t realize any profits on your trade until you sell the stock and lock in your gains or losses.
TIP: It’s helpful to think of your profits/losses on trade in terms of percentage up or down, not dollar value. This is because stocks trade at different prices-–so being $10 up on a $50 stock (+20%) is much different than being $10 up on a $250 stock (+4%).
Step Three: Sell
If you have decided to sell your three Apple shares when they were trading at $155 each, you’d realize a gain from the trade and end up with $465 from the sale plus the $50 you had sitting in cash, for a total of $515.
- Keep your losses small, and don’t let them snowball because you’re holding out hope for a big turnaround—stocks headed lower tend to continue in that If the stock is not generating sizable dividends, I usually place the “stop order”. So, when the market price falls below 2% of my purchasing price, the stock will be sold automatically. In this case, I will incur only a 2% loss and will research the other stocks because I was wrong on this one.
- If I want to realize my gains, I place either a stop order very close to the “ask” price by buyers, or a limit order, very close to a “buy” offer from the sellers.
If the “ask” price is $154.5 and the “buy” price is $155.5, the difference is $1.00. Being a seller in this instance, I’d rather sell for a higher price, the “buy” price that all sellers offer. So, my limit order would be:
- Sell 3 shares of AAPL for $155.5, duration 60 days. You don’t know if it will be executed today or not.
- If I need to sell immediately, I will place a market order that will be executed immediately usually for the asked price of $154.5 or the current price.
TIP: Always know how much you’re willing to lose on a trade before you make it and cut your losses when it hits that point. Investor’s Business Daily service, for instance, recommends cutting your losses when a stock falls 7% below the price you paid for it—no questions asked.
1 Trading stocks is simple and transparent. The first step is choosing a broker that will facilitate the trade when you enter your order.
2 When you buy a stock, you own a share of that company. The stock price will move every day the market is open (Monday to Friday from 9:30 AM to 4:00 PM EST), so be sure to check the prices of your stocks regularly.
3 Your gains and losses in stock are not realized until you sell it, and then your account will be credited with either a larger amount (gain) or a smaller amount (loss).
If those calculations and investment terms did not scare you away but inflated your interest in trading, you are on the way to making money in the stock market. Otherwise, if you feel it is well above your head, don’t risk your money. Get in touch with a good financial advisor.
By the way, there is a good way to check your trading strategy and learn how to trade using so-called “paper trading”. Many brokerage firms offer it for your convenience. Play with paper money until you will gain confidence.
No doubt, there are more sophisticated trading options that you may learn later but all basics described above will give you a good start.
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Disclaimer: This article is intended to provide information to interested parties. As I have no knowledge of individual investor circumstances, goals, and/or portfolio concentration or diversification, readers are expected to complete their own due diligence before following any investment strategies or rules mentioned or recommended. Please excuse any typos. I assure you that I will do my best to correct any errors if they were overlooked.