The stock market continues to be one of the most intriguing and enticing ways to make money in America. Even given the considerable risk involved – especially given stock market crashes in 2001 and 2008 – people want to get involved in trading and leverage their earnings for a better lifestyle and comfortable retirement in the golden years.
If you want to begin trading stocks, you are lucky – it’s perhaps easier to trade today than it’s ever been before. Here, I’ll provide you with a guide to trading stocks from a beginner’s perspective so you can begin investing in no time at all.
Overview of the Stock Market
First, we’ll talk about the market itself. What does trading stocks actually mean?
When you own a share of a stock, you own a (small) piece of the company and its profits. You can keep that share – you may have voting rights, or dividends attached to it – or you can sell it and profit if the price of the share is more than what you paid for it.
You do this (most commonly) on a stock exchange, or a place where buyers and sellers meet in a market to trade stocks. When you trade stocks, you are actually going through a brokerage, be it a brick-and-mortar stock broker or a more modern online brokerage like E*TRADE or Scottrade. These brokerages submit your orders for you.
The two largest exchanges in the country and two of the largest (and most important) exchanges in the world are NASDAQ and the New York Stock Exchange (NYSE). A company is listed on one or the other, and generally the type of companies you see are determined by their industry or sector. Tech companies, for example, tend to trade on NASDAQ. By the way, there are nine sectors, like Basic Materials, Healthcare, or Services, each with sub-categories called industries. The technology sector, for example, has industries like Application Software, Diversified Electronics, and Networking & Communication Devices. What a company primarily does determines what sector and industry it belongs in.
So, when you’re buying stock, you’re going shopping. You are looking to pick up shares of a company for a certain price, called the ask price. You then want to put those shares up for sale at a certain bid price, or how much someone will pay for your shares. The difference between the bid and ask price is called the spread.
Making a profit off the stock market most of the time comes with buying a stock, letting it grow, and then selling it for more than you paid originally, minus brokerage fees.
How to Get Started
Pool Your Resources
The first step to getting involved in the stock market is to gather capital, or the money you’ll be using to invest. Minimal amounts to open an account vary by brokerages; typically the lowest you’ll find is $500. Many have minimums of $1,000.
Open an Account
Once you have enough liquid funds to deposit into an account, you can choose a brokerage. You can go to traditional brick-and-mortar brokerages like Edward Jones, or Merrill Lynch. Or, you can go the online route, like with OptionsXpress, Scottrade, or TD Ameritrade. Many traditional brokerages now also offer online options, too.
The benefits of going to an online brokerage mainly involves money. Basically, you’ll pay a lot less in fees per trade and in annual “account maintenance fees” and other charges than you would with a traditional brokerage. In fact, this has made the number of online brokers explode over the past decade.
With traditional brokerages, you have access to professional financial representatives who are knowledgeable about the market and can offer advice. You can’t get this with online brokerages unless you pay for it, so if you want to work with another person whom you trust, going offline may be your best bet.
Determine What You’ll Trade
Some savvy, seasoned traders trade a little bit of everything, but you might want to stick with one asset class at the beginning. Stocks are probably the most popular asset; they are more volatile and have higher risk, but they’re easy to understand and have the highest potential for return. Mutual funds are basically bundles of stocks; those that you can actually buy and sell on the market like stocks are called exchange-traded funds (ETFs).
Also, will you trade primarily in small companies that have low and affordable stock prices (called small capitalization or small cap stocks)? Or will you choose to instead go toward larger, more established large capitalization/large cap stocks? Do you want to focus on one industry, like Services? Or do you want to spread it around?
This step involves a lot of research. Learn about the sector and industry first, then look for good, quality companies in those fields. That’s the best way to narrow the field and start learning.
Commit to Learning
Trading stocks is risky and involves time, money, and effort. But above all, you have to have a commitment to learn. The best traders constantly read – anything from news articles to investment guides and books, financial data reports, and even message boards for rumors about Company X doing this or that.
Especially learn about two critical types of analysis to determine if a stock is worth buying or selling: fundamental analysis– or looking at key financial data about the economy, the industry, and the company to figure out the company’s value – and technical analysis – or solely looking at pricing patterns, volumes, metrics, indicators, and other info contained in the stock price and past history. The best traders use a combination of the two.
A Recommendation for You: Practice, Practice, Practice
My best recommendation for people who want to get started trading stocks is this: Practice. Practice. Then practice some more. Many online brokerages have free practice accounts for those who already have existing investment accounts. You can use these practice accounts to get your feet wet, try out strategies, and generally have fun while learning the ropes of trading.
Remember: The best thing about a practice account is that you can’t lose money. With that practice – and the above knowledge – under your belt, you can begin your trading career and find your way to success. Good luck!