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How to Begin Online Stock Trading in 3 Easy Steps in 2020

what is stock tradingDo you wish to become a trader or an investor?

If the thought of stock trading scares you, you’re not alone. People with very little experience in stock trading are terrified by the thought because they fail to understand how the stock market works. The reality is that investing in the stock market bears risks, but when done in a disciplined manner, it is among the most efficient ways to build up your wealth.

Before you create an account on an online trading platform, you should first know what stock trading is.

Read on to find out what stock trading entails, its pros and cons as well as some tips on how to trade stocks like a pro.

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    What is Stock Trading?

    online stock trading

    Stock trading refers to buying and selling shares of a publicly-traded company. A stock trader is typically someone who frequently buys and sells these stocks to capitalize on daily price fluctuations. In stock trading, for every buyer, there is a seller. For example, when you buy 100 shares of stock, someone will be selling 100 shares to you. And when you sell your shares of stock, another person has to buy them.

    These frequent traders are betting that they can make some money in the next minute, hour, days, or month, instead of buying stock in a blue-chip company to pass along to their grandchildren someday. These short-term traders hardly sit on a stock.

    What are the Pros and Cons of Trading Stocks?

    Pros

    • Save money – Efficient stock trading is one of the best ways through which you can save money for the long term even if you have short-term profits in mind. If you intend to invest for the long run, online stock trading can make dealing in shares pretty easy.
    • Unmatched liquidity – Unlike other investments like real estate, traders can easily access money in the stock market. If you are a day trader, you can buy, sell and trade as you wish within seconds. This means that if you want to access your money, you won’t have to wait for months or even years to get it. Instead, you can opt to sell your stock quickly and have access to your cash.
    • You can make great money – The most significant benefit of stock trading is the potential to make a lot on your investment in a short period of time. If you play your card well, you can create great wealth via the stock market.
    • Easy to buy – The stock market makes buying of shares of companies easy and straightforward. You can buy them through a financial planner, a broker or online. Once you set up an account, you can purchase stock in minutes with just a few clicks.

    Cons

    • High risks – You can lose your entire investment. When a company does poorly, investors sell, sending the stock price downwards. When you sell, your initial investment will be lost.
    • Time – If you’re trading stocks on your own, you must research each company before making a decision to buy and sell stock. You need to learn how to read financial statements and annual reports as well as follow your company`s development in the news. You`ll also need to monitor the stock market itself.
    • Emotional roller coaster – In stock trading, prices rise and fall every minute. People tend to buy high out of greed and sometimes sell low out of fear. The best option is to constantly look at the price fluctuations of stock so as to better understand the market.

    Note: Learn how the stock market works and how to play it safe before starting out with your hard-earned cash to minimize the risks of trading stocks.

    What are the Stock Trading Terminologies for Beginners?

    1. Buy – You buy stock shares in a company.
    2. Sell – You get rid of the stock shares you bought. There are two reasons behind this. It’s either you’ve already gained profit from the stocks or you’re trying to cut the losses you’ll incur if you keep holding the stocks.
    3. Bid – This is the price you are willing to pay for a share of stock.
    4. Ask – This is the price that the buyers are asking for a share of stock.
    5. Bid-ask spread – You can get the bid-ask spread by subtracting the amount people want to spend and the amount people want to get. You should get the difference between the bid price and ask price.
    6. Bull market – This is a market condition which means that the price of stocks is expected to increase.
    7. Bear market – This is a market condition which means that the price of stocks is expected to decrease.
    8. Limit order – This will help you execute orders only at or under your purchase price. You can only use this to execute orders only at or above your target sale price. It’s recommended that you use limit orders.
    9. Market order – This will help you execute a buy or sell order as quickly as possible.
    10. Volatility – This implies how fast the price of stocks moves up or down.
    11. Liquidity – This refers to how fast you can buy stocks as well as sell stocks to get cash.
    12. Trading volume – This refers to the total number of stock shares that are traded daily. This is a factor that can significantly affect the market’s liquidity.
    13. Blue stock chips – These refer to large and well-known companies that offer stable dividend payments to its stockholders.
    14. Dividend – This refers to the earning being paid to a company’s shareholders annually based on the number of stocks that they hold.
    15. Broker – This refers to a qualified individual will buy and sell shares for you in exchange for a fee.

    How Does Stock Trading Work?

    How Does Stock Trading Work

    For stock trading to work, there must be buyers and sellers. Stock is typically traded by these buyers and sellers on exchanges. The buyer places a market order to purchase shares of stock at their current price or a limit order to buy if the stock reaches a certain price. The order is then matched with up with a seller who has put up shares for sale.

    Although there are physical stock exchanges, stock trading is done online. To trade share, you need a stock broker to act as an intermediary to the stock trading. Your broker can be a full-service or an online broker. A full-service broker can place trades on your behalf as well as give you advice about which share of stock to trade. An online broker is a software platform that lets you execute trades yourself.

    Stock trading works via a network of exchanges such as the NYSE or the Nasqad. A company lists its shares of stock on an exchange via an initial public offers (IPO). Investors buy these shares, which enables the business or company to raise money and develop its business. These investors can then trade these shares of stock among themselves, which drives the supply and demand of every listed stock.

    This supply and demand help dictate the price of each stock or the level at which the people involved – investors and traders – wish to buy or sell. Most of the calculations are done by computer algorithms. Buyers launch a `bid’, which is typically less than the amount a seller `asks’ for. That difference is the bid-ask spread. For stock trades to happen the buyers should increase their price or sellers should decrease theirs.

    Historically, stock trading likely occurred in an actual marketplace. Nowadays, the stock market exists electronically, on the internet and through online stockbrokers. Trading occurs on a stock-by-stock basis. However, prices often move in tandem due to political events, news and economic reports among other factors.

    How to Trade Stocks

    1. Set an investing goal.

    Before you make the decision to start stock trading, you need to set some goals. This is an important step psychologically and will help you remain focused on achieving your goals.

    Find the reason why you want to invest. Are you saving money for retirement? Do you want to earn money for a big purchase in some years?

    2. Open a brokerage account.

    E*TRADE

    An online trading account is going to be the platform where you do your trading and investing. There are numerous online trading platforms to choose from. The best option is to get a self-service site such as TD Ameritrade or E*TRADE. Signing up is quick and easy. Here are the steps.

    • Visit the website of your preferred brokerage.
    • Click on the Sign Up button.
    • Begin the application for an `Individual brokerage account.’
    • Fill information about yourself. Provide your full name, date of birth, address, social security number, employer info, etc.
    • Perform an initial deposit by filling your bank information.
    • Wait for a few days. The first transfer can take anywhere from 3 to 7 days to complete.
    • Log in to your account and start investing. Buy your first stock. The easiest way to narrow down the numerous stock options is to think of companies you love and use.

    3. Withdraw some of your profits then reinvest the rest.

    What are the Best Stock Trading Strategies?

    1. Day Trading

    Day trading is regarded as the most popular active trading method.

    As the name implies, day trading is the method of trading (both buying and selling) stocks within the same day. Positions are closed out on the same day they are taken and no position is held overnight.

    2. Swing Trading

    swing trading stock example

     

    Swing traders invest in stocks when a trend breaks.

    When a trend ends, a bit of price volatility occurs as the trend kicks in. Swing trading is done as the price volatility begins. Trades are often held for over a day. They often create a set of trading rules based on fundamental or technical analysis.

    3. Position Trading

    Some investors take position trading to be a form of buy-and-hold strategy rather than active trading.

    When done by an active trader, however, the strategy can be a type of active trading. It uses longer-term charts, ranging from daily to monthly, coupled with other strategies to dictate the trend of the market direction. This form of trade can remain active for several days to weeks or longer as the trend demands.

    4. Scalping

    scalping

    This is one of the fastest strategies used by advanced traders. Scalping includes taking advantage of several price gaps that result from order flows or bid-ask spreads.

    This strategy works by making a spread or buying stocks at the bid price then selling them at the asking price to find the difference between the two points. A scalper attempts to hold his/her position for a short period, which lowers the risk associated with scalping.

    How much do stock traders make?

    According to the Office of the New York State Comptroller as well as data gathered by Glassdoor.com, $89,000 is the average annual salary of day traders who are working for companies in the United States from 2002 to 2016. The $89,000 annual salary is 27% more than the average salary of New York City residents.

    trading salary

    On the other hand, if you are trading for yourself, the annual profit you’ll make will largely depend on which market you trade, your capital, day trading education, whether all of your trading strategies are effective or not and how much time you allocate for trading stocks.

    Note that day traders often only risk 1% of their total stock or account balance to minimize the risks.

    Most day traders see to it that their win rate is at least 50%. They also target to make their gains around 1.5 times higher than their losses. For instance, if they risk $300 on a trade, their target profit for that trade is around $450.

    Below is an example of a day trading scenario.

    Account balance: $30,000

    1% of account balance: $300

    Stop loss (equal to buy order price): $0.04

    Target ask order price: $0.06

    If the stock price is $0.04, a day trader can buy 7,500 shares for $300. There are 100 round-turn trades that day traders can make per month. If the winning rate is 55%, below is the total amount of money a day trader can make within one month.

    55 profitable trades: 55 x $0.06 x 7,500 shares = $24,750

    45 trades that the trader lost: 45 x $0.04 x 7,500 shares = $13,500

    Net profit for one month = $8,250

    On average, investing in stock generates an average of 10% per annum but it is important to note that there isn’t a fixed return in stock trading as there are a lots of factors that is affecting the market.

    What are the Best Tips When Trading Stocks?

    • Understand your risk tolerance – This can help you avoid investments which can possibly make you anxious. For example, you shouldn’t have an asset which makes you lack sleep. Anxiety triggers fear which then triggers emotional responses. When you understand your risk tolerance, you can retain a cool head during times of financial uncertainty and be able to make analytical decisions.
    • Avoid leverage – In simple terms, leverage means using borrowed money to carry out your stock market strategy. Leverage is a tool. However, it is best suited after you gain experience and confidence in your decision-making abilities. You should minimize your risk when starting out so that you can profit in the long term.
    • Build up positions gradually – In stock trading, you should know how to take your time. Successful stock traders buy stocks because they expect to earn via share price appreciation or dividends, etc. over a period of time, like years or even decades. This implies that you can take your time in buying as well.
    • Have long-term goals – Why do you want to invest in stocks? When will you need your cash back? Are you saving for college, retirement, or to purchase a home? You should answer these questions first so that you can decide on the best way to invest.

    What Not to Do When Trading Stocks?

    • Going all in – You should not try to win it all back in stock trading. Even if you have a risk management plan in place, there will be moments when you`ll be tempted to ignore it and make a much larger trade than you normally do. Resist the temptation and stick to your risk management plan.
    • Choosing a bad broker – Depositing money with a forex broker is the first step you`ll make. If it’s in financial trouble, poorly run or an outright trading scam, you can lose your money.
    • Lack of a stop loss – You need a stop-loss order for every trade you make. It will help you take a significant portion of the risk out of that investment. It will stop you from losing more than you can handle.
    • Unrealistic expectations – The stock market is very volatile and dynamic and it can behave in an irrational manner at times. Ensure you have proper strategies to face it. Take stock trading as an investment and not a gamble.

    What are the Best Stock Trading Books for Beginners?

    You can easily gain more knowledge about stock market trading and investing in general by reading books. Below are the best stock market books you should check out.

    1. The Intelligent Investor by Benjamin Graham and Jason Zweig
    2. How to Make Money in Stocks by William O’Neil
    3. When to Sell: Inside Strategies for Stock-Market Profits by Justin Mamis
    4. Irrational Exuberance by Robert J. Shiller
    5. Stock Investing For Dummies by Paul Mladjenovic
    6. A Random Walk Down Wall Street by Burton Malkiel
    7. Market Wizards by Jack Schwager
    8. Stocks for the Long Run: The Definitive Guide to Financial Market Returns & Long-Term Investment Strategies by Jeremy Siegel
    9. Common Sense on Mutual Fund by John C. Bogle
    10. One Up On Wall Street: Know to Use What You Already Know To Make Money in The Market by Peter Lynch

    What are the Best Stock Trading Courses for Beginners?

    If you don’t want to solely rely on books to learn the basics of stock trading, you should try checking out stock trading courses.

    Based on statistics, around 90% of traders fail. The major reason for their failure is the lack of trading education and lack of support from a skilled trading mentor. By watching online trading courses made by experienced and well-known traders, you’ll have a higher chance of achieving trading success.

    Below are the top 2 stock trading courses that are highly recommended for beginners.

    1. Investors Underground

    investors underground

    Nathan Michaud founded Investors Underground in 2008. Aside from excellent training videos, the platform also has a vibrant online chat group for its users. They can freely interact and share tips in the group.

    The training videos focus on swing trading, OTC trading and momentum trading. All of the lessons also give more emphasis on technical analysis than fundamental analysis. The strategies that you’ll learn include ABCD charts, short-selling parabolic moves, red-green trading reversals and a whole lot more.

    2. Warrior Trading

    Warrior Trading

    Ross Cameron, who is also a world renowned stock trader, founded Warrior Trading. The platform offers a 5-day trial to new users. If you want to continue using the platform, you’ll be asked to pay either a monthly fee or a full fee for the entire course material. Like Investors Underground, it also focuses on momentum trading.

    Its users commend the user-friendliness of the platform as well as the availability of numerous trading tools and real-time trader chatroom. Many also shared that they were able to learn great strategies for fundamental and technical analysis after going through all the training materials provided by Warrior Trading.

    Conclusion

    If you`re new to the stock market, you need to know what type of trader you want to be and how you want to invest.

    If you have funds and time to participate, stock trading can be a very helpful step forward that can result in great returns. But first, learn how the stock market works and how to play it safe before starting out with your hard-earned cash.

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    FAQs

    Where can I trade stocks?

    To buy and sell stocks, you need to find a good brokerage. Find a good online trading platform and start investing.

    How many stocks should I purchase?

    Your portfolio should not be over or underdiversified. Don’t invest all your cash in a single stock as it increases the risk.

    Should I use a stop loss on all of my trades?

    If you`re a day or swing trader, then it’s recommended to use it as it can help prevent a lot of damage.

    How much returns should I expect?

    Based on historial data from S&P500 index, the average annual return stock traders have made from 1926 to 2014 is 10 percent.

    Can I get rich by investing in stocks?

    Yes. Many people have done it before and so can you. But it requires a lot of intelligence and hard work. You need to spend time researching companies you want to invest in.

     

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    All trading carries risk. Views expressed are those of the writers only. Past performance is no guarantee of future results. The opinions expressed in this Site do not constitute investment advice and independent financial advice should be sought where appropriate. This website is free for you to use but we may receive commission from the companies we feature on this site.
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    Nica is a BA Political Science degree holder who fell in love with writing after college. She specializes in financial technology and cryptocurrency. At her young age, she was already able to work with founders who graduated from Harvard, tech startups funded by Y-Combinator, CEOs of multi-million dollar blockchain companies, investment companies in London and many more.

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