Stock trading is purchasing and selling shares in firms in an effort to gain money on daily variations in price. This short-term strategy is what sets stock traders distinct from regular stock market investors who tend to be in it for the long haul.
While trading stocks can provide quick gains for those who time the market well, it also involves the possibility of huge losses. A single company’s fortunes can rise more quickly than the market at large, but they can just as readily sink. Financial advisors normally don’t recommend clients invest in individual equities unless they have money they could afford to lose.
You don’t have to work on Wall Street to master stock trading. Online brokerages have made it feasible to trade stocks rapidly from your home computer or your smartphone.
But before you plunge in, you need to make sure you know how the stock market works, the best applications for trading stocks, and how to limit your risk.
- 0.1 What is stock trading?
- 0.2 1. Open a brokerage account in Stock Trading
- 0.3 3. Learn to utilize market orders and limit orders:
- 0.4 4. Practice using a virtual trading account
- 0.5 5. Measure your returns against a suitable benchmark
- 0.6 6. Keep your perspective in Stock Trading:
- 1 How to manage stock trading risks
- 1.1 1. Lower risk by building positions progressively
- 1.2 2. Ignore ‘hot tips’
- 1.3 3. Keep proper records for the IRS
- 1.4 Frequently asked questions
What is stock trading?
There are two primary types of stock trading:
Active trading is what an investor who places 10 or more trades per month does. Typically, they utilize a strategy that depends significantly on timing the market, aiming to take advantage of short-term occurrences (at the corporate level or based on market swings) to generate a profit in the next weeks or months.
Day trading is the approach utilized by investors who play hot potato with stocks – buying, selling, and closing their positions of the same stock in a single trading day, caring little about the inner workings of the underlying company. (Position refers to the amount of a particular stock or fund you possess.) The purpose of the day trader is to make a few bucks in the next few minutes, hours, or days based on daily price movements.
How to trade stocks
If you’re trying your hand at stock trading for the first time, realize that most investors are best served by keeping things simple and investing in a diversified mix of low-cost index funds to achieve — and this is essential — long-term outperformance.
That said, the mechanics of trading stocks comes down to six steps:
1. Open a brokerage account in Stock Trading
Stock trading needs funding a brokerage account – a specific form of account meant to house investments. If you don’t already have an account, you can start one with an online broker in a few minutes. But don’t panic, creating an account doesn’t imply you’re investing your money quite yet. It only provides you the option to do so once you’re ready.
2. Set a stock trading budget
Even if you have a talent for trading stocks, investing more than 10 percent of your portfolio in individual equities can expose your investments to too much volatility. But this isn’t the only rule to control risk. Other do’s and don’ts include:
Invest only the amount of money you can afford to lose.
Don’t utilize the money that’s designated for near-term, must-pay obligations like a down payment or tuition.
Ratchet down that 10 percent if you don’t yet have a robust emergency fund and 10 percent to 15 percent of your salary routed into a retirement savings account.
3. Learn to utilize market orders and limit orders:
Once you have your brokerage account and budget in place, you can utilize your online broker’s website or trading platform to place your stock trades. You’ll be offered many options for order types, which influence how your trade goes through. We go through these in detail in our guide for how to buy stocks, but these are the two most frequent types:
Market order: Buys or sells the stock ASAP at the best available price.
Limit order: Buys or sells the stock only at or better than a specified price you select. For a buy order, the limit price will be the highest you’re ready to spend and the order will go through only if the stock’s price falls to or below that amount.
4. Practice using a virtual trading account
There’s nothing better than hands-on, low-pressure experience, which investors may acquire via the virtual trading tools offered by many online stock brokers. Paper trading allows users to test their trading abilities and build up a track record before putting real funds on the line.
Several of the brokers we assess offer virtual trading, including TD Ameritrade and Interactive Brokers.
5. Measure your returns against a suitable benchmark
This is critical advice for all types of investors – not just active ones. The bottom-line goal for picking companies is to be ahead of a benchmark index. That might be the Standard & Poor’s 500 index (commonly used as a proxy for “the market”), the Nasdaq composite index (for those investing largely in technology stocks), or other smaller indexes that are composed of firms based on size, industry, and region.
Measuring results is key, and if a serious investor is unable to outperform the benchmark (something even pro investors struggle to do), then it makes financial sense to invest in a low-cost index mutual fund or ETF — essentially a basket of stocks whose performance closely aligns with that of one of the benchmark indexes.
6. Keep your perspective in Stock Trading:
Being a successful investor doesn’t entail identifying the next great breakout stock before everyone else. By the time you hear that a certain stock is primed for a boom, so have thousands of expert traders, and the potential certainly has already been priced into the stock. It may be too late to earn a rapid turnaround profit, but that doesn’t imply you’re too late to the party. Truly outstanding investments continue to provide shareholder value for years, which is a compelling justification for approaching active investing as a hobby and not a Hail Mary for instant riches.
How to manage stock trading risks
Wherever you lie on the investor-trader spectrum, these four recommendations for how to trade stocks can assist ensure you do it securely.
1. Lower risk by building positions progressively
There’s no need to plunge into the deep end with any position. Taking your time to buy (through dollar-cost averaging or buying in thirds) helps decrease investor exposure to price volatility.
2. Ignore ‘hot tips’
People posting in online stock-picking forums and paying for sponsored commercials pitching sure-thing stocks are not your friends. In many cases, they are part of a pump-and-dump operation where shady persons purchase buckets of shares in a little-known, thinly traded firm (typically a penny stock) and hit the internet to hype it up.
As unknowing investors load up on shares and drive the price up, the criminals collect their winnings, dump their shares and send the stock careening down to earth. Don’t help them line their pockets.
3. Keep proper records for the IRS
If you’re not utilizing an account that has tax-favored status — such as a 401(k) or other employment funds, or a Roth or traditional IRA — taxes on investment gains and losses can get tricky.
The IRS applies different rules and tax rates and mandates the submission of different forms for different sorts of traders. Another benefit of keeping solid records is that loser investments can be used to offset the taxes paid on income through a smart mechanism called tax-loss harvesting.
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Where to trade stocks in 2022?
To trade equities, you need a broker, but don’t just fall for any broker. Pick one with the terms and tools that most correspond with your investment style and experience. A higher emphasis for active traders will be low commissions and fast order execution for time-sensitive deals. See our selections for the top day trading apps to learn more.
Investors who are new to trading should search for a broker who can teach them the tools of the trade via educational materials, online tutorials, and in-person seminars (see NerdWallet’s roundups for the top brokers for beginners). Other aspects to consider with stock trading apps are the quality and availability of screening and stock analysis tools, on-the-go alerts, easy order entry, and customer care.
No matter what, the time invested in learning the fundamentals of how to study companies and experiencing the ups and downs of stock trading — even if there are more of the latter — is time well spent, as long as you’re enjoying the ride and not putting any money you can’t afford to lose on the line.
Frequently asked questions
Stock traders analyzed, researched, and ranked online stock brokers based on which ones are ideal for beginners. This list takes into consideration the stock broker’s investment selection, customer assistance, account fees, account minimums, trading charges, and more.
What’s a good stock trading technique for beginners?
First, practice using a virtual trading account, then start by investing minimal sums to avoid excessive risk. From here, you can progressively increase the amount but remember: Don’t invest anything you can’t afford to lose, especially in riskier techniques. Most financial counselors recommend that the bulk of an investment portfolio be placed in mutual funds, index funds, or exchange-traded funds.
Can you trade stocks for $100?
- Yes, as long as the share price is below $100 and your brokerage account doesn’t have any necessary minimums or costs that could push the transaction higher than $100. The top online stock brokers for beginners won’t have minimums or fees, so with them, you’ll be prepared to invest $100 in any firm whose stock price is $100 or below. Some brokers also allow you to acquire fractional shares, which means you can buy a piece of a share if you can’t afford the full share price.
What’s the difference between stock trading and investing?
- The primary difference is how frequently you buy and sell stocks. Traders buy and sell more frequently, while investors typically buy and hold for the long term. Learn more about stock trading vs. investing here.
What time can I start day trading?
Normal trading hours on the New York Stock Exchange and the Nasdaq are 9:30 a.m. to 4 p.m. Eastern time on non-holiday weekdays. However, there are also premarket and after-hours sessions – not all brokers allow you to trade during these extended-market hours, but many do.