Stock trading is one of the most lucrative forms of investment. You make passive income by betting on the performance of a company that you are not involved in daily running. However, before you start investing in stocks and shares, you need to learn the basics of stock trading and how you can make money from this form of investment.
Learn About Stocks and Shares
Take your time to learn about stocks and shares and how the stock market works. For starters, it is better to start with stocks because they are less complicated than shares. Stock is a general term for equities sold at a stock market, while shares refers to owning a piece of a particular company.
There is plenty of free educational resources that you can use to learn about stocks and shares. What’s more, the best brokers offer free education to investors and have knowledgeable and experienced staff who will advise you on the best stocks. You can also practice virtual trading before investing real money into stocks.
Find A Reliable Online Broker
To trade in stocks, you need to open a stock account with an online brokerage firm. Brokerage firms range from small upstarts to established brokers with a large portfolio of investment options.
Take your time to research the best trading platforms in terms of customer experience and commission fees by reading online reviews and consulting experienced investors. Compare the fees charged by different brokers. Check whether they provide investor training, ease of using their website or app, and the investment options they offer.
Buy Your First Stocks
After finding a suitable brokerage firm, open an account and transfer money from your bank account. Most online brokers have very low minimum deposit requirements, so you can start by investing as little as $200.
Only invest money from your savings because stock trading is a long-term investment that you can’t recoup in a few months. Don’t use funds that are budgeted for near-term expenses such as electricity bills or rent.
It takes time for the funds to transfer and become available for trading. However, some brokers allow you to trade while the transfer is being processed while others require you to wait for a few days. Once the money is available, select the stock or share you want to buy and place an order.
Market and Limit Orders
Typically, the brokerage firms give you several investment options, but there two common types of orders you can use to buy or sell stocks.
Market order: instructs the broker to buy or sell the stock at the best price available on the market.
Limit order: requires the broker to buy or sell stocks at prices better than the specific price you set.
If you are not sure which stocks to buy, you can invest in Exchange Traded Funds (ETFs). ETFs are bundled stocks that allow investors to buy stocks of different companies. The large portfolio protects investors from exposure to wild fluctuations in share prices.
Stock trading comes with risk because you can make or lose money on the stock markets. You need to have some level of risk tolerance because sometimes a stock may plummet to unprecedented levels due to some odd events. If you panic and sell the stock, you might lose money only for the stock to rebound in a few months’ time.
You can start by selecting safe stocks whose prices have been stable for the past five years. Later on, when you start making profits, you can try the riskier stocks, such as promising startups or undervalued stocks.
Learn to Analyze Stocks
If you are to engage in stock trading on the long term, you need to learn more about the dynamics that determine stock prices. Your first stock buys may be informed by advice from your broker, but you should be more proactive about future buys.
Learn about stock valuations by analyzing the performance of different stocks. Use publicly available information such as earnings reports, financial reports, and analysis by reputable financial analysts to gauge the performance of different stocks.
Your broker may chip in with information about the major performance indicators and risk ratings of different companies, so you don’t have to do the calculations. However, you should understand the meanings of different ratios and other metrics used in analyzing stocks. Further, take time to learn the core business of different companies so that you can determine if their model is sustainable.
Tax Implications of Stock Trading
Income from stocks attracts capital gain taxes. Typically, the amount of tax levied reduces if you hold a stock for more than a year. You can also invest some of your salary in stocks as a part of the retirement savings. The benefit of salary-based investments is that they are deducted from income before tax, reducing the tax burden.