Online Stock Trading 101: A Simple Guide for Beginners
Looking to invest in online stock trading? The stock market is full of incredible opportunities if you know how to invest!
When it comes to stock trading, gurus claim incredible profits, but experts warn about the risks. So, where do you start?
Buying your first stock online might sound like a big deal, but it's a lot easier than you might think. Read on for a straightforward guide on stock trading 101 to help you get started.
Stock Trading Basics
The stock market is all about supply and demand. Once a company makes their initial public offering (IPO), traders can buy and sell their stocks on a stock market.
In the past, stock markets were physical places where traders met to decide on prices and sell or buy stocks. Today, stock exchanges are virtual and operated through computer networks. At a stock market, stock owners sell shares to potential buyers.
When you buy a share, you never buy it directly from the company. You buy it from another shareholder. The reverse is also true. When you seek to sell a share of stock, you will have to find another stock investor.
The differences between buying and selling prices is what drives stock market profits. Simply put, if you buy low and sell high, you are making profit. On the other hand, if you buy a stock that ends up losing value, you will sell at a loss.
Stock prices go up or down with demand. The more investors want a particular stock, the higher its price will go. As it is hard to forecast demand, investors don't have much power to predict which way markets will go. This is what creates risk in stock markets.
Getting Started with Online Stock Trading
Before you consider opening an account and start investing your hard-earned money, it is important to educate yourself. This is true for any type of investment, but especially so for online stock trading.
There are some basic rules you have to keep in mind before going forward. Let's see them below.
Research Before Investing
This is the cardinal rule of investing. If you don't research your options before buying a stock, you are not investing. You are gambling.
Realize the Risk
You should never invest money you cannot afford to lose. Always invest responsibly, taking into account the risk involved in stock trading. You should start small and go from there.
If you invest only on one type of stock, you are putting all your eggs in one basket. You have to own a portfolio of diversified investments to be able to withstand market disruptions.
You will not get rich if you cash in your profits. In order to grow your net worth, you have to reinvest your profits and buy more stock.
Logic over Emotion
Online stock trading is all about the numbers. There is no room for emotion and impulsive decisions when buying and selling. You should remain calm when investing. This means suppressing fear, excitement, and impatience.
Before moving forward, you have to choose a stock broker. You can't buy stocks online without a verified broker, unless you are an expert yourself.
Online trading can be complex, and buying stock options by yourself is almost impossible. Your broker will guide you to the right decisions, facilitate the trades on your behalf, and protect your assets.
There are countless options to choose from when it comes to brokers. Brokers fall into two broad categories: prime brokerages and the rest of the brokers.
Opening an account with a brokerage firm is easy. You can complete all steps online. The process requires you to send an application, prove your ID, and provide a funding method. You can use the account you will provide for funding to cash in your profits as well.
Different brokers charge different commissions and offer different services. As a beginner, it is a good idea to find a broker that charges cheap trading commissions, but who is also reputable in the market.
Pick Your Stocks
You can start trading from the moment you create your brokerage account. Before you do so, you have to pick your stocks.
Everything starts with you making a plan of action. What types of stocks do you want to invest in? What is your budget?
The goal here is simple. You are searching for companies you want to buy a piece of. So, you need companies you can rust.
Most new investors start by researching companies they are familiar with as consumers. This is a good starting point to find a few stable companies for your first stocks.
When considering a stock from a company, check their annual report and financial status. This will give you a good idea of their health and future.
Avoid Frictional Expenses
When it comes to online stock trading costs, your main challenge will be frictional expenses. These include trading costs that don't give you any benefits. For example, selling fees, broker commissions, and other operational costs are all frictional expenses.
If you buy many smaller stocks, you will incur more frictional expenses than buying a large one with the same money. Similarly, if you buy and sell the same stock again and again, you might lose money due to overwhelming fees.
Reducing your frictional expenses is key to graduating from a beginner to an experienced trader. Watching what experts are doing, and studying costs in depth will help you move forward.
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