If you’ve wanted to become an amateur investor in order to slowly develop a portfolio that will serve you well for years on end, learning to do a bit of stock trading will help you reach your goals. By playing things conservative at first, you can develop tools that can be used for complicated trading later on.
Whether you’re interested in individual stocks or index funds, here are five stock trading trips that everyone should know.
1. Find the Right Broker
You will likely want to find a traditional broker who is comfortable working with people who are just getting into trading. Both full-service and discount brokers exist, and the former offer a much wider range of services. The most reputable brokers belong to widely recognized organizations, which may include the Financial Industry Regulatory Authority and the Securities Investor Protection Corporation. Brokers that belong to these organizations will likely be good choices for people who are just getting into the hobby.
You should also consider your preferred type of trading. In most cases, you can consider yourself one of the following:
- Day Trader
- Medium-Term Trader
- Buy-and-hold investor
Day traders are generally short-term investors, which means they rely on the day-to-day volatility of the market to make gains. If you are interested in this sort of trading, you will want to find a broker with low execution fees. Medium-term traders hold stocks from a few weeks to a few months and might also benefit from a broker with execution fees that are below average.
If you are going to hold stocks for longer periods of time, you should try to find a broker without monthly fees. Because you’ll mainly be a passive investor after you buy the stock, a higher commission rate will be cheaper overall than a monthly fee.
2. Invest in Different Sectors
Consider investing in sectors of the economy that are only tangentially related to each other. This way, you can, as they say, avoid putting all your eggs in one basket. If you have a special knowledge of one particular area, then you might want to make it your primary holding sector. If you work in health care, for example, then it might make sense to begin with a conservative purchase of healthcare stocks.
With that in mind, here is a brief list of possible sectors for investment:
- Health care
Although owning stock in Apple, for example, might seem like fun, it is sometimes better to do a little research and perhaps invest in companies that are not quite as famous. A very popular company might be attractive, but it might not make you the most money over time.
3. Play It Safe at the Start
Beginning stock traders will want to play it safe at the start. This strategy applies equally well to all ages, but retirees will of course want to be especially careful until they feel comfortable with the basics. Both fixed-income and money market securities are good options. You may also want to buy stocks from companies that have been around for many years and are widely seen as reputable. These may include companies like:
- General Electric
These companies have already survived more than one economic downturn and have proven to be resilient through the years. Established companies are less likely to lose significant value in short periods of time.
4. Leave Your Emotions at the Door to Avoid Losing Money
Allowing your emotions to run rampant while trading is a good way to lose money. Maintaining a long-term perspective is of critical importance. Short-term losses should not be seen as a reason to abandon your system and rush into trades that you haven’t researched. Having a few days where losses are more than expected is par for the course. By continuing to be picky about how you trade, you can weather the losses and avoid becoming overly emotional about short-term volatility.
5. Set Reasonable Long-Term Goals
Before you actually begin trading, you should take stock of how much capital you have to begin with. Becoming a millionaire by trading stocks is not likely to be realistic for most people, but you can still make a considerable amount of money that will help with college expenses or retirement. You can use a calculator to determine how much money you’ll need to make over time to meet your goals. By ignoring day-to-day volatility and focusing on gains made over months or even years, you can keep your wits about you and enjoy the process.
You should ultimately stick to the above tried-and-true tips that have worked for beginning traders for many years. You’ll be happy with your gains and can proudly show off your newfound trading prowess to family and friends.