The financial markets are more open to new investors than ever before. Almost all markets are available through online trading platforms. Finding brokers that will accept smaller investments is also easier than ever. You can enter the market regardless of your starting capital.
Entering the financial markets, however, isn’t the biggest challenge. The challenge lies in actually understanding the market enough to make good investment decisions. In the case of the stock market, you have to get to know the companies you invest in, the market as a whole, and other elements that could affect the market and the way it moves.
Worry not, because the stock market isn’t as complicated as you think. By mastering a few basics, you can start investing in the stock market like a seasoned investor. To help you get started, we are going to talk about some of the basics that you need to master in this article.
What you will read in this article:
A Trading Approach
There are basically two ways you can approach the stock market. The first one is through managed investments. This is the simpler of the two approaches since you don’t have to be an expert in the stock market to bank profits.
As the name suggests, you rely on managers, third-party information sources, and even robo-traders designed to analyze the market rather than solely on your own trading decisions. This is an easy way to get started with stock trading, mainly because you can still learn a lot about the market while banking profits from the start.
Another approach to consider is becoming a hands-on investor. Everything from analyzing the market, looking into potential companies to invest in, and deciding when to enter (and exit) the market is done by you. This means you have to spend more time learning about the market and making investment decisions.
Even when you do everything yourself, you can still learn a lot from various sources of information, including tips from experienced traders. You can, for example, follow Michael Robinson Money Morning to get the best advice on stock trading and other investments.
Choose a Trading Style
The stock market is usually more suitable for those who want to make mid- to long-term gains, but that doesn’t mean there is no room for day traders. The trading style you choose to adopt depends entirely on a style you are comfortable with the most; in other words, it depends on your personal preferences.
If you would rather be in front of the trading console during the day and make trading decisions in real-time, becoming a day trader is the way to go. You make shorter trades and aim for smaller but more frequent capital gains. However, you’ll have to be more proactive in analyzing market movements.
For mid- and long-term gains, position trading is the style you need to adopt. Unlike day traders, position traders focus more on long-term trends rather than short-term market movements. As a position trader, you look at the big picture more than you look at the fluctuations of the market.
Naturally, position traders aim for bigger profits over longer trading periods. Again, choosing between the two is a matter of personal preferences. You can make 100 trades with $10 profit each, or 5 trades that score you $200 over the course of a month, and you’ll still end up with $1,000 in profits at the end of the month.
Your First Trading Account
Another important thing to do when you are just getting started with stock trading is to choose a trading platform and a broker. There are a lot of brokers that offer access to the stock market, so finding a reliable one isn’t difficult at all. Some brokers even have international stock exchanges on their trading platform, giving you more flexibility in terms of the investments you can make.
Keep in mind that not all brokers handle smaller investments. Some brokers require you to invest a minimum of $10,000 or more before they let you buy and sell shares on the market. Other brokers have $0 account minimum, giving you more flexibility in the process.
Returning to the two trading approaches we discussed earlier, you can also choose to open a robo-trading account at this point. Brokers such as Betterment and Wealthfront specialize in managed investments and robo-trading. They have offers that make entering the stock market for the first time even more appealing.
Learn to Manage Your Bankroll
There is one important skill that every investor – new and experienced – must have, and that is the ability to manage capital or bankroll. The ability to manage your initial capital and make investment decisions accordingly is a must-have skill since it also allows you to keep your risks in check.
There are three things you need to figure out before you start buying and selling shares. First, you need to know how much you can afford to invest without disrupting the rest of your personal finance. That initial investment amount should be an amount that you can afford to lose.
The second thing is the budget for individual investments. How much are you willing to invest in a company? Do you have a clear budget in mind or will you be determining the size of individual investments on the go? Get these details nailed before you start to further manage your risks.
Last but not least, make sure you know the target profit you want to aim for, and the amount of money you are prepared to lose to hit that target. Always keep risk-return trade-off – the guiding principle of any financial market – in mind. The amount of profit you want to score is always proportional to the risk you bear in the process.
At this point, you are ready to start investing. Making that first investment can be quite daunting, so take your time, read more about the market, the companies, and the indicators you can follow to make good investment decisions. You don’t have to make the investment decision quickly; you just need to make that first investment decision correctly.