Stock trading can be a lucrative investment opportunity to make some money on the side or become a full-time trader. If you know how to buy and sell stocks the right way, you can make a lot of money, especially when you hold your stocks and wait for their prices to go up.
Stock trading may seem confusing at first, but it’s quite a straightforward process. As soon as you open an account with a brokerage company, you can start investing in stocks. Here’s key information you need to know to get started.
What are stocks?
Stocks are securities that represent ownership in a company. They are divided into shares, which represent fractional ownership of a company.
When you own a particular company’s stock, you own a portion of its shares, which means you can generate a profit from the company’s earnings through shareholder dividends. Dividends are profit distributions that you can get in cash as fixed income or as additional shares of stock.
Apart from owning individual stocks in a company, you can also buy fractional shares and make an income from mutual funds.
Choosing the best platform to trade
When getting started with stock trading, you can choose from three types of brokers:
● Online stock brokers
● Discount brokers
● Full-service brokers
Online stockbrokers are e-trade platforms that let you open and fund a brokerage account for buying and selling stocks directly through their website. They can help you manage your stock buying and selling and typically offer many different trading platforms. E-trade platforms come in three versions: desktop, browser, and mobile app.
With a discount broker, you can open a brokerage account without getting any advice or management services, which is why they have lower fees and charge a lower commission. Discount brokers only execute your stock orders.
Full-service brokers offer more expensive services than other stockbrokers and charge a higher commission but provide a greater value to investors. Full-service brokerage firms provide investment advice, management services, research and analysis, financial planning, fixed income investing, advice for mutual funds and exchange-traded funds, personal finance advice, and more.
When exploring full-service and other brokers, it’s essential to check their available trading platforms. The key factors to consider are:
● A user-friendly interface
● Stable performance
● Good responsiveness (low latency)
● Basic and additional financial instruments
● Advanced analytics tools
● High personal data security
● Automatic trading features
● Brokerage account fees
● Brokerage account minimums
● Commission on trades per share
● Customer support
Do your homework and check online reviews to find out more about online brokers, discount brokers, full-service brokers, and various trading platforms. Most brokers offer a demo, which is excellent for exploring their products and services and making an informed decision.
Research your stocks
icking the right stocks is a golden rule in stock trading. When looking to buy stocks, you need to choose the right company. You’re about to become a part-owner of a company, so it’s vital to buy into one that will provide you with great value, especially if you decide to hold the stocks.
Once you know which companies you want to buy into, check their earnings growth to understand their current and future cash flows. Look at each company’s annual reports to find out more about their profits, revenues, and shareholder dividends. Read through their latest news releases and SEC filings to find out more about their earnings.
Check their debt-to-equity ratio and compare it to those across the industry. Gain insights into their market value by looking at their price-earnings ratio (P/E ratio).
When doing your stock research, check their competitiveness and competitors’ performance as well, and find out which companies have long-term stability, as those might be the best you’d want to buy into.
What to look for when watching a stock
When you want to buy stocks, don’t look at the stock or share price only. You need to look for certain trends. For instance, you may notice that some stocks’ prices increase every time there are new announcements in news releases. Others may be going up or down steadily for a while.
When looking at the trend lines, look at the lines of resistance and support. Resistance lines help determine a stock’s price trends on a high-to-low basis, while support lines help determine an uptrend movement.
You should also look for stock splits, after which share prices usually start low and boost the demand, which eventually increases the stocks’ prices.
Looking at historical pricing and closely watching the trends will help you make accurate predictions and buy stocks wisely. Over time, you’ll hone your trading skills and learn how to buy and sell stocks like a pro.
In stock trading, it’s also essential to know the best time to buy and sell stocks.
Stock prices tend to be the most volatile early in the morning and during the last hours of the trading day. That’s when you can make some of the biggest trades, but it’s also when you may lose a lot.
The best time to do it as a beginner should be the middle of the day. That’s when stock prices are stable, and you can make accurate predictions.
When it comes to the best day of the week to trade stocks, Monday may be the best for buying individual stocks, while Friday may be the best for selling them.
The middle of the month is when stock prices tend to go down, so that’s when you can buy stocks at the best prices.
You can place three main types of stock orders when selling or buying stocks:
● Market orders
● Limit orders
● Stop orders
A market order is a type of request to buy or sell a stock immediately at the current price. It doesn’t include price parameters, so you can’t control the execution price. The stock market sets the stock price, so you can buy a stock at or near the current ask or sell it at or near the current bid.
Traders favor this type of entry when the urgency to enter the market is high, knowing that they may not get the very best price.
A limit order is a type of request to buy or sell a stock at a specific future stock price or better. Each limit order executes only if a stock reaches a certain predefined price on the stock market.
There are two types of these orders:
● Buy limit orders – buying stocks at or below the specified price (require setting the minimum price at which you are willing to buy a stock)
● Sell limit orders – selling stocks at or above the specified price (require setting the maximum price at which you are willing to buy a stock)
A stop order or a stop-loss order is a type of request to buy or sell a stock at the moment it reaches a specified price on the stock market to mitigate a potential loss. When a stop order reaches the stop price, it activates a market order.
You can place two types of stop orders on a stock:
● Buy stop orders – buying at a market price above the current bid price;
● Sell stop orders – selling at a market price below the current ask price;
Stock trades also have stop-limit orders. This type requires specifying the stop and limit prices. When a stock reaches the stop price, it becomes a limit order.
Diversification – Optimize your stock portfolio
Optimizing your stock portfolio is important for making strategic, long-term investment decisions, maximizing your profits, and improving your bottom line.
To optimize your portfolio, make sure you define your short-term and long-term goals and expectations before developing a strategy for achieving them. Consider your investment timeline, assess the risks of individual stocks, and learn more about asset allocation to determine which assets you’d like to invest in.
Think about how investing in mutual funds could help you build a strong financial future. Once you get the hang of stock trading, consider setting up a retirement account to save money and enjoy tax benefits.
Diversifying your portfolio will provide you with more investment opportunities, so take the time to see which investment process or service can help you trade and earn money.
We’ve only scratched the surface of how to buy and sell stocks on the stock market, but you now have a good starting point. Make sure you check our blog for more information on stock trading, online brokers, brokerage firms, fractional shares, personal finance advice, and other useful content.
Don’t have enough funds for investing on your own, even with a discount broker? Why not become a fully-funded trader?
OneUp Trader is a full-service company that connects traders and investors with brokers and funders who can help you achieve your investment goals. Once you open an account and get evaluated for stock trades, you can pick from over 20 trading platforms, access advanced analytics tools and data, and communicate with fellow traders and investors.
Reference and bibliography used for this article:
- https://www.nerdwallet.com/article/investing/how-to-buy-stocks by NerdWallet
- https://investorjunkie.com/investing/how-to-buy-individual-stocks/ by Investor Junkie
- https://www.investopedia.com/ask/answers/108.asp by Investopedia
- https://money.usnews.com/investing/investing-101/slideshows/how-to-pick-stocks-things-all-beginner-investors-should-know by U.S News
- https://www.moneyunder30.com/how-to-read-a-stock-chart by Money Under 30
- https://www.investopedia.com/day-trading/best-time-day-week-month-trade-stocks/ by Investopedia
- https://www.investopedia.com/investing/basics-trading-stock-know-your-orders/ by Investopedia
- https://corporatefinanceinstitute.com/resources/knowledge/trading-investing/trade-order/ by Corporate Finance Institute