Like anything in life, getting started trading in stock involves a plan which is based on the trading goals of an investor. It would be helpful to go ahead and write down these goals on a piece of paper. One of the best way to determine these is by looking at the risk tolerance of an investor. Usually, younger investors will have a higher tolerance level for risk than somebody who has just retired.
There are other factors that come into play as well like the investment experience of a stock trader. Is the trader new to investing and trading? Or is the investor just new to a branch of stock trading like selling options, for instance?
A great place to start gathering information is to go on Investopedia which is a very comprehensive web resource that is used by financial professionals all the time to guide individuals and organizations alike in making investment decisions and understanding terminology such as a day order, stop-loss order and a market cycle to name a few terms. Use these resources to get a good grasp of fundamental analysis and technical analysis that are often utilized to determine whether a stock is a good buy or not.
A good way to get started is to buy mutual funds and ETFs that have no transaction costs. Brokerage houses such as Charles Schwab, ShareBuilder and Zecco do not require a minimum deposit. Furthermore, transaction costs at Sharebuilder and Zecco are low at only $4.50 a trade. However, ShareBuilder does charge $9.95 to sell a security.
One of the best techniques to mitigate risk is to invest in dividend paying stocks for the reason that they are usually blue-chip stocks showing a lot of cash in their financial statements. Also, investors can benefit from a consistent cash-flow stream. But, really the primary way to reduce risk is to diversify investment holdings that will happen eventually when the portfolio size reaches a reasonable high value like $25000.
Some useful trading strategies will be shared in the next few paragraphs. One is the straddle strategy that can be used on a stock that has a lot of volatility. A good indicator of a stock being volatile is if it hits monthly highs and lows frequently. This is where the technical analysis that was mentioned earlier in this article comes in handy.
Another great strategy is short selling. This allows investors to make money even during a bear market. Bear markets and bull markets are examples of primary trends which are a period of fluctuation in prices that savvy (and not so savvy) investors can take advantage of.
The previous two were growth and income techniques. A stop-loss order is a capital preservation method. Let’s look at an example. An investor has a 100 shares of Microsoft (NASDAQ: MSFT). The shares were bought at $23, and now they are trading at $27.90 per share. The stock trader wants to hold onto these 100 shares in case they increase in price in the future. At the same time, the trader does not want to lose all of the unrealized gains that have accumulated and so he or she could set a trigger price at $25 to sell out of the position if Microsoft’s stock price fell to $25.
This should be a pretty good introduction to getting started in stock trading. Always remember, and as economists would always stress, that the market will correct itself at some point. Also, fixed income securities are a great way to preserve capital and this is a form of investment that would be great if an investor requires regular cash inflow and minimal risk.