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Stock Trading 101

Posted on June 14, 2010 by StockTrading.net | No Comments

Stock trading is without doubt a risky endeavor. One has to take important, snap decisions on the basis of mathematical probability and second-tier information that can ultimately change one’s fortunes. Certainly, not a task for the ignorant or the faint of heart.

After all, the knowledge most people have of the trading floor is restricted to a vicarious image conveyed generally through popular television or media. The popular image that reigns in people’s minds is that of the inexplicable chaos that follows the opening of the market. Hundreds of well dressed gentlemen shouting and gesticulating across the floor, many others huddled in front of the many glowing computer terminals and the accompanying noise and din of hundreds of cell phones is an intimidating sight.

Everyone wants to make money in the stock market, and here are some basics to help you learn what you need to know in order to help you on your way to being successful:

Create Investment Goals

Before you start trading in the stock market, you should make a list of both long term and short term investment goals. Consider the following when trying to establish your personal goals:

• Are you investing for retirement?
• Are you investing for money that you’d want to spend before retirement?
• Do you plan to invest for short term or long term?
• Will the money you earn be used for your children’s higher education?

Create Investment Account

In order to begin stock trading, you’ll need an account with an online trading site, a bank, or a brokerage firm. The account you choose should be based on the type of investments you plan to make, so do some research before selecting. Will you invest through a Roth IRA? Certificate of Deposits? The stock market? A 529 education plan?

When you understand what your investment goals are, you’ll start to get ideas for which types of investments you want to have. Learn about your different investment options before opening an account, shop around to find the best deals for opening accounts in the various types of investments.

Understand Your Risks

No investment is without risk. When you open your accounts, you’ll want to start funding it. Consider how you will fund each type of investment – whether you’ll do an automatic bank account transfer on a regular basis, send money on your own, or make trades in the stock market. The type of account and your willingness for risk will help you decide how to go about funding your investments.

If you have a low tolerance for risk, you’ll want to stay away from the stock market completely. If you have some tolerance or love the idea of taking risks (or perhaps just have some money that you’re not afraid to lose) then you might start studying the stock market to decide whether or not you’re willing to buy and sell securities.

Many people choose mutual funds before diving into the stock market, as it offers a lower risk version of buying securities.

Get Advice

Always consider getting professional financial advice before making any investments. There are financial advisors you can sit down with face to face to ask your questions and decide what is the best plan for reaching your personal goals. Financial advisors can guide you toward the appropriate types of investments for your financial goals and risk level, and the amount of time and money you have available to put into investing.

Stock traders who make it big are the ones that have taken the time to learn and educate themselves on the how the market works. They have really invested themselves into studying and learning about different stock trading trends and strategies and found out what works best for them. They know the ins and outs of trading and can determine when the best time is to get into a new trade and when to get out. They also know when to cut their losses and move on, and when to hang on so that they can achieve a victory. Those that make it big in stock trading, tend to follow these great tips.

Start Slow

Trading is exciting and when you are just starting out the anticipation and nerves can send you over the edge, that is if you are not careful. If you push too hard too soon, you could fall flat on your face, and when that happens the excitement tends to disappear rather quickly. Start off slow, making one trade at a time and work your way up gradually. This way you can start to get your feet wet as you thoroughly take the time to analyze each trade you are in.

Never Invest More Than You Can Afford To Lose

It is never wise to invest more than you can afford to lose, because you never know when all of your trades will go the wrong way. One of the best things you can do is to make certain that you keep some of your money safe.

Never Invest All In One Place

As the saying goes, never put all of you eggs in the same basket. Instead, carefully analyze different stocks and diversify your funds. As you have a better understanding of the system you will know what companies to go with and which ones to stay away from.

When First Starting Out, Stick To Trusted Companies

When you are first starting out it is best to stay away from companies that could be a complete gamble. Instead, stick to the companies that have a good reputation in the market and have been around for a number of years. Steer clear of startup companies and ones that have a losing track record. As you become a more seasoned trader, and have built up your assets, then you may want to make a more risky move here and there.

Take The Time To Research

Research is the name of the game. Never invest your hard-earned money unless you have taken the time to truly analyze the company you are planning to purchase stock in. Learn everything you can about the company, before making the investment. This will help protect your assets.

Your Investment Process

1) Create and Follow a System

Many times, stock traders simply make guesses and emotional decisions regarding what and how much to invest. Creating a personal system helps increase profits because you will make decisions based on logic and analysis rather than emotions.

2) Test Your System Through “Back Testing”

If you create a trading system that you believe will work, you then need to test it out. See how your system of trading would have performed based on the previous trading data of the stocks you are thinking about investing in. If your system and trading criteria would have turned a profit in the past, it has a good chance of turning a profit in the future.

3) Remember to Use Your System

It’s amazing how many stock traders have a system worked out and have taken the time to back test it for previous performance indicators, but who fail to use it. Once you’ve come up with your system, you need to commit to it. Be confident that you’ve taken the time to test it out and then commit to using it and not straying from your system – even if it causes you to lose money sometimes.

4) Find and Use Charting Software

There are a number of software programs available to help you analyze and track your stock trading progress. Before purchasing charting software, make sure it will allow you to use it for everything from choosing and analyzing stocks to keeping track of your successes and failures. Charting software can be difficult to use, so once you select a program, spend time learning how to use it to your advantage.

5) You Are Willing to Make Mistakes

A successful stock trader must not only be willing to make mistakes – but also not be afraid to admit to them. If you have to take a loss, you need to be prepared to take the loss to prevent losing more money, and that will often mean admitting that you made a mistake. Being embarrassed about a mistake and deciding to ‘wait it out’ to prevent having to take the loss will only result in additional losses and bigger mistakes.

While these five tips are not considered advanced strategies for stock trading, they are exactly what you need to get started. If you’ve already been trading stocks for awhile but have not had the results you expected, maybe you should also review these tips and adjust your trading strategies accordingly to get better results and profitability.

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