Whether you plan to become an active trader or you’re looking for a long-term investment strategy, there are crucial factors to consider before getting started. Knowing which tools to use and what to expect will help ensure a smooth entry into the trading world. Here are a few things to do and think about before becoming a stock trader.
Determine If Trading is Right For You
You may contemplate trading if:
You’ve hit your employer’s 401(k) matching limit and you’re investing in an individual retirement account (IRA). Most 401(k)s don’t let participants buy individual stocks; rather, they allow them to choose from a range of index and mutual funds. However, IRAs typically allow for the purchase and trade of stocks. IRA trading is beneficial: because the account carries tax benefits, capital gains taxes may be avoided or deferred.
You’ve made the yearly maximum contribution to your IRA and 401(k) and are on the right path toward your retirement goals. You’ll be assuming a substantial risk by trading stocks, so you may wish to open a brokerage account and trade from there.
Trading individual stocks comes with more risk and it takes more effort than an investment into an index or a mutual fund. You’ll have to proactively monitor your positions and learn how and when to react to changes in the market. With stock trading software from TradeZero, position monitoring is easy, and you’ll have the tools needed to trade with retirement in mind.
Learn About the Stock Market
Stocks are the smallest components of a company. The stock’s price, or share, reflects the company’s outlook and its value as determined by those trading the stock itself (traders and investors). A stock has no set price; it continually fluctuates throughout the trading day.
Stocks are traded on exchanges such as the NYSE or New York Stock Exchange. The NYSE operates from 9:30am to 4:00pm EST. Most trades occur during normal hours, but after-hours and pre-market trading is possible.
To trade a stock, you’ll need its ticker symbol. Enter the company’s name into Google Finance or another financial portal, and you’ll find the ticker symbol. A ticker is a one- to five-letter short code used during trading. Most traders purchase stocks and then attempt to sell them at a profit, but others sell first and try to buy the stocks back at a reduced price. The latter process is known as short selling, and day traders do it often. However, long-range investors tend to avoid it. Before starting out as a trader, learn about the bid-ask spread and learn how to read stock quotes and stock charts.
Find Out Why You’re Trading
To be a successful trader, you’ll need to have a plan and a purpose for those trades. Do you plan to trade every day, or do you want to do it part-time? If you have a day job, you may have to devote most of your nights to research. Or, do you intend to purchase stocks and hold onto them?
There’s no one way to be a stock trader, and many people succeed by combining several approaches. For instance, day traders take trades that sometimes last only a few minutes. Swing traders accept trades lasting anywhere from one day to a few weeks. Investors take trades that last for months or years. Before adopting a trading strategy, carefully assess your finances.
Before making your first trade, learn everything possible about the stock market and investing, as mistakes can be quite costly. There are numerous free resources on trading through online brokerages. Most brokers offer educational services and are staffed by investment advisors and former traders who can provide guidance. Some brokerages even offer paper trading, a simulation that allows traders to practice with no financial risk. Furthermore, with free trades and free tools from TradeZero, it’s easy to learn how the market works.
Think About Your Finances
If you’re planning to be a day trader in the United States, you’ll have to maintain a daily account balance of $25,000 or more. If you can’t do that, day trading may not be appropriate. Though swing trading has no minimum capital outlay requirement, you’ll need to commit at least $10,000 if you plan to buy a range of stocks as they become available. To succeed as a regular trader, you’ll need a substantial account as well, to prevent your balance from being consumed by fees and commissions.
Fortunately, investing comes with a lower capital requirement. Because stocks are held for a longer period, commissions aren’t a significant factor. Stocks are usually traded in blocks of 100 shares, and you can start as soon as those 100 shares become affordable. Save on commissions by making one trade rather than several. For instance, instead of purchasing 100 shares each week, save that money for an entire month and make a combined purchase.
The above advice applies only to small-value transactions, where the broker’s commission may represent a substantial portion of the capital being used. Conversely, if you’re purchasing thousands in stocks with each investment, commissions may not mean as much.
Find a Trading Platform or a Broker
Stockbrokers facilitate trading between the market’s participants, letting you buy from sellers and sell to buyers (every transaction has a buyer and a seller). To see trading success, choose a broker who:
Offers low fees and commissions for greater savings
Is reliable enough to let you trade when you wish, with minimal system downtime
Is honest and ethical
Offers research tools and shows you how to use them
The last point isn’t as important as others, simply because there are quite a few free online tools to use. With TradeZero, all that and more is included. Register for a demo account and get started today!
Criteria for Successful Day Trading
If you’re planning to become a day trader, you may need to look for a few more aspects. We’ve listed a couple of key points here.
Your brokerage or platform should immediately execute orders with no intervention required. A delay of even one second can be costly.
The platform should offer the ability to trade from a chart and/or the ability to quickly make, modify, and cancel trade orders.
Not all brokerages and platforms are created equal. Some are better suited to investors, and some are more appropriate for short-term traders. Picking a platform or broker is one of the biggest trades you’ll ever make. After all, you’re risking all your capital. Therefore, it only makes sense to do some in-depth research before signing on.
TradeZero offers an easy platform from which you can see stock quotes, view charts, do your research, and place trade orders. Sign up for a demo account today, and see the difference!
Don’t Risk Your Money: Practice First
As you narrow the field of brokerages and platforms by experimenting with demo accounts, it’s time to start placing some practice trades. Familiarize yourself with the range of available order types, and from there, form strategies and test them on past price charts. Place practice trades based on your strategies and analyze your findings to see if your plan will create a profit.
If you cannot make a profit during the practice phase, there’s little reason to use real capital. Similarly, producing a ‘practice’ return won’t always translate into real-world profits. In your demo account, risk management is crucial. Be sure not to risk too much of your account on one trade. There are many differences between practice trades and real trades, but demo trading is still a powerful tool for beginners and experienced traders alike.
Form a Plan and Don’t Deviate From It
Investing is a highly emotional process, especially for a beginner. It doesn’t feel good to lose your hard-earned money, and it’s all too easy to make a snap decision and get out at an inopportune time. It’s also very easy to get caught up in the excitement that comes with a successful trade.
That’s why it’s essential to determine how much you plan to invest, at what price, and decide how far you will let the stock fall before getting out. The effective use of trade order types will help you stay on track and prevent emotional responses. For instance, a stop-loss order will force a sale if the stock dips below a certain price, which minimizes risks and losses.
A Few Closing Thoughts
Becoming a stock trader is an exciting process because of the reward and risk involved. Starting as a trader is easy; success is another matter entirely. To achieve success as a trader, you’ll need to put yourself in a position to research long- and short-term strategies. Every trader must find the strategy that fits their goals, their finances, and their situation. By following the tips and considering the factors in this guide, you’ll gain access to the market and you’ll have the basic knowledge required to trade.