It seems that the market is making new highs every day (or you’ve heard that), and you want to take part in the rally. But, how exactly do you do that. Well, in this post, we’ll offer you the basic information you need on how to start investing in the stock market.
The first thing you should note is that the market doesn’t provide any guarantee. Just because an analyst recommends investing in a stock doesn’t meant that it’s price is going to go up. Information is always your best friend in the stock market.
Before you invest in any stock, study the company first. Another important element to make money in the stock market is patience. Buying a stock doesn’t automatically mean that its price will go up.
A lot of novice investors panic and sell at the first sign of a softness in the price. And when the price goes up, they start blaming themselves for lacking enough patience. Reading some books on day trading can help you understand how to trade and avoid such pitfalls. However, the next time you buy a stock, they find themselves repeating the same mistake.
In general, there are two types of stock brokerage firms:
Full service brokers: these offer you advise on what you should be buying, what not to buy, and when to buy. Most of them charge for their advice, and usually have a set quota to meet. So, take great care when listening to their advice. Plus, they might have a vested interest to sell a given security, since many IPOs are typically provided by full-service broker firms.
They also have a full-fledged research division that ideally searches and scrutinizes the market to find stocks that they are certain are going to move up. But you have to pay for the research, but there’s nothing wrong about it provided you’re aware of it.
Discount Brokers: these typically don’t provide any form of advice. They just execute orders. Under this category are the “Deep Discount Brokers” like E-Trade and Ameritrade, as well as the “Not So Deep Discount Brokers” such as Fidelity and Schwab. Aside from the access to their system and speed of execution, Discount Brokers are in many ways the same.
Type of Accounts
There are two main types of brokerage accounts:
- Cash Account
- Margin account
Cash account refers to the type of accounts that require cash up front, and the trading capacity of the user is limited to the amount of funds available in your account. Margin accounts are the kind of accounts that need cash up front, but the buying limit of the user is twice as much as the amounts of funds available in your account.
In the margin accounts, you can ideally borrow money from the broker to buy stocks. You then use the stock itself as the collateral. In order to Sell Short, you’re typically required to have a margin account. The interest charged on these account will vary based on the brokerage firm. Options can’t be bought on margin.
The Dos and Don’ts of Stock Trading
Rely on your own homework: collect as much information as possible on the stock you want to invest in. Don’t hesitate to contact the company and inquire from their Investor Relation Department their earnings, product details, and other relevant information.
After all, you are ideally planning to own a share of their company, and you have the right to know the details of what you’re buying. You’d be amazed at how many people are willing to spend more time to do research on a $400 laptop purchase than a $2,000 purchase of stocks.
- Investigate the Company before committing your money. This will increase your chances of getting your investment call right.
- Have patience once you’ve purchased a stock.
- Set an exit price of your own. In case you make a bad trade, just take your losses and move on. Don’t make the mistake of hoping that the stock will recover tomorrow. In most case, that tomorrow never comes.
- Don’t buy a stock just because someone offered a hot tip. In many cases, the ‘hot tip’ is just a ‘lukewarm tip’ at best.
- Don’t buy a stock just because a friend of a friend or someone you know made a lot of money on the stock. In most cases, you’ll end up losing your money.
- Never buy a stock at market open. Never. There’s always a pop at the market open, which quickly fades away in an hour or two. The ideal time to purchase a stock is about 45 minutes or an hour after the market opens, and late in the afternoon, about 30 minutes before the market closes. Contrariwise, the ideal time to sell is during the market open or about 1300 hrs. Eastern Time. Check the daily chart of the stock. You’ll be surprised at how similar the price fluctuations are.
- Always have a time frame for a stock. This can be a day, a month, a year, or even longer.
- Always have the discipline on your buying and selling signals. Never act on emotions; they should never have a role in your investments.
- Lastly, Hope that luck will be on your side.
Have Discipline on When to Take your Profits
As a rule of thumb, always set a target for your profits. In most cases, people will stay on a stock that has gone up for too long, thinking that the price will appreciate indefinitely. Be wise; lock in your profits.
You’ll never go broke by taking your profits, as the old adage goes. A 10% gain is perhaps a good place to start locking in your profits. Of course, you can always come back and buy again.
Another important thing is to know what you want to be. Do you aim to be a trader or an investor? For investors, the normal price fluctuations for a stock shouldn’t bother you. That’s because your time horizon is much longer than that of a trader.
For traders, you will be working with short time frames. As such, you need to take your gains or losses at the end of your designated time frame. The worst thing you can do is try to be both a trader and an investor. People who try this usually fail to take their profits in time, and instead register losses when the price of the stock they bought goes down. So, be disciplined!