Trading stocks online can seem complicated and confusing if you're just starting out, but with careful research and strategy, this business can be simple and even fun. With the right planning, online trading can help you earn money from your own home.
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Part 1 of 4: Researching and Selecting Stocks
Step 1. Perform technical analysis
Technical analysis is an attempt to understand the psychology of the market, or in other words, what investors' overall feelings about a company are reflected in the stock price. Technical analysts are usually short-term buyers, who pay attention to the timing of their buying and selling. If you can detect a pattern, you may be able to predict when the stock price will rise and fall. This can provide information on when you should buy or sell a particular stock.
Technical analysis makes use of moving averages to monitor security prices. The moving average measures the average price of a security over a certain period of time. This helps make it easier for traders to identify price trends
Step 2. Identify the pattern
Patterns identified in technical analysis include price limits identified in the market price of a stock. The upper limit, which a stock rarely crosses when the price rises, is known as resistance or "resistance". The lower limit, which a stock rarely crosses when the price drops, is called support or "support". Identifying these levels provides information on when to buy (at resistance levels) and when to sell (at support levels).
- Some special patterns can also be detected in stock charts. The most commonly known as "head and shoulders". This is the price peaking then falling, followed by a higher peak then falling, and finally followed by a peak that is as high as the first peak. This pattern indicates that the upward trend in price will end.
- There is also an inverted head and shoulders pattern, which signals the end of a downward trend in price.
Step 3. Understand the difference between a trader and an investor
An investor is a person who seeks to find a company with a competitive advantage in the market that will generate sales and profit growth in the long run. Meanwhile, traders are trying to find companies with identified price trends that can be exploited in the short term. Traders usually use technical analysis to identify these price trends. In contrast, investors usually use another type of analysis, namely fundamental analysis because it focuses on the long term.
Step 4. Study the various orders traders place
Orders or orders are what traders use to determine their trades through brokers. There are different types of orders that traders can place. For example, the simplest type of order is a market order, which buys or sells a certain number of shares of a security at the prevailing market price. In contrast, a limit order or limit order will buy or sell a security when its price reaches a certain point.
- For example, placing a buy limit order on a security will instruct the broker to only buy the security if its price drops to a certain level. This allows the trader to determine the maximum amount he or she is willing to pay for the security.
- In this way, a limit order guarantees the price the trader will pay or earn, but that does not mean the trade will take place.
- Similarly, a stop order instructs a broker to buy or sell a security if its price rises above or falls below a certain point. However, the price that the stop order will meet is not guaranteed (what is guaranteed is the current market price).
- There are also combinations of stop orders and limit orders called stop-limit orders. When a security's price crosses a certain threshold, this order will turn into a limit order instead of a market order (as happens in regular stop orders).
Step 5. Understand the blank sale
Short selling is when a trader sells shares of securities that they do not own or have borrowed. A short sale is usually made in the hope that the market price of the security will fall, which will result in traders having the ability to buy the security stock at a lower price than they sold in a short sale. Short sales can be used to generate profit or hedge against risk, but it is very risky. Short sales should only be made by experienced traders who understand the market thoroughly.
- For example, imagine that you believe that a stock currently trading at $100 per share will decline in value in the coming weeks. You borrow 100 shares and sell them at the current market price. Well, you made a blank sale because you sold stock that you didn't own and in the end had to return it to the creditor.
- Within a few weeks, the share price did drop to Rp90 per share. You buy back your 100 shares for Rp90 and return them to the creditors. This means you sold the shares you didn't own for a total of $1,000 and now replace them with $9,000, for a profit of $1,000.
- However, if the price goes up, you are still responsible for returning the stock to the creditor. It is this exposure to unlimited risk that makes short selling so risky.
Part 2 of 4: Choosing a Brokerage Partner
Step 1. Interview an online broker
Don't just rely on recommendations from friends or neighbors. The right brokerage services can determine financial success and failure. Before choosing an online broker, ask for details such as prices and available investment options. Find out the customer service they provide and whether or not they offer educational and research resources. Finally, find out what security measures they take.
Step 2. Decide which brokerage tools are important to you
Depending on how much experience you have, you may need a different level of service from an online brokerage service. Some services offer personalized advice, which beginners may find helpful. You may have to pay a higher fee for this service, but if you're just starting out, it's worth it. Online brokers that offer tools and advice to help novice traders include E-Trade, ShareBuilder, Fidelity, Scottrade, and TDAmeritrade.
ShareBuilder also offers an ATM card that gives you access to uninvested funds
Step 3. Use the discount service if your experience is more
If you can do all the research yourself and don't need personal advice from a broker, consider using a discounted price online brokerage service. You can start with a smaller amount of money. In addition, you have access to more investment options. In addition to stocks, other investment options may include options, mutual funds, exchange-traded funds, fixed income funds, bonds, certificates of deposit, and pension funds.
Part 3 of 4: Learning Stock Trading
Step 1. Study the financial performance indicators
Read news and finance websites. Listen to podcasts or watch online investing courses. Join the local investment community to learn from more experienced investors.
- Books you can read include Benjamin Graham's The Intelligent Investor (Harper Business, 2000), Rod Davis' What You Need to Know Before You Invest (Barron's Educational Series, 2003), Adam Grimes' The Art and Science of Technical Analysis (Wiley, 2012) and David Dreman's Contrarian Investment Strategies (Free Press, 2012).
- For a list of open bulk online courses (MOOC), visit the MOOC list.
- Stanford offers online courses to learn about stocks and bonds.
- Kiplinger has published a list of mutual funds for socially responsible investors.
Step 2. Practice with an online stock simulator
Online stock simulator is an imaginary market game that simulates online trading. This device allows you to practice skills without risk. Many come with tutorials and forums for discussing investment strategies.
- However, keep in mind that this simulator does not reflect the real emotions of trading and is therefore best used for testing theoretical trading systems. Real gains are much harder to achieve than imaginary gains.
- Online stock simulators worth checking out are Investopedia, MarketWatch and Wall Street Survivor.
Step 3. Trade cheap stocks
Many companies offer shares that are traded at very low prices. This gives you the opportunity to practice taking advantage of the market without much risk. Low-cost stocks are usually traded outside the major stock exchanges. These stocks are generally traded on OTCBB (over-the-counter-bulletin-board) or through daily publications called pink sheets.
- Many legitimate brokers will not accept cheap stock orders due to the sheer number of fraud cases inherent in this market.
- However, be warned, cheap stocks can be a risky investment. The US Securities and Exchange Commission (SEC) says that the price of these stocks is difficult to determine, and that selling them once you own them will also be difficult (these stocks are illiquid). These cheaply traded stocks are also prone to large supply-demand spreads (the difference between buying and selling securities) so it can be difficult to make money trading them.
- In addition, fraudulent brokers prey on inexperienced investors by providing false information about the company's expected performance, as well as using well-known spokespersons to market poor investments.
Part 4 of 4: Making Smart Investment Decisions
Step 1. Decide what you can afford to trade
Start slowly as you learn to make smart decisions about what to trade. Trade only with the funds you can afford. Once you start earning profits from shares, you can reinvest those profits. This process helps your portfolio grow exponentially.
You can also trade borrowed money using a margin account, which allows you to potentially increase your returns. However, this poses equally great risk and may not be appropriate for most traders, even those with a high risk tolerance
Step 2. Diversify your investment portfolio
Be aware that stock trading is an unreliable source of money; what is profitable today may not be profitable tomorrow. Diversifying your trading portfolio means choosing different types of securities to spread your risk. In addition, invest in different types of businesses. Losses in one industry can be offset by gains in another.
- Consider investing in an electronically traded index fund (ETF). This is a good way to diversify because they have a lot of stock and can be traded like any common stock in the market.
- Note again that trading is different from investing. Investing means holding the same security over a long period of time to build value slowly. Trading, also known as speculation, relies on fast trading and carries more risk for the trader.
Step 3. Treat trading like a job
Invest time in your research. Stay up to date with the latest financial news. If you don't have time to do your own research, consider investing in more ETFs to spread your risk. Or, maybe you should enlist the help of a professional broker instead of trying to do it yourself.
Step 4. Make a plan
Think about your investment strategy and try to make smart decisions. Determine beforehand how much you plan to invest in a company. Limit how much you are willing to lose. Set a limit on the percentage decrease or increase in price. This step will automatically schedule an order to buy or sell once the stock price drops or rises by a certain percentage.
- Two commonly used automatic orders are "stop loss" and "stop limit" orders. A stop loss order immediately triggers a sell order when the price of the security falls below a certain point. On the other hand, a stop limit order still triggers a sell order when the price drops below a certain point, but will also not fill the order below a certain price.
- This means the stock price may continue to fall below your order and be filled with stop loss orders, but stop limit orders will prevent you from taking too much of a sell-off. Otherwise, your order will not be fulfilled until the price rises to the limit you set.
Step 5. Buy at a low price
Resist the temptation to buy stocks with good performance when the price is high. Perform technical analysis of stock performance. Try to detect patterns of price changes, and predict when the stock price will drop. Try to get the stock when the price is at its support level.
Step 6. Trust your research
If you see a stock price falling, don't sell it for fear of losing your investment. If possible, leave your investment intact. If your research is correct, your target price point may still be achievable. Letting go of a stock when the price drops can cost you a lot of money because you don't make a profit when the price starts to rise again.
Step 7. Reduce costs
Brokerage fees can reduce your profits. This is especially true if you participate in day trading. Day traders buy and sell stocks quickly throughout the day. They hold stocks for less than a day, sometimes just seconds or minutes and look for opportunities to make quick profits. Day trading or any strategy you use frequently to buy and sell securities can be expensive. For each transaction, you may be charged transaction fees, investment fees, and trading activity fees. These fees build up quickly and can significantly add to your losses.
- Day trading can be very costly and difficult for inexperienced traders, 99% of nonprofessional day traders lose money and end up quitting the market.
- Instead of executing high-volume trades, minimize the costs you incur to brokers and other intermediaries by making long-term investments in companies you trust.
- The SEC and other financial advisors have warned that day trading, while neither illegal nor unethical, is not only extremely risky but also extremely stressful and expensive.
- While timing the buying and selling of securities is very important, relying on the intrinsic value of the company you invest in will be profitable in the long run.
