Valued at an incredible $112 trillion (as of July 2023), the stock market is an important part of the global economy. Not only is it an important source of capital for businesses, but it also provides investors with the opportunity to share in the profits of publicly traded companies.
YOUR CAPITAL IS AT RISK
When done right, investing in the stock market has the potential to grow your money as, historically, it offers a steady return on investment that outperforms money left sitting in a savings account. Here’s how to get started in stock trading.
Table of contents
What Is Stock Trading/Investing?
The terms “stock trading” and “investing” are often used interchangeably, but they differ. Understanding the market nuances is crucial for beginners navigating the financial landscape.
An investor adopts a long-term perspective, focusing on a company's potential for sustainable growth. When investing, patience is key as you anticipate future yields in the form of capital appreciation and dividends. Investing prioritizes stability and compounding returns over swift profit-taking. Think Warren Buffett.
In contrast, traders have an opportunistic spirit, actively buying and selling stocks to capitalize on short-term market fluctuations. Traders seek short-term opportunities to buy and sell within days, weeks, or even minutes. Trading requires keen market awareness, rapid decision-making, and a higher tolerance for risk.
While they are different, they're not mutually exclusive. Many investors incorporate elements of trading into their portfolios, allocating a smaller portion for short-term maneuvers while maintaining a foundation of long-term holdings. While many traders will also hold a long-term portfolio.
Ultimately, deciding whether to trade or invest in stocks depends on individual financial goals, risk tolerance, and other personal factors.
Remember, thorough research and understanding are paramount before venturing into either realm.
The First Steps For Stock Trading
Step 1 – Define Your Investment/Trading Goals: The first step is to define your goals as an investor and/or trader. Assess and clarify what you want to achieve financially.
Step 2 – Determine How Much You Can Invest: Determine the amount of money you can afford to put aside for your investing/trading account. This should be money you can afford to lose.
Step 3 – Understand Your Risk Tolerance: Ascertain your comfort level when it comes to risking a portion of that cash in the stock market. Remember, whether you are trading or investing, risk management is key.
Step 4 – Trading/Investing Style: Using the above steps, the next stage is to determine your investing style. Will you be actively trading each day, swing trading, or investing?
Step 5 – Research Brokerage Accounts: Depending on how you want to invest/trade, each brokerage will have positives and negatives. Ensure that any platform you sign up to is regulated in your home country.
Step 6 – Understand the Costs: Make sure you get a clear understanding of the costs involved with each transaction you make. For example, some accounts may charge for deposits, withdrawals, and inactivity.
How to Begin Trading Stocks
Before jumping straight in, invest time in learning the market. Analyse financial statements, understand different investment strategies and learn common technical indicators. The more knowledge you equip yourself with, the smoother your trading journey should be. It won’t be easy, but entering the market with as much knowledge as possible is not a bad thing. It will never be plain sailing but make sure to have a clear plan. Here are some steps to help you on the journey:
1. Practice on a Demo Account: Once you have acquired a solid base of knowledge and understanding, the next step is to practice some of the skills you have learned. Firstly, open up a demo account with a broker. Make sure to research the various brokers (that are regulated) and pick the one that fits you best. You can, of course, change later down the line. A demo account will allow you to practice trading with virtual money. As the saying goes, if you don’t know yourself, the stock market is an expensive place to find out. Practice with virtual money before you use any of your own. Perfect your stock trading strategies.
2. Do Research: Research companies and their earnings, and read research articles to make sure that you are making well-informed decisions when deciding to buy or sell a specific stock. You will need to search for the stock you want to buy or sell. Our very own news page is a great place to keep up-to-date with the latest breaking market news.
3. Place an Order: Once you’ve identified the perfect stock, it’s time to buy. You need to click the buy or sell button (that will bring up a trade ticket) and fill out the trade ticket for the stock. Don’t click buy before you have completed the trade ticket, as it will include the trade size and whether you want to add a stop-loss (you should) or take profit level. Once you’ve done all of that, you will need to review the order and place the trade.
How Many Times Can You Trade Stocks in a Day?
The number of trades you can make in a day depends on various factors, including your strategy, trading style, the amount of money you have in your account, and the amount of margin you have access to. If you are using a non-margin account, there is no limit to the number of times you can trade stocks in a day.
However, if you trade with margin and have less than $25,000, you must comply with the ‘pattern day trading’ rule’. According to FINRA, if you trade four or more times in five business days, you are defined as a ‘pattern trader’.
As a pattern trader, you must maintain a $25,000 balance in your trading account at all times. If it falls below this amount, your broker will not allow you to execute any further trades until your account reaches this level again.
Stock Trading Advantages
Here are some of the advantages of investing in the stock market:
Return on Investment: Whether you are trading the stock market or building a long-term stock portfolio, the market has the potential to provide a high return on investment, although it also comes with risk.
Owning a (Small) Portion of a Company: If you are investing in the stock market, it’s a great way of having an ownership stake in a company, and, you may be paid back consistently via the company’s dividends.
Stock Trading Disadvantages
Risk: As mentioned earlier, investing in the stock market can be risky. The higher the potential reward typically means there is a higher risk. So it is essential to be aware of the risks and protect yourself against them.
Time: Trading the stock market can be extremely time-consuming. You will need to do your analysis, which itself can be extremely complex, find the right stock, enter a position, and then manage the trade until you decide to exit.