It seems like the easiest way to make money: Invest a few dollars in a company, wait for the stock to go up, then sell, sell, sell!
But trading stocks successfully is a tricky business, and you can easily fail trying to “short the market.”
“Stock trading without knowing all the rules is a really good way to lose money,” says Sam Seiden, chief educational officer for Online Trading Academy. He says customers will often start trading first, realize they’re hemorrhaging cash and then come to his site for help.
If you want to skip this doozy of a life lesson, do your research before ever opening an E-Trade account. Of course, you’ll never completely isolate yourself from losses — that’s just not how trading stocks works.
“Even guys who are thoroughly professional, do this for a living and have all kinds of resources say that 80% of their trades are losers,” says former UBS managing director Jeremy Hardisty, who now recruits executives for top trading firms. “A brilliant trader is getting trades right 55-60% of the time, max.”
If you’d like to inch toward brilliance, here’s the step-by-step guide to doing it. These tips won’t make you rich overnight, but hopefully they can save you from losing big your first time at bat.
How to Get Started With Online Stock Trading
1. Know the Difference Between Trading and Investing
Sure, both involve the markets, but they’re drastically different.
In investing, you plunk money into a broad range of funds and leave them there long term. Trading is buying something (stock, gold, foreign currency, commodities), with the belief that its value will rise in the very near future, at which point you’ll sell it.
“When you invest you want to diversify — that’s best for passive investing,” Hardisty says. The idea is as the years pass, some investments will grow while others won’t. Trading is done in the very short term.
2. Find Your Niche
Since specialization is key to successfully trading, you need to pick the assets you’ll trade with care. Options include stocks, bonds, commodities, gold and foreign currency.
Buying and selling stocks on the New York Stock Exchange is probably the best-known option — it’s also where the popular online marketplaces usually let you trade — but it’s not the easiest.
Hardisty says trading foreign currencies is much more simple, since they’re less volatile.
However, his advice isn’t to necessarily go with the easiest. Instead you need to figure out, “What do you think you have expertise and enthusiasm about?” To really become an expert trader, you’re going to need to know the inner workings of whatever industry you’re quite literally hedging your bets on.
3. Make Your Hypothesis
Every move you make on the stock market should look like this: I am buying this thing because I think it is at too cheap of a price. I believe the price will go up for X reason. I will sell it when it reaches Y price.
“Buying Whole Foods because you like it as a company may or may not work as a strategy,” Hardisty explains. “The big question is, why are you doing this? Why do you think it’s going to generate income? What’s your hypothesis?”
Ultimately, winning in stock trading is all about anticipating what might happen next. To strike with precision, you have to have to think critically about all of the possible variables that could affect the price of a stock between when you buy it and when you sell it.
4. Practice On Paper
It’s not very glamorous, but Hardisty says the best way to get started is with zero real dollars on the line.
Pick a stock, figure out your hypothesis for the stock, write it down and then wait. As the market moves you’ll see whether you were right or not. “And be honest,” Hardisty says, adding that it’s very easy to say I would have done this or that in hindsight.
5. Realize Your Limitations
These days, computers do the vast majority of trades. And when it comes down to it, you’re really no match for a robot — sorry to burst your bubble.
Computers trade using algorithms instead of gut instinct, and decisions are instantaneous. In fact, Hardisty says there’s been debate about how to make trading more fair, since computers closer to the NYSE can actually trade faster than those farther away.
Information travels quickly over fiber-optic networks, but distance matters. The fractions of milliseconds it takes for info to travel across town add up when a big investment firm is making thousands of trades a day.
You’re never going to be as fast or emotionally detached as a computer. So stock trading will likely never be as lucrative for you as it is for corporate Wall Street firms. If you’re thinking of this as your main means for generating retirement income, definitely think again.
6. Pick Your Website
Seiden says competition has, for the most part, pushed trading fees so low that the cost of trades is almost nothing industry-wide.
Still, since your account info will be synced with either your bank account or a credit card, you want to make sure you’re using a site with a good reputation.
Hardisty says most people choose their trading platform via the information it provides.
“People are looking for more data, more news, more research,” Haristy explains. He’s right. A 2015 survey of “self directed investors” by J.D. Power found what investors wanted most was access to guidance.
7. Put Most of Your Money Elsewhere
Robert Johnson, Ph.D., president of the nonprofit American College of Financial Services, says the money you allocate for stock trading needs to be small.
“Maybe this is what you do instead of going to Vegas,” he says.
The rest of your invested funds need to be in well-diversified, long term investments — and preferably ones providing compound interest.
Hardisty puts it like this: “At the end of the year this is not going to be a W-2 you can live off of.”
8. Understand the Psychology of Loss
Winning feels great, but losing hurts. And it hurts at a rate unequal to the joy we feel when we win.
This is called loss aversion, a well-known tenet of behavioral psychology and economics. Loss aversion is the reason people sell when the market slips.
“Our tendency is to take the loss to avoid further loss,” Hardisty says, adding, “And sometimes that’s the right choice. Sometimes it’s not.”
To avoid being “whipsawed,” a term for constantly reacting to a share’s most recent price change, you need to have a firm strategy in place and the discipline to stick to it — even when things are painful.
Your Turn: Do you know any other stock-trading tips? Let us know in the comments!
A.C. Shilton is a Tennessee-based freelance journalist with a husband who likes to trade willy-nilly on the stock market. Since researching this piece, their financial future (and marriage!) is looking a little less precarious.
The post Want to Trade Stocks Online? These 8 Expert Tips Can Help Get You Started appeared first on The Penny Hoarder.
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