Five Steps to Start Stock Trading: Tips for Beginners

Are you just starting to enter the world of stock investment? It feels like a mysterious realm at first. You might not understand what to do with your money to achieve success as you have seen in other people. This is why many beginner investors are more likely to throw away their capital in careless manner. 

They tend to rely solely on their instincts, instead of utilizing tangible strategies that will lead to maximized return. Such approach in stock buying is proven to be dangerous because you do not have the necessary means to determine the security of your investment.

How should a beginner investor start buying stocks? There are several steps that you have to follow.

1. Selection of the stockbroker

Today, everyone will tell you about the practicality of working with online stockbroker. Online stockbroker allows user to have greater access to stock market at relatively low cost, especially if compared to traditional brokerage. It also enables you to have more control over your own account because the operational is done through your gadget. Still, figuring out which online stockbroker that can cater your financial objectives is a task that you need to do carefully. An online broker will have different approach from another.

You have to understand what you need first prior registering to an online stockbroker website. There are some typical aspects that you have to decide to assess your actual needs, including:

Do you want to be an active or passive investor?

How knowledgeable are you in stock investment?

What kind of assistance that you are expecting to get?

What are your investment goals?

Educating yourself about the most pivotal characteristics that a reputable brokerage needs is something you should not skip on. It would be better that the broker is registered to several bureaus such as Financial Industry Regulation Authority (FINRA) and Securities Investor Protection Corporation (SIPC). The online broker should also be covered in insurance. Usually, insured broker will be registered by Federal Deposit Insurance Corporation (FDIC).

 Since you will need to share sensitive information, you have to ensure that the broker’s database is secured. It will be better if the online broker has two-factor authentication and if it has advertisements. You have to check the product offerings as well as fees (including the hidden costs). If the broker has platform simulation, then it will be better to try it out.

2. Researching the target stocks

Once you have started a broker account then you need to conduct research on the stocks that you are interested in buying. As a prerequisite, you are recommended to be updated with the latest news. The news is not limited to the financial world but also political and societal issues. This observation will provide insights that go beyond the numerical data you obtain from your research. You will have more wholesome data to interpret.

As a beginner, there are few steps that you need to conduct in researching target stocks. You have to obtain the company’s financial data. It contains two main documents: 10-K which is an annual audited report of financial statement and 10Q which is a quarterly report on company’s operational and financial gains. It will be helpful if you can manage to narrow down your focus because the report can get overwhelmingly packed. Generally, you only need to focus on information such as company’s net income, earnings per share ratio, return of equity, price earnings ratio, and revenue.

You also need to obtain qualitative data about the company, if you are inclined to purchase shares from it. The most valuable information would be to understand how the industry that the company dabbles in work. It can help you gaining insights about how the company is making money, competitive advantages it has, and possible business risks. You also need to check whether the company has good management team that can handle the market pressures. Once all of those data have been gathered, you need to synthesize them into a cohesive argument about whether it will be a worthy addition to your portfolio.

3. Making decision about the number of shares

At this point, you have already decided on the company that you are going to put your capital in. Then, it comes to determine how many shares that you are going to purchase. It is a tough decision that you should not make rashly, even if you think that the firm you are investing in has very promising future. By ensuring that this decision is made according to sound arguments, you also ensure that your portfolio would be more sustainable.

In the initial step of decision making, you need to look into your own financing to see how much money that you can invest at that time. After that, you can compare your own financing ability with the stock price of the company you want to invest in. You should be able to see how many shares it is possible to purchase for you. One thing that you need to remember about this is that you should never take a loan just to finance your stock investment venture. Even in low-risk companies, the risk is still present. You do not want to deal with the aftermath.

After you get the approximation of your ability to purchase shares in that stock, you need to consider portfolio diversification. Every expert would tell you that investing only in one company is such a risky move. It means that you are putting all your capital in one spot. If your portfolio is more diversified, you are dividing the risks to several stocks. If a stock’s value plummets, you still have other fallbacks. So, it is recommended against buying the maximum number of shares according to your financial ability.

Last but not least, you should check the broker’s regulation. Some brokers only enable users to purchase rounded number of shares. However, there are certain brokers that will allow you to purchase only a fraction of share. This will impact the number of shares you can purchase. You should also check whether there is a brokerage fee applied for your purchase.

4. Selection of stock order type

When you are considering investing in stock, you need to understand certain basic concept including stock order. The order means instructions from your to the broker to purchase or sell a security. Generally, there will be two types of order that you will see from time to time. The first one is limit order while the other is market order. Market order is always going to be simpler than the limit order.

Market order is an order to purchase or sell immediately after the order is given at the current price point. This particular order is great for beginner investor who does the investment activities individually. It is because you do not need to wait for delay to obtain or let go of stock. If the market price is very volatile, you will be surprised to see that the price at the moment you lock the order is different than the last recorded price.

Meanwhile, there is a concept of limit order. Different from market order, you cannot get or sell stock immediately after you release the order. You have to wait for sometime in the future because it aims to lock the price at certain point. It all based on prediction, so according to the data that you obtain, the price will reach certain point after certain time. If the price deviates from your prediction, your order will not be processed further. It is noticeably more secure. You will find four general types: sell stop, buy stop, sell limit, and buy limit.

You have to consider which order that suits your portfolio better. But it is not only for that portfolio quality. You select your order because that way you can predict the cost that can possibly added to your expenses. Market order tends to be provided at lower cost.

5. Optimization of investment portfolio

Because the trading world is changing continuously, you need to revise your plan as it goes to optimize your portfolio. You have your targets set up, but if the situation changes in the direction that you are not expecting then you need to make some adjustments to ensure that your goal would be met. You need to continuously analyze the market and compare it to your own portfolio. That way, you will not if there is some discrepancy between the two.

You also need to get information be it from professionals or from data that you get on your own. This will help you forecast the possible condition in the future and see if your portfolio will withstand the test of time or you need to change some things. If there are indications that you are investing in stock that will harm your finance in the future, you should not be afraid to make decision to quit from that before the situation is aggravated even further. You need to make decision to purchase shares in new and promising companies too should the opportunities arise.

Those are basic knowledge for beginner investor in stock trading. You should be open to new learning experience and adapt quickly to the changes in environment. That way, you will have a great time building your portfolio.


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