Stock trading is one field which has continued to make people a lot of money over the years. There are however, some people who would strongly disagree with me after they made huge losses and exited the market. The stock market is risky and complicated and if you fail to start right, you might not make it too far. In life, there is never a legit quick and easy way to make money. It is the same in the stock market. You must be ready to put in a lot of time, commitment and discipline. After setting this attitude, here are 8 tips you should know before embarking on stock trading.
The first tip is to understand the difference between trading and investing so as to decide which side to belong. This is because there are different strategies for investors that will not work for traders and vice versa. A trader buys stocks and sells them within a few minutes, hours or days. An investor is a long-term participant in the market. They can hold onto their stocks for months or years. Choosing whether to be a trader or investor before you start will set your trading journey on track from the start.
You should gather all the basic knowledge about the stock market before you dive in. Most beginners are in rush for quick money that they enter the market blindly. You should know what stocks are,market Cycle the stock and timings, stockbrokers, etc. Without this basic knowledge, you will be unable to build good investing or trading strategies.
Selecting a stockbroker is a very key decision you have to make before you start your trading/investment journey. It can be difficult as there are many fake stockbrokers who are only after the money of a naïve beginner. You should do your research on the reputation of the stockbroker you are selecting. Look at their trading software and brokerage before making that decision. Brokerage is especially important as you will have to pay it whether or not you make a profit. It is worth noting that for stock traders, brokerage for multiple trades will add up to huge amounts quickly.
You should make sure that the trading software of your stockbroker has a stop loss option. Stop loss option will help you avoid a lot of losses by setting a minimum price which you want your position to be squared off automatically, if your shares drop. For example, if you purchased 100 shares at a price of Ksh. 23.00 and you expect that shares’ price to rise, you may set your stop loss at Ksh. 20.00. If the shares’ price does actually fall, it will be squared off at Ksh. 20.00. Stop loss is now provided by most stockbrokers and I would encourage you to use it.
A lot of stock trading beginners lack capital and usually get tempted to use the margin facility. Margin facility is offered by stockbrokers, where they enable you make more purchases with your limited capital. For example, your stockbroker may decide to give you a margin of 5 times your capital. Therefore, you can buy shares worth $ 5 with $ 1. The issue with margin facility is that all its trades have to be squared off by close of market on that day. This may incur huge losses on the beginners. I would advise margin facility only for professionals.
Short selling takes advantage of a falling market to make money. In the normal process, you first buy shares and sell them at a higher price, thus making profit according to the number of shares you have. In short-selling, however, you first sell your shares and then buy them at a lower price, hence works in a falling market. Though it is a good move, I would recommend beginners to avoid it and use the normal buy-sell strategy. When you gain some experience in the market, you can now use the sell-buy strategy.
Derivatives market involves contract-based purchases. It is made up of options and futures which have an expiry date. It allows you to make huge purchases with your little capital, just like in margin facility. The derivatives market is well-suited for professionals in the market and I would not advice beginners to engage in it.
It is important to start with small amounts of capital. Make use of a trading account demo to be accurate. Understand technical and fundamental analysis if you want to thrive well in the market. If you want a long-term investment, diversify. Make sure you understand financial statements and reports from companies. You should never invest money that you need at that moment or in near future and never get emotionally attached your shares.