Stock Trading Guide: First Steps to Begin Your Journey

Eager to Trade but Unsure Where to Begin?

Trading stocks can be an exciting and profitable way to grow your wealth. However, for beginners, the stock market’s complexity, with its various strategies, platforms, and tools, can be overwhelming. Many new traders enter the market daily, but a lack of knowledge, preparation, and proper risk management prevents them from reaching their full potential.

If you’re eager to learn how to trade stocks but don’t know where to start, you’re not alone. The good news is that anyone can become a successful trader with the right knowledge, mindset, and approach. In this guide, we’ll walk you through six essential steps to begin stock trading, including determining your trading style, choosing a brokerage, conducting research, placing orders, and managing risk.

Whether you’re a complete novice or have some investment experience, this article will give you the foundation needed to confidently enter the world of stock trading. By following these steps and continually expanding your knowledge, you’ll develop the skills and strategies necessary to succeed in the ever-changing stock market. Let’s dive in and explore how you can start trading stocks today.

 1 Determine Your Trading Style

Before you begin trading, it’s crucial to decide on your trading style. Are you interested in short-term trading, or are you focused on the long-term? Do you have the time and dedication to be a day trader, or would swing or position trading be more appropriate?

Consider your personality, risk tolerance, and the time you can realistically devote to trading. Reflecting on these factors will help you choose a trading style that aligns with your goals and abilities.

For example, if you are generally risk-averse and don’t have much time for stock market analysis, day trading might not be the best fit. It requires constant attention to the markets during trading hours and making quick decisions under pressure; it’s not for the faint of heart. Swing or position trading may be more suitable, as these allow for longer holding periods and require less time commitment.

Most common trading styles

Swing Trading

• Holding Period: From days to a few weeks or months
• Time Commitment: Moderate
• Risk and Volatility: Moderate

Position Trading (Long-Term)

• Holding Period: Several months, years, or even decades
• Time Commitment: Low
• Risk and Volatility: Low to moderate

Day Trading

• Holding Period: Intraday (positions are closed by the end of the trading day)
• Time Commitment: High
• Risk and Volatility: High

Day traders seek to profit from short-term price movements and typically close all positions by the end of the trading day, making their trades the quickest. Swing traders, on the other hand, hold positions for several days to a few weeks or months, aiming to capture short- to medium-term trends. This style requires less time commitment than day trading but still demands significant market engagement.

The third style is position or long-term trading, where investors hold stocks for several months, years, or even decades. These traders focus on long-term trends, often relying on fundamental and technical analyses. This approach requires patience and a long-term perspective, with less frequent trading compared to the other two styles.

There is no one-size-fits-all approach to trading. It’s crucial to choose a style that aligns with your personality, risk tolerance, and lifestyle. As you gain experience and knowledge, or as your circumstances change, your preferred trading style may also evolve.

2 Research Brokerages and Choose One That Fits Your Trading Style

Once you’ve chosen your trading style, the next step is to find a suitable online broker and open an account. It’s important to select a brokerage that aligns with your trading needs, as different platforms offer varying features and tools tailored to specific trading styles.

Brokerages for Day Traders

Day traders require a platform with fast speeds (low latency), real-time data, and advanced charting capabilities. Essential tools for day traders include Level 2 quotes for detailed order book information and hot keys for rapid order execution. Some platforms also offer automated or algorithmic trading options, triggers, and a range of technical indicators. Popular brokerages for day traders include Interactive Brokers, TradeStation, and TD Ameritrade’s thinkorswim, known for their customizable platforms.

Brokerages for Swing Traders

Swing and position traders should seek platforms that offer a variety of indicators, research resources, fundamental analysis tools, and risk management features. Mobile trading apps are also beneficial for monitoring positions and trading on the go. Brokerages like Charles Schwab, Fidelity, Robinhood, and E*TRADE are well-suited for swing and position traders, providing a good balance of research tools, user-friendly interfaces, and competitive pricing, often with commission-free trading in most stocks and ETFs.

Brokerages for Long-Term Investors

Long-term investors or those new to trading should consider brokerages with strong educational resources and easy-to-use interfaces. Robo-advisors such as Betterment and Wealthfront are excellent options for those who prefer a more automated portfolio management approach. These platforms use algorithms to create and manage diversified portfolios based on the investor’s risk tolerance and goals.

For a more comprehensive overview of the best brokerage platforms for different trading styles, check out our list of the best online brokerages and platforms.

Many brokerages offer free demo accounts, allowing you to practice trading with virtual money before risking your own capital.

3 Open and Fund a Brokerage Account

After selecting a platform that suits your trading style and needs, the next step is to open and fund an account. This process is straightforward and can be completed in minutes.

1. Provide Your Personal Information: You will need to supply your name, address, date of birth, Social Security number, and other basic personal details. This information is required by law to verify your identity and prevent fraud.

2. Choose Your Account Type: Brokerages offer various account types, such as individual taxable accounts, joint accounts, and individual retirement accounts (IRAs) including traditional and Roth IRAs. Select the account type that best fits your trading goals and tax situation.

3. Complete the Application: Fill out the online application, which may include additional questions about your employment status, income, net worth, and trading experience. This information helps brokerages comply with regulations and assess your risk tolerance. It may also be used when applying for features such as margin (borrowing to trade) and options. Be sure to read and agree to the brokerage’s terms and conditions, which outline the services provided, fees, and your rights and responsibilities as a client.

4. Fund Your Account: Once approved, you’ll need to deposit money before you can start trading. It may take a few days for the funds to become available for trading, depending on the funding method and your brokerage’s policies. Most brokerages offer several ways to fund your account:

    – Bank Transfer: Link your checking or savings account and initiate an ACH transfer. Funds usually appear in your account within a few days.

    – Wire Transfer: For faster trading, send a wire transfer from your bank to your brokerage account. Wire transfers typically clear the same or the next business day, but may incur an extra fee.

    – Check Deposit: Some brokerages allow you to mail a physical check to fund your account, though this is the slowest method.

Ensure you understand the minimum balance requirements and any maintenance fees associated with your account. Some brokerages require a minimum initial deposit or charge fees if your balance falls below a certain amount.

When reviewing brokers, compare their commissions, research and analysis tools, ease of use, and reputation. Online resources offer broker reviews to help you find the right broker.

4 Research the Stocks You Want to Own

Before investing, it’s crucial to research the stocks you’re interested in. This involves analyzing the company’s fundamentals and the stock’s price movements over time. Combining fundamental and technical analysis will give you more confidence when making your investment decisions.

Fundamental Analysis

– For Position Traders and Long-Term Investors: Evaluate a company’s financial health, competitive position, and growth prospects. Review financial statements to assess profitability, debt levels, and liquidity. Look for companies with consistent and growing earnings, indicating a robust business model and effective management. Additionally, understand the company’s industry and its market position. Consider its market share and growth potential. Research the management team’s track record and the company’s competitive landscape.

Technical Analysis

– For Day Traders and Swing Traders: Study past prices and volume data to identify trends and patterns that may indicate future price movements. Look for recognizable chart patterns, such as head and shoulders, triangles, and wedges, which reflect market participant behavior. Use moving averages to identify trends and potential support and resistance levels. Employ oscillators, like the relative strength index (RSI) and stochastic oscillator, to gauge momentum and identify when a stock is likely to rise or fall. Many platforms provide these technical analysis tools.

News and Sentiment Analysis

Monitor news and investor sentiment for the stocks you’re interested in. Review earnings reports, management guidance, analyst ratings, and any geopolitical or macroeconomic events that could impact the company or its industry.

Diversification

To manage risk, invest across different sectors, market capitalizations, and geographic regions. Diversification helps mitigate the impact of underperformance in any single stock or sector.

Continuous Learning

Expand your knowledge by reading financial articles, stock market books, and website tutorials. Watch financial news channels like Bloomberg TV to stay informed about market trends and economic indicators that could affect your holdings. Adapting to new information is essential for long-term success as a trader.

Remember, research and analysis is an ongoing process. As you gain experience, you may refine your methods and develop a personalized approach to stock selection. Regularly review and assess your portfolio to ensure it aligns with your trading goals and risk tolerance.

Many brokerages offer extensive research resources and tools to help you analyze stocks and make informed decisions, including stock screeners, fundamental and technical data, market news, and educational content.

5 Place Your Order to Buy or Sell Stocks

After developing a trading plan and researching various stocks, it’s time to place your orders through your brokerage. When placing an order, you’ll need to provide the stock ticker symbol, the number of shares, and the type of order you wish to use.

Market Orders

– Description: Request your brokerage to buy or sell a stock at the best available price.

– Pros: Executed quickly, ensuring your trade goes through.

– Cons: You might get an unfavorable price, especially in volatile markets or with less frequently traded stocks.

– Best Used: When you need to make a trade quickly and are willing to accept the current market price.

Limit Orders

– Description: Set the maximum price you’re willing to pay (for buying) or the minimum price you’re willing to accept (for selling).

– Pros: Provides more control over the execution price.

– Cons: Your order may not be filled if the stock never reaches your limit price.

– Best Used: When you have a specific price in mind and are willing to wait for the market to reach that level.

Stop Orders

– Description: Triggered when a stock reaches a specified price, turning into a market order filled at the next available price.

– Pros: Can limit losses or protect profits if a stock’s price starts to fall.

– Cons: In fast-moving markets, your order might be filled at a significantly different price from your stop price.

– Best Used: To manage risk and protect your position against unfavorable price movements.

Order Modifications and Cancellations

– Description: You may be able to modify (e.g., change the limit price or number of shares) or cancel your order before it’s executed.

– Note: In fast-moving markets, your order may be filled before you can modify or cancel it.

Time in Force

When placing your order, you’ll also need to specify the duration for which it remains active. Here are the most common options:

– Day Order (DAY): Active for the current trading day only.

– Good ‘Til Canceled (GTC): Remains active until you cancel it or it expires, usually 60-90 days.

– Immediate or Cancel (IOC): Requires immediate execution of all or part of the order; any unfilled portion is canceled.

– Fill or Kill (FOK): Requires immediate execution of the entire order; if not, it is canceled entirely.

Understanding these options will help you effectively manage your trades and align them with your trading strategy.

When trading, it’s crucial to double-check the details to avoid costly errors. Make sure you’ve entered the correct stock ticker, order type, quantity, and price (if applicable). Verify that the number of zeros in the quantity is correct, as buying 1,000 shares is significantly more expensive than buying 100 shares (this mistake is common). Additionally, be aware of any fees or commissions associated with your trades, as these can impact your overall profits.

6 Managing Risk

Once you’re actively trading with real money, managing risk becomes crucial. This involves identifying, assessing, and ranking potential risks to minimize their impact on your portfolio. By implementing effective risk management strategies, you can protect your capital, limit losses, and improve your trading performance.

Diversification

Spread your investments across different stocks, sectors, and asset classes to reduce the impact of any single investment’s performance on your overall portfolio. This is particularly important for long-term investors. However, keep in mind that diversification does not guarantee profits or eliminate the risk of loss.

Emotional Discipline

Emotional control is vital for managing risk. Emotions such as fear and greed can significantly affect your trading decisions. Fear may lead you to exit a position too early, while greed can cause you to hold onto a losing stock longer than advisable. By managing your emotions and sticking to your trading plan, you can make more rational decisions and avoid impulsive trades.

Hedging

For more advanced traders, hedging involves taking a position to offset the risks of another trade. For instance, if you own a stock, you could buy a put option to protect against a potential decline in the stock’s price. While hedging can be complex and involves certain costs, it can be quite effective in managing risk.

Position Sizing

Position sizing refers to the number of shares or contracts you trade relative to your account size. Proper position sizing helps you control your risk exposure and avoid over-concentrating your investments. A general rule of thumb is to risk no more than 1% to 2% of your account on any single trade.

Risk-Reward Ratio

This compares the potential profit from a trade to the potential loss. A common risk-reward ratio is 1:2, meaning you risk $1 to potentially earn $2. Maintaining a favorable risk-reward ratio ensures that your winning trades are larger than your losing ones, helping you achieve overall profitability.

Stop-Loss Orders

Stop-loss orders automatically close your position if the stock price reaches a preset level, limiting your potential losses and protecting your capital. When setting a stop-loss, consider the stock’s volatility, support and resistance levels, and your risk tolerance. A trailing stop is a type of stop-loss that adjusts automatically as the stock price moves in your favor, allowing you to lock in profits while still limiting potential losses. If the stock price reverses and hits the trailing stop, your position will be closed, securing your gains.

Risk management is an ongoing process that should be regularly reviewed and adjusted. As your trading skills, life circumstances, and economic conditions change, you can adapt your risk management strategies. Regardless of your circumstances, prioritizing risk management is essential to protect your capital, minimize losses, and increase your chances of long-term success.

Traits of a Successful Trader

Beyond knowledge and experience, discipline and mental fortitude are crucial traits of a successful trader. Discipline is essential for adhering to your trading strategy, especially when facing challenges. Without it, small losses can escalate into significant ones. Mental fortitude is necessary to recover from inevitable setbacks and bad trading days that every trader experiences. While trading acumen is also important, it can be developed over time as you gain more knowledge and experience.

The Bottom Line

Begin your trading journey by familiarizing yourself with the financial markets. Study company fundamentals, analyze charts, and observe price movements to see if they align with your expectations. Use demo accounts to practice trading, review your results, and make necessary adjustments. Once comfortable, research stocks, select a brokerage, and start making trades. Remember, this is just the beginning of your investing journey, not the end.