Before you start to trade stocks, there are things you need to know. Whether you decide to just invest in stocks or want to start trading them, knowing what to expect, when to expect and what tools you would need to help you prepare for your entry in the stock market is essential. If you are completely ready ahead of time, the chance of becoming successful in a short period is more likely.
This guide will walk you through the entire process in simple terms and also make you aware of the things you need to know before you start trading stocks. This guide is especially useful for beginners who have limited knowledge about stocks, expenses, commissions, hidden fees, and many such elements.
A to Z Steps Involved in Online Stock Trading
Education before wading into any type of investment is very crucial. You have to lay a foundation before you begin the journey. So let’s see the steps involved.
1. Choose Your Stock Broker for Your Trading Purpose
You have to first open a brokerage account with an online stock broker. You have to pay attention to several pointers before you decide to settle for with the right one. For instance, you need to think about accounts minimum, prioritize the low commission on the investments, consider your trading style and tools needed, and know the difference between other brokers and prime brokerage.
2. What Type of Trade Do You want to Place?
There are overall twelve types of trades in the stock market. Once you have chosen a stockbroker, you have to begin buying investments, such as mutual funds, bonds, stocks etc. However, even before that, you got to be acquainted with the different types of trades you can place. Although as an investor, you won’t encounter more than a few trades, here is the complete list of trades for your knowledge.
- Market orders and Limit orders
- Stop order and Stop Limit order
- All or None orders
- Selling Short and Buy to Cover orders
- Bracketed orders
- Trailing stop orders
- Summary of stock trades
- Day and GCT Orders
3. Learn How to Avoid FrictionCosts
The biggest foe of stock trading is frictional expenses. Friction costs are hidden investment tax and the most frequent frictional expense is brokerage commission and fees. Other types of frictional expenses include capital gain tax, spreads, and frictional expense in mutual funds, such as fees and sales loads. Frictional costs are money that you would spend without receiving any benefits out of it. . You have to learn how to avoid them to mitigate risks.
4. The Next Step Would Be Trading Stock on Margin with Borrowed Money
You can borrow money from your brokerage firm if your stock trading brokerage account is under speculation. This is a good option if you want to make an entry during the speculation phase. This option is known as trading on margin. Margin trading refers to the process where you buy more stocks than you can afford with borrowed money. Margin trading involves buying and selling securities at one single go. You have to place a request with your broker to open a margin account, however. And, there are three steps involved in Margin Trading that you have to follow.
5. Now You are Eligible for Short Stock
Margin trading approval also makes you an eligible candidate for short stock. You can start trading short stocks before you dig deep. This is a place where you make money when the company shares fall or when they crash. It has its own pros and cons; however, every successful investor would have traded short stocks at one point in their career. One of the biggest shortfalls in here is you get exposed to unlimited liabilities.
6. Invest in International Stock through ADRs
If you are a resident of United States and if you are interested in stock trading in the foreign market, you can definitely buy and sell shares of foreign companies from your home country using American Depository Receipts (ADRs). You can easily find out if a business has ADRs. International Investment can be tricky, however, most financial advisors recommend investing in some foreign stocks to diversify a portfolio. There are other ways to diversify your investment, such as with ETFs and Mutual Funds.
7. Know Your Market Makers
You cannot trade stocks and invest in them without the help of Market Makers. Their role is crucial and it is better you know about them because there are high chances of your order to go through a market maker on one of the stock exchanges, every time you trade a stock. Market makers are essentially the retailers of shares and display their prices in working hours. They can also manipulate the price and can conjure shady deals and exploitation. However, they can help you buy and sell shares at a moment’s notice.
8. Investment Bank in Stock Trading
Now you have to go one step further and get acquainted with investment banks. Investment banks are financial institutions that work with large finance and help companies to ascertain the market, both stock and bond markets, to raise money for expansion and other needs.
For instance, if a processed food company wanted to sell few billion worths of bonds to build a new packaging plant in South Africa, an Investment bank would help find investors for the bonds and take charge of the paper works and documents, and deal with accountants and lawyers.
9. Learn to Avoid Wash Sale Rule
Naturally, most investors, like us would like to lower our tax bills. Sometimes, investors sell assets that have come down below purchasing price and claim a capital loss. However, by doing so, you may accidentally violate the wash sale rule.
The wash sale rule prohibits an investor to claim a capital loss for taxing if the investment in which capital loss took place is repurchased within 30 days. However, you can avoid wash sale rule if you know how to do it without making a muck of yourself.
10. Know How Stocks Can Affect Your Tax Bill
The last step would be to learn and understand the tax rules for each of your positions. This is very important if you are planning to be an active trader. For instance, the shorter you hold a stock the more you will pay taxes to IRS.
Hence, you should know how holding period affects capital gains tax and how you can make the most use of it.
5 Points to Consider for Trading Stocks
Now that you know the basics of stock trading, here are 5 things you should do before you even consider stock trading and investing
1. Are Your Priorities Right?
It is important to make sure that you are ready for this kind of investment. You cannot begin investment with your credit card. You have to spend less than what you earn to stay debt free. Unless it is your home loan, any investment you make should be cautiously done. Set a goal and start learning about investing and set up a debt payment that will help you clear your debts faster and start investing as soon as possible.
2. How Much You Invest?
How much can you invest initially and how much can you continue to invest monthly and annually. This will help you determine the right investments for your budget. When you know your budget, your goals will automatically get clearer and stronger. Do not invest your emergency fund. Emergency funds are for critical uses, such as wealth and long-term savings and hospitalization. Start saving a minimum amount every month to make things working.
3. Where is Your Financial Planner?
Okay, so you cannot do it all. Every aspect of business or trading or anything else requires an expert. So, your basic step in investing would be getting in touch with a financial planner. Make sure you choose someone who takes the time to explain the types of investments, trades and the pros and cons of investing. This person will ensure that you see a potential growth in your stock trading while making you feel safe.
Your financial planner should also set up an effective financial plan for you. You can also go for an online investment firm; they cost less but they will not take you through the entire process, such as risks and other rules, like a financial planner.
4. Do You Understand the Different Types of Investment Accounts and the Risks Involved?
If you understand the basic investment tools, accounts, and strategies, it will help you in several ways to save for your retirement as well. Make sure you know the difference between money-making accounts and mutual funds, and understand their ‘goods and bads’. You have to simultaneously figure out how comfortable you are at taking risks. Ask questions and research. You can also consult your financial planner for clarity.
5. Have You Considered Real Estate Investments?
You may consider using real estate as an investment or wealth building tool and we must add that it is a great investment option. However, there is a difference between long-term real estate properties and flipping properties; know them and learn more about their investment plans. Talk to someone who is in this trading. Read books and research about passive income generating real estate for that is a good option to start your real estate investment.
We have tried to get the basics of stock trading for beginners covered in the blog. Hope it gives you the kind of exposure you are looking for. If yes, do share your views in comments.