Personal Finance

How to Trade Stock: A Beginners’ Guide

How to Trade Stock: A Beginners' Guide

Want to learn how to trade the stock market? You can start by learning the basics, then work your way up so you feel confident as you begin to trade.

Moving on, this beginner’s guide to online stock trading will act as a starting point and walk you through the basics so you can feel confident choosing stocks, picking a brokerage, placing a trade, and more.

Choosing an Online Broker

The first step requires you to open a brokerage account with an online stock brokerage. It is advisable to carry out in-depth research on the reputation, fees, and reviews of the options you have in mind. You have to be certain that you are choosing the best online stock broker for your situation.

Prominent things to look out for while researching include trading commission fees, easy access, and usage of the app or website in question, and provision of any research or learning tools for users.

There are big firms like Fidelity, Charles Schwab, and Vanguard that have been around for years, they are very well known for their low charging fee and they have both online and app-based trading tools.

Some platforms specialize in small trades and easy-to-use apps, such as Robinhood, WeBull, and SoFi. Speaking of trade platforms, Oil Profit is a good platform that guarantees complete peace of mind even as you trade crude oil. It comes highly recommended.

The style and size of brokerage are your choices to make.

Research Stocks

After choosing an online broker, the next step is to buy stocks. Here comes the tricky part. If you are brand new to trading, stocks may not be the best place to start. You may want to try exchange-traded funds (ETFs) instead.

With ETFs, investors can buy a group of stocks at once. This can help if you do not feel confident a beginner choosing one company over another.

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If you decide on going through this route, you can start with ETFs that replicate major stock market indices like the Dow, Nasdaq, and S&P 500. They give your portfolio broad exposure to the U.S. stock market.

Another option at this stage is to diversify your investments by investing in assets other than stocks. Bonds are a competent way to diversify and create less risk to your investments during stock market downturns.

Knowing the Right Kind of Trade that Works for You

There are different types of trade orders you can place when buying or selling a traded asset, such as a stock or ETF. The two most basic types are market orders and limit orders. Market orders execute instantly. The asset you are trading goes for the best price available at that moment.

Limit orders are a way of having greater control over the price you pay or receive when selling. They don’t necessarily execute right away. You can set a price at which you will buy or sell a certain asset, as this gives you greater control to get the most profit possible.

Once you own a stock, you should consider placing a trailing stop-loss sell order. This allows you to retain the stock as long as the price is going up and automatically sell when the price drops past a certain point.

The Cost to Trade Stocks

Expense is an obstacle to successful stock trading; what is expense? Well, this is money you pay just to own or trade securities. For example, one type of expense is a commission fee. This is why choosing a brokerage with low commission fees is super important.

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If you buy individual stocks through a brokerage that does not charge commission fees, you might not have many expenses. However, you still need to understand expense ratios when you start trading ETFs, mutual funds, and other investments. Trust me, you will find it useful.

Determine Your Risk Tolerance

You need to determine your risk tolerance so you do not go overboard with your investments. Imagine your investments suddenly losing 50% of their value. Would you buy more after the crash, do nothing, or sell?

If you would buy more, you have aggressive risk tolerance. You can afford to take more risks. If you would sell, you have conservative risk tolerance. You should seek out relatively safe investments.

Understanding how you would react to losses is one thing, and understanding how much you can afford to lose is another.

For instance, you may have an aggressive risk tolerance but no immediate fund to fall back on. In such a scenario, it isn’t wise to use your limited funds to invest in risky stocks.

Tax Rules for Trading Stocks

If you want to actively trade stocks, then you need to understand the tax rules for your investments. 

Did you know that, when you hold a stock for less than a year before selling, you pay more capital gains taxes, as opposed to when you hold a stock for more than a year; you pay less.

Selling stocks for a profit will increase your tax bill. But selling stocks for a loss will decrease your tax bill. To prevent you from taking advantage of this tax benefit, there’s something known as the “wash sale rule,” which delays the tax implications of any profits or losses if you re-enter the same position within 30 days. In other words, if you sell a stock for a loss, then buy the same stock a week later, your loss will no longer give you tax benefits.

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This tax structure is designed to encourage long-term investing.

Trading Your First Stock

To trade your first stock, fund your brokerage account. Note that, it may take some time for your funds to become available. Some brokerages give you the money immediately while the transfer is processing, and others wait a certain number of days.

Once you can access the funds, log into your online account with your brokerage. Select the stock you want to trade, pick an order type, and place the order. After placing the order, watch to make sure it executes. Remember, if you are using market orders, it should execute immediately.

If you are using limit orders, your order might not execute right away. If you want the trade to happen more quickly, move your limit price closer to the asking price (if you’re buying) or the bid price (if you’re selling).

Advanced Stock Trading Strategies

As a beginner, I advise that you stick to simple buy and sell trades. However, once you master those basic concepts, you can add advanced strategies to your trader’s toolbelt.

For instance, trading options expose you to greater risks. You can make both gains and losses more quickly at this stage.

Another advanced strategy is borrowing money from your brokerage firm to trade stocks. This is known as “trading on margin.”

Margin trading allows you to exponentially grow your portfolio, but it can also quickly land you in debt. This approach to trading stocks is very risky. You should avoid it until you feel confident in your trading abilities.

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