As you become more familiar with trading stocks, there are specific strategies that can help you achieve your financial goals. This article will provide a more comprehensive framework for trading stocks, complete with key steps investors can take.
Determine Your Goals
Before they do anything else, investors who are interested in trading the stock market should determine their goals. To figure out your plan, you must first establish where you want to go. Are you looking to save enough money for retirement? Do you want to build enough wealth to pay for your children's college education?
You could be saving up for some other goal, too, such as starting your own business. Or you may have something a bit more lighthearted in mind, such as using your available funds to do some day trading. Whichever scenario matches your own, the most important thing here is to figure out your financial goal.
Have The Right Mindset
Once you have determined your goals, you can benefit from having the right frame of mind. If you want to make money trading stocks, you should treat it like a job and not a hobby. If you don't take stock trading seriously enough, it could reduce your chance of success, causing you to generate lacklustre returns. Picking out the right stocks or leveraging strategies that are profitable can take up significant amounts of time.
Establish Your Risk Tolerance
Another key part of stock trading is determining your risk tolerance, which refers to the amount of volatility you are willing to accept. One way an investor can determine this is by figuring out how you would react to specific market conditions, such as a sharp decline in the value of stocks.
It is important to note that risk tolerance is different from risk capacity, which is defined as the amount of risk an individual investor can manage. To put it another way, risk capacity is defined as the amount of risk you can take on without it reducing the odds you will reach you financial goals.
To explore these matters, some traders may benefit from consulting a financial planner, who can help you gauge your ability to tolerate risk. By looking into this, you may determine that you are "aggressive," "moderate" or "conservative."
Once you have determined your risk tolerance, you can harness a strategy that reflects your ability to stomach risk. To manage risk successfully, you may create a diversified portfolio that incorporates many different types of stocks. This could include stocks of different sized companies, as well as stocks representing businesses based around the world.
Know The Industry Terminology
Another important step that traders should take is making sure you are familiar with key industry terminology. There are plenty of guides online they can use to catch up to speed on this information.
Terms like market capitalisation and liquidity can be extremely helpful to an investor who is looking to successfully trade stocks. When evaluating individual stocks, investors can benefit from looking at varying measures such as the price-earnings ratio and return on equity (ROE). By examining these measures, an investor can achieve a better sense of whether a particular stock is undervalued or overvalued.
Establish An Investment Account
In order to trade stocks, an investor must set up some kind of investment account. For someone who is beyond the beginner stage, a discount broker may be a great option. These are frequently less expensive than their full-service counterparts, making them more appealing.
While discount brokers may provide a compelling opportunity to save money, traders who are thinking about using them need to conduct thorough due diligence. For example, you should review the discount broker's fee schedule to find what the key expenses will be. You should also make sure the discount broker you want to use will let you trade the securities you want.
Additionally, you should make sure that the broker offers the services you want; for example, research on different investments or the ability to execute trades over the phone. If you do choose a discount broker, make sure you know the minimum amount you must have to open a specific type of account.
An experienced investor may also opt for a full-service broker that will provide more options than their discount broker counterparts. More specifically, a full-service broker can provide interested traders with the ability to take part in initial public offerings (IPOs) or access proprietary research. A full-service broker may also help with potentially dicey issues like retirement planning.
Use A Practice Account
One approach that can prove quite helpful is setting up a practice account and using it to trade stocks before getting involved and risking actual money. Many investors lose money when starting out, so if you work with a practice account, you can learn to make trades that would otherwise be unprofitable without risking any principal. Many brokers offer paper trading accounts, which let investors make simulated transactions.
Know The Order Types
It is important to know the difference between a Market Order, a request to purchase an asset at the market price, and a Limit Order, which kicks in when an asset reaches a certain price. For example, if you wanted to buy shares of Apple Inc. (AAPL), but considered the stock overpriced, you could put in a Buy Limit Order to make a purchase once the shares declined to a certain level.
Buy Companies Instead Of Tickers
At times, investors may feel overwhelmed with information. One way you can narrow down a list of stocks to trade is to remember that every share represents ownership in a business. Given that information, you can decide which companies you want to own. Investors who are interested in trading stocks should determine whether these businesses have a strong competitive advantage and compelling long-term prospects.
Create A Strategy And Maintain It
Once an investment strategy is created, you should stick to it. Volatility is perfectly natural for the stock market, so if you purchase stocks, you should be ready for the shares to rise and fall in value.
After developing a plan, investors can benefit greatly from staying disciplined. In other words, it can prove quite helpful for them to avoid getting distracted by headlines or predictions made by analysts about which stocks will generate strong returns.
If you're interested in trading stocks, there are many different strategies you can harness to give yourself the best possible chance of generating compelling returns. These include the following:
- Determine your goals
- Have the right mindset
- Establish your risk tolerance
- Know the industry terminology
- Establish an investment account
- Use a practice account
- Know the order types
- Buy companies instead of tickers
- Create a strategy and maintain it
Senior Market Specialist
Russell Shor (MSTA, CFTe, MFTA) is a Senior Market Specialist at FXCM. He joined the firm in October 2017 and has an Honours Degree in Economics from the University of South Africa and holds the coveted Certified Financial Technician and Master of Financial Technical Analysis qualifications from the International Federation…