The Only Checklist You Need As A Beginner In The Trading Business
Trading has become open to all, and no longer restricted to only those with MBA degrees or those who work in the top stock brokerages in the world. However, if you are a beginner in stock trading, you will need enough help to get familiar with all the terminologies, rules, and processes.
All the world’s leading investors once started as novices, and they only got better it by continuously practicing, making mistakes, and learning from experience. This article provides a brief overview of some concepts you need to know as a novice to start your stock market career.
What You Should Do as a Beginner in the Trading Business
1. Know All the Rules and Jargon
You must be absolutely thorough with the knowledge of stock market terms before starting to trade. Making a bad trade because you didn’t understand the language or jargon is no excuse. Although the stock dictionary is vast, here are the explanations of some terms you are likely to hear often:
- Bid and Ask Rates: The bid is the price at which someone is willing to buy a stock, and ask is the rate at which someone wants to sell a stock. The difference between the bid and ask rates is called the spread.
- Bull and Bear Markets: A market that is on the rise, accompanied by a high employment rate and a strong economy, is called a bull market. A market where the share prices are continuously dropping, accompanied by a recession, is a bear market.
- Open, Close, High, and Low: The prices of stocks vary throughout the day, but these four values are the most important to understand the stocks’ performance. Open and close refer to the price of the stock at the start and end of the trading hours, respectively. High and low refer to the highest and lowest prices the stock had during a day.
- Portfolio: An investor’s collection of securities or investments is called a portfolio. It can consist of stocks, bonds, mutual funds, and other assets.
- Short-Selling: Short-selling is when an investor borrows stocks, sells them at a value, then purchases them back at a lower price, and returns them to the seller. The profit obtained due to the price difference goes to the short-seller. Traders use this strategy on stocks for which they predict a decline in prices.
2. Trading Takes Up Time
Not everyone needs to be a full-time trader, but if you aim to make money from trading, you need to devote considerable time to it. Typically, part-time traders set aside a couple of hours every day to focus only on trading. Full-time traders are active throughout the trading hours as well as extended-hours if needed.
This practice isn’t ideal, of course, because the stock market is active throughout the trading hours, but you can make the most of those couple of hours as a beginner. If you feel that you like what you are doing and that you are successful, you can think of making stock trading your full-time profession.
3. Start Small
It is easy to get carried away and lose money in the stock market, especially in your early stages. As a novice, restrict yourself to trading only 2-3 stocks a day or limit yourself to a specific budget. Analyzing those few stocks gives you a better picture of trading than buying or selling dozens of stocks without knowing how things work.
4. Invest in Safe Stocks
Some stocks are “safe,” while others are not; this means that some shares are guaranteed to give your returns, typically those of blue-chip companies. It is best to invest in safe stocks in your early days, where the risk is minimal.
It could be tempting to invest in high-risk stocks that potentially give you much higher returns because you are not used to the downside. Penny stocks (stocks worth less than $5, typically traded over the counter) is bad news for new investors; stay away from them till you are accustomed to trading.
5. When to Buy or Sell Stocks
Your decision to buy or sell stocks should be systematic; always base your decisions on facts and not emotions. Typically, traders analyze the volume of trade, volatility, and the liquidity of stocks before deciding to buy them. The lower the volatility and the higher the volume, the safer it is to buy the stock.
Selling stocks is trickier because there are more parameters to consider. One strategy is to fix the desired profit margin in advance and sell the stock(s) as soon as the price crosses the margin. More experienced traders use sophisticated strategies like fading, where they go against the market knowledge to profit off a rare opportunity.
If you are restricted by time, i.e., you can only afford to spend two hours a day trading, the best time to trade would be in the opening hours or closing hours when the market is most volatile. Involving in trading during the closing hours also allows you to hold overnight trades or take part in extended-hours trading.
6. Keep Emotions at the Door
When you know all the basics, practice all the strategies, and are ready to trade, the biggest obstacle you can face is your emotions getting in the way. Maintain a neutral composure throughout your trading time, irrespective of whether you win money or miss out on opportunities.
Never try to cheat the system or other traders by breaking a rule or finding loopholes. If you are uncertain of how a rule or restriction works, seek help or find a way to avoid falling prey to it. Trade in the safest way possible until you clear the beginner stage.
Start Practicing Today!
These terminologies and tips will give you a good foundation in trading, but remember, you can never only read about stock markets in theory and become good at it. It is always good to read up to sharpen your knowledge and strategies but to get a proper experience; you should practice trading.
You can create a paper trading account online, which lets you trade stocks with virtual currency. You get excellent exposure to what it is like in the actual market but without the risk of losing any money.