Congratulations! You have taken a very important step in taking control of your finances and your current and future wealth by wanting to trade stocks. It might feel overwhelming, the choices many and the research needed overwhelming. In reality though, it is very easy to get started and the level of “complicated” is set by yourself! Now lets get started.
WHAT TYPE OF TRADER ARE YOU?
This might sound silly, but you need to start by taking a moment and reflect on yourself as a person. How do you react to stress and losing money? How much can you take in terms of a stock dipping before you let that stock go?
When trading stocks, we talk about risk averse and risk seeking traders. The risk averse traders want a safe bet, while risk takers are willing to risk a lot for a good return. And yes, the amount of risk you are willing to take is connected to the expected return you can get. But you should not trade as a risk seeking person if you are risk averse and vice versa, as it will only end in sadness and possibly a very empty portfolio as you will trade in a way that is not adapted to your needs. In conclusion, keep track of your feeling and write it down! “I, [NAME], am a risk averse/risk seeking trader. I will trade stocks in a way that is line with who I am and what I can handle”.
HOW DO I CHOOSE STOCKS TO TRADE?
Let’s start easy, by asking the question: what are you interested in? If you are to trade in stocks, it should of course be fun and it is more fun to follow companies you might actually be interested in.
Once you are done with the first step of identifying what type of trader you are, continue by choosing five industries (e.g. IT, finance, utility, real estate, med tech, airlines) that you think have potential to be stable and grow in the future. Choose companies that are interesting to you, and if you are
- Risk averse, choose stable large cap companies listed on big exchanges
- Risk seeking, choose as you please but dare to take in a few growth firms in the smaller exchanges
Once you have found industries you like and a list with companies of interest, do your research and check their financials. How you choose among companies depends on the trading strategy you choose to apply.
HOW DO I CREATE A TRADING STRATEGY?
Are you a numbers person, or do you rather base decisions on information gathering and fundamentals? Or both?
There are many different types of trading strategies, but we will keep to the most common and easy to learn: technical analysis and fundamental trading.
Trading based on technical analysis is based on looking at charts as well as key figures about a company such as the price development, volume in terms of how often a stock is traded etc.
Trading based on fundamentals then means that you based your trading decisions on the perceived fundamental value of a company. This is done by reading through the annual report of a company, following the news and checking key ratios such as the P/E of a company.
Aside from the above, you also need to specify an entry signal (that is, at what price do you buy a specific stock?) and an exit signal (this could be say if the stock drops by 10%). You also need to set the period with which you trade, that is do you want to keep a trade in your portfolio for one day or for 10 years?
Write all of this down, and follow this strategy. As important as it is to have a trading strategy, it is of equal importance to update it continuously as markets change as well as the fundamentals of firms.
HOW DO I START TRADING?
The easiest way would be by creating an account with a trusted online broker. Do you research and find a broker that is licensed and has good reviews from other customers. Make sure to compare commission and trading fees among brokers, as such fees can eat up a lot of your returns! It might also be interesting to know which exchanges are included by the broker, if you want to trade international stocks.
An exchange is simply a place where stocks are listed for trade. There are also market places that are not exchanges; the difference between an exchange and non-exchange is connected to regulatory rules and transparency expected on the companies listed. Exchanges simply set tougher rules on companies compared to other market places for stocks.
Once you have an account with a broker, just start trading! This is the toughest psychological part but once you do it once, you are set. If you are a risk averse type of trader, you might want to start by paper trading. Paper trading simply means that you do not use real money but a demo account or write down trades you would have done in real life and follow your fictive trade or trades.
WHAT ARE THE RISKS?
This may or may not come as a surprise, but the biggest risk when trading is actually yourself. Research shows this as well, among retail as well as institutional investors (that are supposed to be professionals!): we trade too much with our feelings too often. And trading when you are scared, angry or overly optimistic is not that smart. If you stick to a trading strategy and risk management program, you minimize the risks of messing up because well – yourself.
Another issue is connected to a company going bankrupt or a stock dipping hugely in price- if you are a risk averse trader with a strict exit price policy, make sure to use stop losses to minimize your losses.
Starting to trade stocks is an easy task and is open to all traders. It does not take much effort or starting budget. History has shown again and again that stock trading will be a good deal; try it out yourself; good luck!