Buying Stocks Explained for Beginners
Investing in the stock market is a great way to generate a substantial amount of payouts. However, it is not as simple as that because buying stocks requires a lot of knowledge as well as market experience in order to avoid all the risks related to trading.
If you are a beginner trader and want to take your first steps into the stock market, there are several things you need to take into account before starting trading. First of all, it is important to know what type of investor you are going to be in the future which includes what your investment goals will be and how much risk you are willing to take in your future investments.
We will discuss the step-by-step process of buying stocks in the stock market including choosing a good stockbroker, finding an industry you know about, researching the top-performing stocks, outlining the budget, buying the stocks, and setting Stop/Losses. So let’s take a closer look at each of them down below.
Step 1: Choose a Good Stockbroker
As you start progressing and building knowledge and now you are ready to actually execute a trade, first of all, you need a good stockbroker to do that. Usually, there are two types of brokers including the discount broker and the full-service broker. Full-service brokers give traders advice based on their taxes, their future plannings, and they actually execute the trades. However, this costs a lot of money.
On the other hand Discount brokers are more like the online types of brokers and way cheaper than full-time stock brokers. The major function of this type of broker is to execute the trades. It might cost a trader 5$ or 10$ depending on how many shares they are trading with.
Consequently, you should choose a stock broker according to your future goals, for example, if you need to know what to do with your money, you should definitely choose a full-time stockbroker. Besides, there are several things an investor should take into consideration before choosing the right broker. First of all, the major factors that influence whether the broker is good or not are their commission, trading platform, and customer support. Moreover, the broker should be reliable and trustworthy in order to manage to protect your funds at every step of the trading process.
However, usually, it is more about the allocation of what's important for you. It goes hand in hand with what it is that you want from your stock broker. So once you analyze your goals, you should match them to the appropriate company.
Step 2: Find an Industry You Know About
Another important step before buying any type of stock is finding an industry you already have information about and are interested in. This is an essential thing because it helps with finding information and analyzing it. For example, if you really really like video games, choosing the gaming industry as your target market could be a good decision.
Traders have access to a lot of information about any type of industry. Often, the annual report of a company itself gives a good enough overview of the industry, along with its future growth outlook. Annual reports also tell us about the major and minor competitors in a particular industry. Simultaneously reading the annual reports of two or three companies should give a clearer picture. You can also subscribe to trade magazines and websites that cater to a particular industry for monitoring the latest industry happenings.
Step 3: Research The Top-Performing Stocks
On the other hand, traders should take into account that they may love one particular company, but that doesn’t mean they’re a good investment.
Famous companies are usually required to publish their information about the company’s earnings, revenues, net profit, and so on. Traders can see this information on the specific company’s webpage.
These reports are very important as they can tell investors how they make gains if the business has any type of risks, and how the company’s performance is going in general. Besides, while reading the information about top-performing stocks traders also need to know how they managed to reach success because it might be an important factor for the company’s overall picture and their potential income.
On top of that, you should also know that even top companies face a lot of risks in terms of stock trading so knowing all about them will be a great benefit for your future income. Usually, The company publishes reports that have a section where it is written information about their risks as well as the industry.
While talking about how to buy stocks online, it is also important to mention that reading all about the company’s past revenues and cash flow is also another essential thing. Doing technical analysis helps to shorten the time spent on research, but is more complex to understand. Besides, reviewing their future projects might give you a good picture of what you can expect from trading this stock. After knowing all about the top-performing companies, think twice and then choose the most appropriate one for you to start trading with them.
Step 4: Outline Your Budget
Another big question that a new trader can have while learning about buying stocks is how much money do they need in order to invest in a specific stock?
The money that an investor needs in order to buy a specific stock depends on how expensive they are. (stock prices can range from 5 or 10 dollars to thousands of dollars.) If you want to choose mutual funds and do not have a big amount of budget, an exchange-traded fund (ETF) might be the best option for you.
While we talk about the beginner’s guide to online stock trading, it is also essential to note that in order to perfectly outline your budget, it is important to ask the financial advisors, especially if you are a beginner and do not have further experience and knowledge of the stock market. Even though it will cost you money, they will tell you in detail what is the most appropriate budget for you to start trading.
Without knowing how to size your positions properly, you may end up taking trades that are far too large for your account. In such cases, you become highly vulnerable when the market moves even just a few points against you. Your position size, or trade size, is more important than your entry and exit when investing money. You can have the best strategy in the world, but if your trade size is too big or too small you'll either take too much or too little risk.
Step 5: Buy The Stocks and Set Stop/Loss
While we have stocks explained for beginners, it is essential to state that while buying the stocks it is also important to set several market orders in order to buy or sell the stock at the best price available at the given time. Most amateur traders do not put their stop-loss where it would make sense based on a trade idea but they are putting their trade stop-loss at a place based on how much money they are willing to lose.
The stop loss is the point at which your trade idea is proven wrong which tells you that you should not be in the market anymore. If you let the price run anyway then you are probably making the biggest mistake that a trader can ever make.
A limit order such as a Stop Loss gives traders more control over the current price. This means that this type of order tells the broker to execute the order only when the asking price falls to that fixed level.
Stop losses are a good instrument for traders to buy and sell smaller stocks, which have a wider spread, however, it depends on the traders’ activity. They are also a good idea for trading when the market has a volatile characteristic and prices start to move very quickly for a short period of time.
Therefore, if you wonder how to buy stocks online, you should first take those things into consideration in order to avoid the unpredictable and unpleasant circumstances that might occur while trading in the stock market.