Introduction to Stock Trading

Learning how to get your money to make money is critical. I believe the first steps to achieving financial independence is demystifying the stock market and learning how to trade stocks

Beginners taking their first steps towards learning the basics of stock trading should have access to multiple sources of quality education – articles, books and video tutorials are readily available on the internet. Just like riding a bike, trial and error, coupled with grit and resilience, will eventually lead to success.

Stock trading is like a game and one great advantage is the fact that the game itself lasts a lifetime. Investors have years to develop and hone their skills. Strategies used twenty years ago are still utilized today.

What is the Stock Market?

The stock market is built around the simple concept of connecting buyers and sellers who wish to trade shares of publicly traded companies. It is a marketplace.

Each publicly traded company lists their shares on a stock exchange. The two largest exchanges in the world are the New York Stock Exchange (NYSE) and the NASDAQ; both are based in the United States. Attempting to grasp just how large the NYSE and NASDAQ is certainly not easy. Both exchanges have a market capitalization well in excess of $10 Trillion. In 2020, four companies had a market cap in excess of $1 trillion – Apple (AAPL), Microsoft (MSFT), Amazon (AMZN) and Alphabet (better know as Google – GOOG (By the way, market cap is a simple way to gauge the value of a company. If you bought every available share of stock, the market cap is how much it would cost you to buy the entire company.)

Once a company has their shares listed on an exchange, then anyone, including you and I, can use an online broker account to trade shares. Whether you are an everyday investor or an institutional hedge fund managing hundreds of millions of dollars in client money, anyone can trade.

What is Stock Trading?

First things first, let’s quickly define stock trading. Stock trading is buying and selling shares of publicly traded companies. Popular stocks most people know include Apple (AAPL), Facebook (FB), Disney (DIS), Microsoft (MSFT), Amazon (AMZN), Alphabet (GOOGL), Netflix (NFLX), and more recently listed companies such as Uber (UBER).

In the stock market, for every buyer, there is a seller. When you buy 100 shares of stock, someone is selling 100 shares to you. Similarly, when you go to sell your shares of stock, someone has to buy them. If there are more buyers than sellers (demand), then the stock price will go up. If there are more sellers than buyers (too much supply), the price will fall.

Great Ways to Learn Stock Trading as a Beginner

For beginners who want to learn how to trade stocks, here are some suggestions to the simple question, “How do I get started?”.

1. Open a stock broker account

Find a good online stock broker (good reputation and has been around for at least 10 years) and open an account. Familiarize yourself with the layout and take advantage of the free trading tools and research offered to clients only. Some brokers offer virtual trading which is beneficial because you can practice trading stocks with fake money. Review the fee structure to understand the cost associate with each trade.

2. Educate Yourself

There are many resources available over the web that provide a wealth of information. This ranges from helping with understanding how to trade stocks to investment strategies. Naturally, searching with Google is a great way to find educational material to read. A great education site I would recommend is Khan Academy. Khan Academy offers great free tutorials to help you understand how to trade stocks and the various mechanisms associated with the market. Books provide a wealth of information and are inexpensive compared to the costs of classes, seminars, and educational DVDs sold across the web. I recommend Stock Investing for Dummies and Trading for Dummies as introduction to stock trading. Articles are a fantastic resource for education. One of the most popular website for investment education is Investopedia.com.

3. Find a mentor or a friend to learn with

A mentor could be a family member, a friend, a coworker, a past or current professor, or any individual that has a fundamental understanding of the stock market. A good mentor is willing to answer questions, provide help, recommend useful resources, and keep spirits up when the market gets tough. All successful investors of the past and present have had mentors during their early days. Just be careful of who you listen to. The vast majority of people who volunteer to give you investment advice are not professional traders, let alone profitable traders. Heed advice with a heavy dose of skepticism .

4. Study successful investors

Learning about great investors from the past provides perspective, inspiration, and appreciation for the game which is the stock market. I personally follow Warren Buffett.

5. Read and casually follow the stock market

News sites such as CNBC and MarketWatch serve as a great resource for beginners. For in depth coverage, look no further than the Wall Street Journal, Financial Times and Bloomberg. By casually checking in on the stock market each day and reading headline stories, you will expose yourself to economic trends, third-party analysis, and general investing lingo. Pulling stock quotes on Google Finance or CNBC.com to view a stock chart, view news headlines, and check fundamental data can also serve as another quality source of exposure.

TV is another way to expose yourself to the stock market. I strongly recommend CNBC as the best source for financial information. Even turning on CNBC for 15 minutes a day will broaden your knowledge base. Don’t let the jargon or the style of news intimidate you, just simply watch and allow the commentators, interviews, and discussions to soak in. Beware though, over time you may find that a lot of the investing shows on TV are more of a distraction and source of excitement than being actually useful.

6. Carefully consider paid subscriptions

CAUTION – Be careful. Many paid subscriptions marketed online, especially in social media, come from one-off traders that claim to have fantastic returns and can teach you how to be successful. 99.99% of them are a really poor investment and come with higher prices of $99 – $149 per month, or more. The worst damage though comes when you try to do what they do, invest way too much in a stock tip, and get burned when it doesn’t work out.

7. Beginners should avoid seminars, online courses, or live classes

CAUTION – Like paid subscriptions, be very careful with classes and courses. Most are easily over $1,000 and are sold with promises of acquiring valuable knowledge. Their fantastic sales funnels will suck you in, take your money, excite you during the course, then leave you with a strategy that was profitable five or ten years ago, but is no longer relevant today. That, or you simply do not yet have the expertise required to be successful and trade the strategy properly.

8. Buy your first shares of stock or practice trading through a simulator.

With your online broker account setup, the next step is to simply take the plunge and place your first stock trade (instructions further down!). Don’t be afraid to start small, even 1, 10, or 20 shares will serve its purpose.

If the thought of trading stocks with your hard earned money is to nerve racking, consider using a stock simulator for virtual trading. Most Online brokers offer virtual trading.

9. Follow Warren Buffett’s advice, buy and hold the market

For the most people, online trading (especially day trading) will not outperform simply buying the entire market, such as the S&P 500, and holding it for many years. Warren Buffett, the greatest investor of all-time, recommends individual investors simply passively invest (buy and hold) instead of trying to beat the market trading stocks on their own. A simple strategy is buy an ETF that tracks the market like the S&P 500 (SPY). ETFs and Mutual Funds

As part of formulating your trading strategy, it’s important to understand ETFs and mutual funds to determine if they are suitable for your investment goals. ETFs (exchange traded funds) and mutual funds are similar in that they both represent a collection, or “baskets”, of individual stocks or bonds.

Take for example the S&P 500 market index, which is comprised of 500 of the largest companies. Buying shares in 500 different companies would be very difficult to do. Thanks to mutual funds and ETFs, we can simply buy one single security that holds shares in all 500 companies. The largest S&P 500 mutual fund is the Vanguard 500 Index Fund Admiral Shares (VFIAX) and the largest S&P 500 ETF is the SPDR S&P 500 ETF (SPY).

By buying an ETF or mutual fund, your portfolio is better diversified than just owning shares of one or two stocks; thus, you are taking on less risk overall. This is the primary advantage of buying ETFs and mutual funds over trading individual shares.

The main difference between ETFs and mutual funds is in how they trade. ETFs trade like stocks, which means you can buy and sell them throughout the day and they fluctuate in price depending on supply and demand. Contrarily, mutual funds are priced each day after the market closes, so everyone pays the same price. Also, mutual funds typically require a higher minimum investment than ETFs and charge higher management fees.

How to Buy Shares – Step by Step Instructions

Once you open and fund your online brokerage account, the process of placing a stock trade can be broken down into five simple steps:

Choose whether to buy or sell

Insert quantity

Insert symbol

Select order type

Review order, place trade

1. Choose Buy or Sell

The first step is always to choose what you would like to do, buy shares or sell shares. .As a new investor, keep it simple, don’t try complex trading strategies like butterfly options!

2. Insert Quantity

Next, enter how many shares you would like to buy or sell in total. To calculate how many shares you can afford, simply take the total amount of cash currently in the account and divide it buy the stock’s last price. So, if stock XYZ is trading at $10 and we have $1000 in our account, we can afford to purchase 100 shares of stock ($1000 / $10).

3. Insert Symbol

The ticker symbol represents the company we are going to trade. For example, Disney has a ticker symbol of “DIS”, Apple is “AAPL”, and Facebook is “FB”. If we are not sure of the company’s symbol, you can click on the Symbol field and search to find it.

4. Choose Order Type

The most common order types: market, limit, and stop.. Market orders buy or sell immediately at the current best market price when the trade order is received. Limit orders only buy or sell these shares at, “$xx price or better”. Lastly, stop loss orders are combined with a market or limit to trigger once $xx price hits. For new investors just getting started, I always suggest just sticking with market orders.

5. Review Order and Place Trade

After the basic inputs have been made, the “Place Trade” button will appear to complete the order. By default, a summary screen always appears once this button is clicked to summarize the order and confirm you have enough funds in our account. Once investors have experience and are comfortable with the trade ticket, this confirmation page can be disabled.

Here’s an example of a order ticket filled out:

Other fields (Expiration, Special Instructions, Routing)

New investors should ignore these fields and leave them set to their default values. These options give investors more control as to how long certain orders should remain active and how they should be filled. For example, “GTC” for expiration means “good-till-cancelled”.

Tips for Success

The following are a few tips as you start the journey leaning to invest in the stock market that I have gleamed from various sources over the years. By applying any of the following tips, you can become a better trader. Success takes time, and these rules will lead you in the right direction.

• As a new investor, be prepared to take some small losses.

• Persistence is key when learning to invest. Don’t get discouraged.

• Learning to invest doesn’t happen overnight. It takes time and effort to become successful at it.

• As a beginner, set up a cash account, not a margin account.

• Concentrate on a few, high-quality stocks. There’s no need to own twenty or more stocks.

• Don’t get emotionally involved with your stocks. Follow a set of buying and selling rules, and don’t let your emotions change your mind.

• Always do a post-analysis of your stock market trades so that you can learn from your successes and mistakes.

• Stocks never go up by accident. Understand why? Was it news related or large buying, typically from big investors such as mutual funds and pension funds.

• Replace the old adage, “buy low and sell high” with “buy high and sell a lot higher.”

• History always repeats itself in the stock market.

• Ignore personal opinions about the market.

• When starting to invest, keep it simple.

• Don’t rely on experts, be skeptical.

• Always have an exit strategy.

• Experience counts.

• Don’t fall in love with any single investment, keep emotions aside.

• Don’t risk too much on any single trade, diversify risk.

My Three Favorite Stock Tips

Think win/win. Psychology is a huge aspect of trading. If you have a big winner on your hands and aren’t sure whether you should hold the shares to try for higher prices or sell them to lock in a profit, consider selling half and holding the rest with a stop loss (at worst) back at your original buy price. That way, if the stock drops back to your buy price, you still win because you sold half and made a profit. Similarly, if the stock shoot higher in price, you also win because you still hold half your original position. Heads you win, tails you win too.

Set strict rules to help you stay disciplined. Always know the day and time (pre or post hours) when your stock holdings are posting earnings next!

Final Thoughts

If you are just starting out trading stocks, remember it’s a life long game. Take your time! There is no reason to rush into the stock market.

Start with a small amount to invest, keep it simple, and learn from every trade you make. If you find trading emotionally taxing, then passively investing in the overall market with a simple index fund is likely a better choice.