How To Trade Stocks: 6 Steps To Get Started

How To Trade Stocks

Trading stocks can be a fascinating and lucrative way to grow your wealth. However, the stock market can be daunting for beginners, especially with the complex strategies, platforms, and tools available. New traders enter the market daily, but many fail to achieve their full potential because of a lack of knowledge, preparation, and proper risk management.

If you’re interested in learning how to trade stocks but don’t know where to start, you’re not alone. The good news is that anyone can become a successful trader with the right amount of knowledge, mindset, and approach. In this guide, we’ll walk you through six essential steps to get started in stock trading, including determining your trading style, choosing a brokerage, conducting research, placing orders, and managing risk.

Whether you’re a complete novice or already have some experience with investing, this article will provide you with the foundation you need to enter the world of stock trading confidently. By following these steps and continually expanding your knowledge, you’ll develop the skills and strategies necessary to thrive in the ever-changing stock market. Let’s dive in and explore how you can start trading stocks today.

1) Decide What Type of Trader You Want To Be

Before you start trading, it’s important to choose your trading style. Are you interested in short-term trading, or are you looking at the long-term? Do you have the time and dedication to be a day trader, or would swing or position trading be more suitable?

Consider your personality, risk tolerance, and the time you can realistically dedicate to trading. Reflecting on this will help you find a trading style that aligns with your goals and abilities.

For instance, if you are generally risk-averse and don’t have much time for stock market analysis, day trading is not the best fit for you. It requires constant attention to the markets during trading hours and making rapid decisions under stress; it’s not for the faint of heart. Swing or position trading is likely more suitable, as these allow for longer holding periods and require less time commitment. The table below can help you decide:

We sort the trading styles above based on how long an investor or trade holds onto the stocks. Day traders aim to profit from short-term price moves and typically close out all positions by the end of the trading day, so their trades are the fastest. Next up are swing traders, who hold positions for periods ranging from days to a few weeks or months and aim to capture short- to medium-term trends. This style requires less time commitment than day trading but still involves being pretty engaged in the market.

The third style is position or long-term trading, which is for those who hold onto stocks for several months, years, or even decades. These investors focus on long-term trends and may base their decisions on fundamental and technical analyses. This style requires patience and a long-term outlook, with less frequent trading than the other two.

There’s no one-size-fits-all approach to trading. It’s essential to choose a trading style that aligns with your personality, risk tolerance, and lifestyle. As you gain experience and knowledge or as your life circumstances change, you may find that your preferred trading style also evolves.

2) Research Brokerages and Choose One Suitable for Your Style of Trading

Once you’ve decided on your style, you’ll need to find a good online broker and open an account. When selecting a brokerage, you’ll want a platform that caters to your needs. Brokerages have different features and tools, and some are more suitable for your type of trading than others.

Brokerages For Day Traders

A platform with quick speeds (low latency), real-time data, and advanced charting abilities is a must for day traders. Day traders often require tools like Level 2 quotes, which provide detailed liquidity information about the order book and hot keys for rapid ordering. They may also offer automated or algorithmic trading options, triggers, and technical indicators. Customizable platforms like Interactive Brokers, TradeStation, and TD Ameritrade’s thinkorswim are popular among day traders.

Brokerages For Swing Traders

Swing and position traders should look for a platform with a wide range of indicators, research resources, fundamental analysis tools, and risk management features. These traders may also benefit from a platform that offers mobile trading apps, allowing them to monitor their positions and trade on the go.

Brokers like Charles Schwab, Fidelity, Robinhood, and E*TRADE are well-suited for swing and position traders since they provide a balance of research tools, user-friendly platforms, and competitive prices (typically with commission-free trading in most stocks and exchange-traded funds).

Brokerages For Long-Term Investors

For long-term investors or those new to trading, a brokerage with a strong educational component and user-friendly interface is likely the best choice. Robo-advisors, such as Betterment and Wealthfront, can be a good option for those who prefer a more automated approach to their portfolio. These platforms use algorithms to create and manage diversified portfolios based on the investor’s risk tolerance and goals.

For a more comprehensive discussion of the best brokerage platforms for different kinds of trading, see our list of the best online brokerages and platforms.

3) Open a Brokerage Account and Fund it

Once you’ve chosen a platform that suits your trading style and needs, it’s time to open and fund an account. The process is straightforward and can be done in minutes.

  1. Provide your personal information: You must supply your name, address, date of birth, Social Security number, and other basic personal information. This information is required by law to verify your identity and prevent fraud, so you can’t avoid doing so by going elsewhere.
  2. Choose your account type: Brokerages offer several account types, such as individual taxable accounts, joint accounts, and individual retirement accounts (IRAs), such as traditional and Roth IRAs. Select the account type that best fits your trading goals and tax situation.
  3. Complete the application: Fill out the online application, which may include additional questions about your employment status, income, net worth, and trading experience. This helps brokerages follow regulations and assess your risk tolerance. This information may also be used when applying for account features such as margin (borrowing to trade) and options. Be sure to read and agree to the brokerage’s terms and conditions, which outline the services provided, fees, and your rights and responsibilities as a client.
  4. Fund your account: Once approved, you’ll need to deposit money before you can start trading. After you’ve funded your account, it may take a few days for the funds to become available for trading. The delay depends on the funding method and your brokerage’s policies. Most brokerages offer several ways to fund your account:
  5. Bank transfer: Link your checking or savings account to your account and initiate an ACH transfer. The funds will generally appear in your account within a few days.
  6. Wire transfer: To get trading faster, you can send a wire transfer from your bank to your brokerage account. Wire transfers are usually cleared the same or the next business day, but there’s usually an extra fee.
  7. Check deposit: Some brokerages allow you to mail a physical check to fund your account, though this is the slowest funding method.

Ensure you understand the minimum balance requirements and any maintenance fees associated with your account. Some brokerages require a minimum initial deposit or charge fees if your balance falls below a certain amount.

4) Research the Stocks You Want to Own

Before investing, you should research the stocks you’re interested in. This involves analyzing the company’s fundamentals and the stock’s price moves over time. Combining fundamental and technical analysis will give you far more confidence when finally diving in.

  • Fundamental analysis: This approach best suits position traders and long-term investors. Fundamental analysis involves evaluating a company’s financial health, competitive position, and growth prospects. Review each company’s financial statements to assess its profitability, debt levels, and liquidity. Also, companies should be looked for with consistent and growing earnings over time since this can indicate a robust business model and effective management. As you narrow your list of potential investments, learn a bit about the company’s industry and its position. What is its market share? Is this a sector set for growth? Don’t forget to research the company’s management team and track record.
  • Technical analysis: Day traders and swing traders often use technical analysis. Technical analysis involves studying past prices and volume data to identify trends and patterns indicating future price moves. You might look for recognizable chart patterns, with names such as head and shoulders, triangles, and wedges. These price patterns reflect the behavior of market participants and can help signal potential trend reversals or continuations. Moving averages can help identify trends and potential support and resistance levels. For momentum, you would employ oscillators, such as the relative strength index and stochastic oscillator, to gauge momentum and identify when a stock is set to rise or fall. Many platforms provide these technical analysis tools.
  • News and sentiment analysis: Monitor news and investor sentiment for the stocks that interest you. Review earnings reports (earnings call transcripts will typically reveal specific areas of concern to investors), management guidance, analyst ratings, and any geopolitical or macroeconomic events that could impact the company or its industry.
  • Diversification: To manage risk, it is important to invest across different sectors, market capitalizations, and geographic regions as you build your stock portfolio. Diversification helps mitigate the influence of any single stock or sector underperforming.
  • Continuous learning: Expand your knowledge by reading financial articles, stock market books, and website tutorials. Tune into Bloomberg TV and stay informed about market trends and economic indicators that could affect your holdings. Adapting to new information is essential for long-term success as a trader.

Remember, research and analysis is an ongoing endeavor. As you gain experience and knowledge, you may refine your research methods and develop a more personalized approach to stock selection. It’s also important to regularly review and assess your portfolio to ensure it aligns with your trading goals and risk tolerance.

5) Place Your Order To Buy or Sell Stocks

Once you’ve developed a trading plan and researched a range of stocks, it’s time to place orders with your brokerage. When placing an order, you’ll need to specify the stock ticker symbol, the number of shares you want to trade, and the type of order you want to use.

  • Market orders: These are the simplest type, where you ask your brokerage to buy or sell a stock at the best available price. Market orders are executed quickly, so you can be sure your trade will go through. However, you can get an unfavorable price, especially when there’s lots of market activity or when dealing with stocks that don’t trade frequently. Market orders are best used when you need to make a trade quickly and are willing to accept the present market price.
  • Limit orders: For these orders, you set the maximum price you’re willing to pay for a stock (if you’re buying) or the minimum price you’re willing to accept (if you’re selling). Limit orders give you more control over the execution price, but don’t guarantee that your order will be filled. If the stock never reaches your limit price, your order won’t go through. Limit orders are useful when you have a specific price in mind and are willing to wait for the market to reach that level.
  • Stop orders: These are triggered when a stock reaches a specific price, known as the stop price. Once that price is reached, the order becomes a market order and is filled at the next available price. Stop orders can limit losses on a trade or protect profits should your stock start to fall. However, in fast-moving markets, your order could be filled at a price significantly different from your stop price.
  • Order modifications and cancellations: After placing an order, you may be able to modify (e.g., change the limit price or number of shares) or cancel it before it’s executed. However, keep in mind that your order may be filled in fast-moving markets before you can do so.

When placing your order, you’ll also need to specify the time in force, which is how long it’s active. This table provides the most common options, along with their abbreviations in case they aren’t spelled out on a platform:

6) Managing Risk

When you’re finally up and running and real money is at stake, you’ll need to manage your risk. This involves identifying, assessing, and ranking potential risks to minimize their impact on your portfolio. By implementing effective risk management strategies, you can protect your hard-earned capital, limit losses, and improve your trading performance.

  • Diversification: This involves spreading your investments across different stocks, sectors, and asset classes. By diversifying, you can reduce the impact of an investment’s performance on your overall portfolio. This is especially important for long-term investors. However, keep in mind that diversification does not guarantee profits or eliminate the risk of loss.
  • Emotional discipline: Don’t underestimate the importance of emotional control for managing risk. Emotions such as fear and greed can significantly affect your trading decisions. Fear can have you exiting a position too early, and greed can cause you to hold onto a losing stock long after hope for a recovery is gone. By managing your emotions and sticking to your trading plan, you can make more rational decisions and avoid impulsive trades.
  • Hedging: For more advanced traders, this involves investing in a position to offset the risks they’re taking with another trade should the price not move as they expect. (Like when you put money into an insurance policy to offset the chance your home is flooded.) For example, if you own a stock, you could buy a put option to protect against a potential decline in the stock’s price. While hedging can be complex and involves certain costs, it can be quite effective in managing risk.
  • Position sizing: This refers to the number of shares or contracts you trade in relation to your account size. Proper position sizing helps you control your risk exposure and avoid putting too many eggs in one basket. A general rule of thumb is to risk no more than 1% to 2% of your account on any single trade.
  • Risk-reward ratio: This compares the potential profit from a trade to the potential loss. A common risk-reward ratio is 1:2, meaning you risk $1 to earn $2 potentially. Maintaining a favorable risk-reward ratio ensures that your winning trades are larger than your losing ones, helping you achieve overall profits.
  • Stop-loss orders: A critical risk management tool, these orders automatically close your position if the stock price reaches a preset level. By setting a stop-loss, you can limit your potential losses and protect your capital. When placing a stop-loss, consider the stock’s volatility, support and resistance levels, and your risk tolerance. A trailing stop is a type of stop-loss that adjusts automatically as the stock price moves in your favor. This allows you to lock in profits while still limiting potential losses. As the stock price rises, the trailing stop-loss moves up with it, maintaining a fixed distance from the current price. If the stock price reverses and hits the trailing stop-loss, your position will be closed, securing your gains.

Risk management is an ongoing process that should be regularly reviewed and adjusted. As your trading skills, life circumstances, and economic conditions change, you can adapt your risk management strategies. Whatever your circumstances, though, prioritizing risk management is a must to protect your capital, minimize losses, and increase your chances of long-term success.

Are There Main Differences Between Trading and Investing?

In general, investors are long-term buy-and-hold market participants, while traders buy and sell shares more frequently, hoping to make shorter-term profits.

What Are Some Common Trading Strategies?

These would include following the trend, that is, buying when the market is rising and short selling when it is declining; contrarian trading, or going against the herd; scalping, and trading the news.

Is Technical Analysis or Fundamental Analysis More Important for Trading?

Because technical analysis looks at the short-term picture and can help you to identify short-term trading patterns and trends, it is ordinarily better suited to trading than fundamental analysis, which takes a longer-term view.

What Are the Traits of a Successful Trader?

In addition to knowledge and experience, discipline and mental fortitude are key. You need discipline since you’re most often better off sticking to your trading strategy should you face challenges. Without this, small losses can turn into huge ones. Mental fortitude is required to bounce back from the inevitable setbacks and lousy trading days in every trader’s career. Trading acumen is another trait necessary for success, but this can be developed over the years as you gain knowledge and experience.

The Bottom Line

Start your trading journey by getting up to speed on the financial markets. Then, dive into company fundamentals, read charts, and watch the prices to see if they meet your expectations. Test these strategies with demo accounts to practice trading, analyze the results, and make adjustments. After that, you can research stocks, pick a brokerage, and begin your first trades. That brings you to the beginning, not the end, of your investing journey.

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