Buying and selling stocks is not only for the ultra rich.
With countless digital forums for sharing tips and an abundance of friendly interfaces to trade in real-time, there is little doubt that we are living in the era of the everyday trader.
According to a recent study, 77% of Canadians have investments. Mutual funds make up 42% of the assets in their RRSPs, and stocks make up 14%. With the democratization of trading tools and knowledge, the number of investors is expected to keep growing.
Stock trading isn’t all about flashing screens and suited traders on the Stock Exchange floor as shown on TV. You can get started from the comfort of your couch. Here are the key steps on how to start trading in stocks:
Define your why
Before you get started in trading the stock market, you need to first understand your why and decide what kind of trader you want to be.
Do you see yourself trading every day? Are you doing it for fun? Do you want to trade only a few times per week? Or do you want to buy stocks and hold them for the long term?
If you are an immigrant entrepreneur, are you thinking of trading in stocks to make extra money to remit back home? Knowing your why, will make you a smarter trader.
Decide how much to invest in stocks
The next important step in trading in stocks is to decide how much you are investing.
Before then, let’s talk about the money you should NOT invest in stocks. These will include your emergency fund, next tuition payment, your next month’s rent, mortgage payment, or money you are saving for some down payment.
Can you start trading in stocks with $100? Of course, you can. You could also go up to $50,000. After determining your objectives and risk tolerance, you can then start with your budgeted amount. Just don’t rush into it. $2000-$5000 is a reasonable sum to start with.
Do some research and homework
Research and self-education will help you better understand how to start trading in stocks.
Stock trading and news sites such as Investing-com, CNBC, Yahoo Finance, Google Finance, Wall Street Journal, and Bloomberg are helpful. You can also look into newspaper financial articles, stock market books, and website tutorials.
Your broad and detailed market background will come in handy over and over again. In stock trading, good knowledge is power.
Understand basic technical analysis and fundamental analysis
Fundamental analysis looks at all the factors which have an impact on the stock price of the company in the future.
These include financial statements, profitability management processes, industry, competition, new products, and other such items. The analysis will indicate whether the stock is under-priced or over-priced.
On the other hand, technical analysis uses past charts, patterns and trends to forecast the future price movements of the stock.
As stock prices change every minute, a basic understanding of what affects prices will also show you how to start trading in stocks successfully.
Open a trading account
Now that you are better informed, you are ready to start trading stocks. To get you started, you need a trading or brokerage account, to buy and sell stocks.
The account gives you access to the trading platform where buyers and sellers meet electronically to exchange stocks. Should you open an account with your bank or online brokerage firm? Let’s look at the benefits and downside of both.
Consider trading cost
Simplicity can sometimes be your best ally. For beginner traders, opening a trading account with your bank could make your trading smoother and more accessible.
All the major banks including Scotia Bank, TD, RBC, CIBC, and BMO all offer trading accounts. The catch is that banks have the higher trading cost. ($6.95 to $9.99 per trade).
On the other hand, online brokerage firms have less customer support and transfer of funds takes a few days. So you might lose out on a quick market opportunity.
However, people flock to these Canadian and offshore brokerages because they are free or cheaper than the banks. Examples are WealthSimple, Questrade, AVA Trade, Interactive Brokers, and BDSwiss.
It might be worthwhile to also start with a practice account to get your feet wet without giving up your trading stake.
Choose your stocks
Your account is open, and you are now ready to start trading in stocks. What’s next? Picking the stocks is the trickiest part of trading.
Here are the important concepts to master before you start buying stocks:
- Diversify your portfolio.
- Invest only in businesses you understand.
- Invest in proven companies to start with
- Avoid high-volatility stocks until you get the hang of investing.
- Learn the basic metrics and concepts for evaluating stocks.
- Start slowly, picking one or two stocks and investing a set amount of money that you are prepared to lose. You can plow gains back into the stock — or into companies — but don’t add more money to the pot until you get a better grip of the market.
No one has consistently tamed or timed the stock market perfectly and where there are economic activities, there are risks. Diversifying your stocks is one way to hedge your portfolio and the best answer to the question of how do I start trading stocks successfully?
Let’s say you opened your new trading account and deposited $5000 in it. A friend suggested the Electric Vehicles (EV) sector is killing it right now. So you eagerly dumped all 5K in one of the EV companies. If the EV sector tanks, you are done. But if you invested $1667 each in three sectors; EV, Banks, and Energy, all your eggs are not in one basket and you’ll reap the benefits of learning about other sectors of the financial markets.
Automate your contributions
Consistency is one of the keys to successful trading in stocks. And there’s no better way to remain consistent than to automate your investment contributions.
By investing regularly, you can help smooth out the ups and downs of the markets, as you’ll be automatically investing when markets go down, and get better returns when they go up.
Take away tips for immigrants and beginner traders on how to start trading in stocks.
- Avoid chasing hot stocks
If you ever watch the financial news, you would have heard about investors that doubled their money overnight or stocks that jumped 200% -300% in a week.
In early 2021, GameStop was the “flavor of the month,” with the stock skyrocketing by 400% in a single week. The stock has since come down to earth.
If you chase hot stocks like GameStop, AMC you could lose a huge percentage of your investment in a hurry. While you can speculate with a small portion of your portfolio, keep the rest of your portfolio on track by constantly referring back to your investment objectives, risk tolerance and fundamentals.
- Leave your emotions at the door
Emotions can play a big role in trading stocks. While you might feel euphoric during strong market rallies, bear markets can be emotionally devastating.
One of the main reasons traders underperform is that they tend to sell at market lows when they are most nervous and buy at market highs when they are feeling most confident. Of course, this is the opposite of what you should be doing as an investor.
The best way to avoid this common pitfall is to work hard at keeping your emotions out.
- Determine your risk tolerance
Your risk tolerance is an assessment of how well you can handle the ups and downs of your portfolio. Know when to take profits and when to count your losses.
Risk management is the difference maker in trading in stocks. And remember to always keep a close watch on your overall life budget and the key budgeting rules.
- Know the right time to buy and sell
Choosing the best time to buy or sell stocks is the hallmark of great traders
- Embrace the Long-Term Approach
Patience is your friend when it comes to trading in stocks. You will make mistakes along the way, you will take some losses, but if you pick the right companies, diversify and stay invested, your patience will be richly rewarded. Think long-term.
The most effective way to make money in the stock market is to buy shares of great companies at reasonable prices and hold on to them for as long as the businesses remain great (or until you need the money). If you do this, you’ll experience some volatility along the way, but over time you’ll produce excellent returns.
- Know Thyself
Learn from people but be you. Know yourself, your limits, and risk tolerance.
- Start now
When is the best time to start trading in stocks? If you’ve got a long-term perspective, the answer is always now. The sooner you can start investing, the sooner you’ll be on the path to meeting your financial goals.
Like golf, trading stocks has been portrayed, for so long, as prestigious and something for the selected few, or the rich. Now that you better understand how to start trading in stocks and managing risk, you can finally join this trading business class.
Disclaimer Past results are no indication of future performance. In no event should the content of this article be construed as an express or implied promise or guarantee.