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Top 10 Tips for People New to Stock Trading
The days of contacting a broker to buy stocks and shares are long gone, and so are the fees associated with using this service. The 21st Century has seen the advent of internet stock brokers who allow you to use their websites free of charge.
It is incredibly easy to create a trading account and to start trading stocks for real money in less time than it takes to make a cup of tea. The only time you pay money to the internet stockbroker is when you make a trade. However, their commission is often less than $15 (£10) per trade.
I have been trading stocks on the internet for a number of years. In this article I will share what I have learnt so you can reach my level of expertise in less time than I have. Having traded on the London Stock Exchange (LSE) for a long time, I stand by my tips, but I also advise you to do your own research. Every opportunity comes with a sizable dose of risk!
In no particular order, here are the top 10 tips for people new to stock trading.
1. Internet Stock Trading
The best way to trade shares is online. First, open an internet bank account if you don't already have one. Next, open an account with an internet stock broker. Always choose a broker that is reasonably well-known to avoid being scammed. To do this, use a search engine to find articles that compare the different internet stock brokers. Before picking a broker, consider what you will use it for. If you just want to trade stocks, always go for the broker that charges the lowest commission per trade, but be careful to avoid monthly fees and inactivity fees. It may be that you want extra advice from your broker on how to pick stocks, and this could be included as part of a higher commission fee. Once you have chosen your broker, you can use their website to transfer funds from an internet bank account.
2. Create a Watchlist
Do not jump in and trade immediately! The broker should offer you a facility to create a watch-list of stocks that interest you, so start by creating a list of 20-30 companies. If there is no facility to do this, Google Finance can be used instead (by creating a new portfolio). Pick companies from a range of sectors (banks, retail, oil exploration, mining, etc) with a range of prices. I picked companies that had shown a lot of movement in their recent price, thus giving the best opportunity to witness significant fluctuations in future.
3. Day Trading
Observe the watch-list for at least one month. See how the prices of the stocks change from day to day, and look at the graphs that show this movement over extended periods of time. One method of earning money is to predict the next movement of a stock price based on trends that you can decipher. My first purchase was a UK stock called Croda (CRDA). I could see how the price had been fluctuating consistently up and down, and within two days I had made 5% on that investment after commission. I bought the stock at a low point and sold at a high point. This method of earning from fluctuations only comes from observation over an extended period of time. It may be that other stocks go up or down consistently. Get a feel for how the stocks on your watch-list perform each day.
4. Read Relevant News
There are other factors that affect stock prices. Try to compare the movement of the price with any recent news items relating to the company. Your broker should provide a link to news stories related to the companies on your watch-list (Note: Google Finance doesn't link to every story that is relevant). These news stories usually impact prices and override fluctuations. Learn how news stories have impacted the price of stocks on your watch-list.
5. Rebounding Stocks
Another factor affecting stock prices is the rebound mechanism. A large one-day increase or decrease in a price often see's a rebound in the opposite direction the next day. After an increase this is called "profit taking", as people are selling the stock because they like the new price. This selling reduces the price. After a large decrease, investors may think the market over-reacted. They buy the stock because they think the new price is a bargain. It is dangerous to do this because the stock could tumble further. I would recommend waiting until the price has stabilized before buying stock; but only if you decide it is now a bargain.
6. Size and Prospects
The most important factor is to judge the prospects of the company against the risk. Look at the size of the company (market capitalization). A smaller company carries more risk but usually has the chance of bigger gains. Read back through the news items related to the company to see the Annual and Interim Reports. Decide what potential for money-making there is, and when this is likely to occur. If an oil exploration company is about to start drilling somewhere then a large price increase (or decrease) could be imminent.
7. Investor Sentiment
Another factor is to gauge investor sentiment. I created a free account at a website called interactive investor, and I use their discussion boards to see what people are saying about stocks that I trade on the LSE. Quite often people using the boards unearth information that I have not. However, beware these discussion boards as the sentiment is usually very optimistic to say the least; take it all with a pinch of salt, and never buy stocks because they were recommended by another board user. Every time I have been swayed by recommendations it has back-fired.
8. Calculate Your Objectives
Over time you will be able to spot bargains using your evaluation of company prospects, fluctuations, news, rebounds, and investor sentiment. Only when you have established confidence in having found a bargain should you invest. Don't invest too little in one stock because your profit will be too small. Aim for 5% profit at first and decide whether this return on your investment is worth it. Only invest what you can afford to lose, but don't take this philosophy too far, as losing everything you invest rather than some percentage of that sum is very unlikely (the larger the company the less likely it is to lose the entire investment).
9. Diversification is a Myth
Don't believe what people say about diversifying your portfolio. Your confidence for the stocks on your portfolio will not be equal, so it's better to invest more in the companies you see as being a bigger bargain. Like Warren Buffett said "Wide diversification is only required when investors do not understand what they are doing." Go for about 3-6 companies (or less if your minimum investment won't allow that many), and they can all be in the same sector if you want.
10. When to Sell
Knowing when to sell a stock can be very difficult. The rebound mechanism may not apply to a rising price, causing you to sell too soon. News leaking out before it is officially announced may cause a small rise in the price, which you could interpret as a fluctuation, causing you to sell too soon. When the news is finally released you will regret not having held onto your stock. This happened to me once, and was a source of great displeasure as without the corruption of others I would never have sold. Conversely, you may wait too long to sell, failing to sell at the peak price. I call this "missing the boat", and it can be equally frustrating.
A Final Word
There is always more to learn, but if you are new to stock trading, I hope you now have the tools to start trading stocks on the internet, and the expertise to know what is available to you and how to use it. So good luck, do your own research, and most importantly, don't dwell on "what could have been". Always look to the future, and learn from your mistakes.