Maybe there is a product that you use so much that friends or relatives tell you you should buy stock in the company. Or maybe you’ve received a bargain and want to invest some of it in the market for fun and, if all goes well, to cash in on it.
If you can’t wait to get started with active online trading, this guide will help you get started.
1. Decide if this is the right strategy for you
You might consider trading stocks if:
You have reached your employer’s maximum of 401 (k) dollars. Most 401 (k) plans don’t allow participants to buy individual stocks – instead, investors choose from a selection of mutual funds and indexes. But you can usually buy and trade stocks within an individual retirement account. Trading within an IRA can be beneficial: Since these accounts are tax-efficient, capital gains taxes can be deferred or avoided altogether.
You’ve contributed the annual maximums to a 401 (k) and an IRA, and you’re probably on your way to meeting your retirement goals. You are also willing and able to take more risk when trading stocks. In this case, you may want to open a taxable brokerage account with an online broker and trade in that account.
If you aren’t saving regularly for retirement yet, you’ll want to start doing so before you start trading online. Maximizing a 401 (k) and contributing what you can to an IRA is one of the most effective ways to build long-term wealth. Learn how to open an IRA.
Trading individual stocks not only carries more risk, but requires more effort than investing in mutual funds or indexes. You need to actively monitor your positions and understand if and how to react to market movements. (Learn more about the the basics of buying stocks here.) This is not the kind of risk most retirement investors want to take.
If you’d rather remain largely passive after all, then invest in a portfolio managed by a robot advisor might be a better choice than trading individual stocks.
Before you trade anything, learn all you can about investing and the markets. Mistakes can be costly.
There are a lot of free Educational resources that teach how to trade through an online broker. Think about the Morningstar investing classroom or one of the investing courses on Udemy.com.
Also, most securities brokers offer their own training centers and a team of former traders or investment advisers who can guide you. Some brokers, like TD Ameritrade, offer their clients paper trading, a trading simulation that is a great way to practice without money or risk.
3. Select an online broker
Choose an online broker with the right tools and support for your needs. In general, novice traders should prioritize customer support, educational resources, and account and trading minimums. Also, consider the online broker’s stock trading software. New traders will want a streamlined platform that is easy to navigate and incorporates practical advice and a community of peer traders to help answer questions.
4. Start looking for stocks
Your account is open and you are ready to start investing. And after? Choosing stocks, of course, and that’s the tricky part.
Most traders start by doing a thorough analysis of a company, looking at public information including earnings reports, financial documents, and SEC reports, as well as external research reports from professional analysts. Much of this information should come from your broker, along with recent company news and risk assessments.
Start slowly, picking one or two stocks and investing an amount of money you’re willing to lose. You can reinvest the gains back into the stock – or other companies – but don’t add more money to the pot until you know what you’re doing and can research other companies. .
5. Make a plan and stick to it
Investing can be emotional, especially for those new to the game. Losing money doesn’t feel good, and it’s easy to panic and pull out at the wrong time. It’s also easy to get carried away by the excitement of what seems like a winning action.
This is why it is important to plan how much you want to invest at what price, and to determine how far you are willing to drop a stock before you retire. Using the right kind of business order can help you stick to your plan and avoid emotional reactions. For example, stop-loss orders trigger a sell if a stock drops to a certain price, which can minimize risk and loss. Learn more about the different types of market orders.