Trading - Knowing how to buy stocks is a major benefit when you want to start investing in the stock market today. The global COVID-19 pandemic has sparked a massive interest of retail investors of all levels coming into the stock market. With so much information about trading stocks out there, we want to help you cut through all the noise. That’s why our team here StockMarket.com, put together this comprehensive beginner guide on how to start trading stocks in 2021. If you’re new to the stock market or maybe you just need a refresher this guide will help you. Without further ado, let’s dive into it.
Before you start investing your hard-earned money, let’s make sure you understand the basics. If you have no prior knowledge of the stock market, you might be saying “What exactly are stocks”? Maybe you’ve heard a family member or co-worker talking about stock market investing, or day trading stocks. Well, a stock by definition is a security that represents ownership of a company. This is not to be confused with a share, which refers to the stock certificate of a specific company. The main reason people invest in the stock market to earn a return on their investment. This usually happens in two ways:
The stock price of the company you invested in goes up. This allows you to sell your stock for a profit if you choose to. For example, if I buy 100 shares of ABC stock at $10 a share, I’ve invested a total of $1,000 (100 shares x $10 a share). If I hold my ABC stock shares for 3 years and ABC stock is now trading at $20 my position is now worth $2,000. If I chose to sell my ABC stock shares at $20 dollars a share I would stand to make a $1,000 profit, representing a 100% return on investment.
Investing in Dividend Stocks. All companies don’t pay dividends, but a lot of them do. Dividends are distributions paid out regularly by a company to its shareholders out of its profits. Dividend stock investing is a popular strategy among long-term investors looking for predictable income.
Furthermore, there are two types of stocks, which are common and preferred. Holders of common stock have the ability to vote on corporate events such as electing the board of directors and other corporate policies. On the other hand, preferred stock allows shareholders to have a higher claim to dividends and asset distributions than common stock. Also, preferred shareholders usually have no or limited voting rights. Now that we’ve got this covered, let’s get into the differences between the major stock exchanges.
It’s likely if someone is talking about buying and selling stocks, it’s usually associated with the NASDAQ or the New York Stock Exchange (NYSE). That’s because these two major exchanges are responsible for the majority of stock trading not just in North America, but across the globe. However, the two exchanges are different in regards to their operations and the type of equities they list. Understanding the differences in how these two exchanges work, will only help you when you start buying or selling stocks. Let’s take a deeper look into some of the differences.
Nasdaq is a global electronic marketplace that permits investors and traders to buy and sell securities. It was the world’s first electronic stock exchange. The term, “Nasdaq” is also used to reference the Nasdaq Composite. This is an index made up of more than 3,000 stocks that are listed on the Nasdaq exchange. Most of the big technology names you’ve grown accustomed to like Apple (NASDAQ: AAPL), Amazon.com, Inc. (NASDAQ: AMZN), Facebook (NASDAQ: FB), and Alphabet (NASDAQ: GOOGL), the parent company to the search giant Google are all listed on the Nasdaq exchange.
The New York Stock Exchange or NYSE is the oldest American stock exchange that’s still active and is the biggest in terms of the total market capitalization of its listed companies. The NYSE is considered an auction market, which utilizes designated Market Makers (MMs) or specialists. While Nasdaq is what’s called a dealer market that consists of many market makers that compete with each other. Some of the best stocks to buy for beginners that trade on the NYSE are; Shopify (NYSE: SHOP), Salesforce (NYSE: CRM), and Walt Disney (NYSE: DIS) to name a few.
Making money day trading or swing trading stocks is an acquired skill that takes the proper education, research, discipline, and most importantly practice. If you’re reading this and you’re brand new to the market, this section below will help speed up your learning curve. Below we have put together step-by-step instructions on how you can start trading stocks. It’s important to note that there is a difference between investing and trading. Investing is more long-term and active trading is more short-to-mid term investing. For this guide, we’re going to cover how to make money trading stocks online in 2021. Before we jump in, let’s just briefly discuss the two most popular active trading strategies in the stock market today.
First, let’s take a look at day trading stocks. Day traders are active traders who execute intraday trading strategies to profit off-price fluctuations for a specific asset class. To put it simply, a day trader is someone who is buying and selling stocks on the same trading day. Day trader’s trades’ can last anywhere from a couple of seconds, minutes, or hours based on daily price volatility. Technical analysis is something that is often associated with day trading stocks.
Next, we have the swing trading strategy. Swing trading is a style of active trading where a trader tries to capitalize on short-to-medium-term gains in a stock. Whereas day trading is usually intraday, with swing trading, trades can last from a few days, several weeks, or months. Similar to day traders, swing traders also deploy technical analysis to identify profitable trade ideas. However, you may see a swing trader also include fundamental analysis into their game plan, which is not as common to see in day trading.
Ultimately, choosing which active trading strategy is right for you, comes down to a few questions you need to answer for yourself.
What are your overall investment goals?
In what time horizon do you want to achieve these goals?
What type of investment strategy best matches my personality and current lifestyle?
What is your risk tolerance?
How much time do I have to commit to learning this new skill?
After answering these questions, you should have a better understanding of which active trading strategy may be best for you to start trading with. There is no right or wrong, just what works for you.
What Is A Brokerage Account?
A brokerage account gives you access to a wide range of investment products that you can invest in. The most common asset classes are stocks, bonds, options, and mutual funds. You have the ability to transfer money into and out of your brokerage account similar to a traditional bank account, though, unlike banks, brokerage accounts grant you access to stock market investing as well as other investments. You own the money and investments in your account, the assets are yours, and you can liquidate them at any time. Just think of the brokerage or investment company as a “middle-man” between you and the investments you want to purchase.
Nowadays, many of the best stock brokerages in 2021 allow users to open a brokerage account quickly online. Top discount brokerages like Interactive Brokers, TD Ameritrade, E-Trade, and Robinhood have made it easy for new investors and traders to open a brokerage account by not requiring a large initial deposit to open an account, and offering commission-free trading. However, you will need to fund your account before you can start making any investments. Here’s how to open a brokerage account in 3 simple steps.
Step 1: Decide How Much Help You’ll Need From Your Brokerage
There are many different kinds of brokerage accounts, all with their own pros and cons. The first step to opening a brokerage account is to do your due diligence on the top brokerages to see which best fits your needs. A few things to consider while doing your homework are the following:
What are the fees associated with the brokerage account?
What education and resource tools do I have access to?
Is the brokerage’s online platform easy to use for me?
Is there a minimum balance required?
Despite there being different brokerage accounts, it ultimately falls under two umbrellas, a self-managed or managed brokerage account. They’re exactly how they sound. A self-managed brokerage account is an account that you manage entirely versus a managed brokerage account is one that is managed by a financial professional like a financial advisor or a registered investment advisor. Again, this ultimately comes down to personal preference and how much hands-on help you think you’ll need. If you’re leaning more towards the day trading strategy then a self-managed account maybe your best option. If you’re gravitating towards swing trading, then a self-managed brokerage account may be a good option for you to consider.
Step 2: Apply To Open Your Brokerage Account
You’re almost there! You’ve done the research and chose which brokerage firm to open your account with. Now what? Well, it’s time to apply for your account. As I stated above, most of the best discount stock brokerages today allow you to apply directly online and can take less than 10 minutes to complete the process. The best part is, you can open an account from your laptop, desktop, tablet, or smartphone. Didn’t we say there’s never been easier to start investing in the stock market? We meant it.
If you’re now saying to yourself, “what information do I need to provide to open a brokerage account?”, just keep reading…
Here is some of the information you will need to have on hand to set up your account:
Personal Information: In terms of the personal information you need to provide when applying for your stock brokerage account, you will have to provide items such as your:
Social security number.
Current financial situation and assets.
Tax Status: You will also see some questions (not limited to) on the application such as:
Are you creating the brokerage account under your personal or business?
Are you filing individually?
Or are you filing jointly with your spouse?
Risk Tolerance: There will be asked questions about your risk tolerance. You’ll likely see questions about your:
Investment Strategy & Goals
Although, these are not the only questions or items you may need to provide, these items mentioned above have been generally universal across all the best stock brokerages
Step 3: Fund Your Account & Start Trading Stocks
You are now technically ready to start building your future wealth within the stock market. It’s an exciting feeling, and the only thing left to do is fund your new brokerage account. The stock market has the potential to significantly appreciate your money, but nothing is guaranteed and you can also lose the money you invest. With that being said, if you’re trying to figure out how much money you should start with, the answer is, whatever dollar amount you feel comfortable risking knowing you may not get that money back.
You obviously wouldn’t want to risk your rent and bill money to start trading stocks. This is because if you lost that money you’d be homeless with no food. However, if you have extra money after all of your obligations are paid for, then that may be a better option to use that money to start learning how to day trade or swing trade stocks. Ultimately the choice is yours, but before you get trigger happy, you should keep reading.
When it comes to finding the best stocks to buy now, there are easier ways than just choosing a random stock ticker that you found in a Facebook group or on Twitter. To start, “the best” relates to stocks that have the highest chance to make a strong move. This is where having a good stock screener comes in handy. Most of the best online stock brokers offer their customers built-in screeners and customizable ones. You could use software like TD Ameritrade’s Think or Swim platform, True Trading Group, or Finviz to put your scanner together.
First things first, using a good stock screener is one of the best ways to “follow the smart money” because if a stock is showing unusual volume, there’s usually an “unusual” event that could be used as a catalyst. For example, there are screeners that will show the top “unusual volume” despite the company itself reporting any news or other catalyst. This could be something like industry-related news that caused the spike in volume.
For example, in 2020 electric vehicle stocks took the market by storm. Top EV stocks like Tesla (NASDAQ: TSLA), and Nio (NYSE: NIO) brought in over triple-digit gains for investors in the last year. There was so much bullish speculation around the electric vehicle industry as a whole, that during this rally most of the direct and ancillary EV stocks saw their share prices increase too. Even if that company didn’t necessarily have a catalyst. Being able to identify when a particular stock or sector is experiencing unusual higher volume activity can help you potentially see trading opportunities that other inexperienced traders can’t.
Next, we have stocks that are gapping up or popularly referred to as “stock gappers” or “volume stock gap ups”. This popular premarket stock scanner will help you identify stocks that are experiencing above-average volume and their shares are trading above their previous day’s close. Stocks can gap up or down depending on the catalyst or market sentiment.
For example, if a biotech company reports after-hours or premarket positive clinical trial results, that most likely will bring a lot of investor interest and unusual volume for that company causing it to gap up. Vice versa, if that same biotech company reported negative or less-than-expected clinical trials results, it’s likely that stock will experience a lot of selling pressure causing this biotech stock to gap down, which is a bearish sign.
The volume-weighted average price (VWAP) is a technical analysis indicator that is commonly used by day traders and swing traders. VWAP gives you the average price a stock has traded at throughout the day. This is based on both price and volume. It provides traders with a better indicator of both the value of the stock and the trend.
Obviously, there’s a lot of strategies traders can use with VWAP, but to start this screener will help you find stocks that are trading near their VWAP. One example is, combining your VWAP scan with a volume indicator may help you only focus on trending stocks that are testing VWAP levels, but also that you know other traders are also watching.
The stock screeners are a great first step in building your list of stocks to watch daily. While these scanners give us a good head start in picking the best stocks in the stock market today, that’s exactly what it is, a start. Understanding how and why these stocks get on your scanners is just as if not more important to know. Let me explain.
Let’s first discuss stock market news. If the company reported news or was it industry-related? Events like Mergers and Acquisitions or FDA approvals would likely be seen as a bullish indicator as a result of that material event. Contrarily, if stocks are moving without any real catalyst, one would consider it to be speculation. Keep in mind, there’s plenty of quality companies to choose from. It takes the same amount of work to look for quality stocks with strong fundamentals moving in a bullish trend., then trying to trade junk.
If you ask any stock trader, they’ll likely tell you that the first thing they look for when finding the best stocks to buy is volume. Volume equals volatility, and volatility is the lifeline for active traders. Volume creates the ability for traders to enter and exit trades efficiently and at the most optimal price levels. This goes back to what we mentioned above and that higher than above average volume is a must-watch for traders.
Another popular day trading term you’ll hear a lot among traders is stock float. Every publicly traded company has a float. This is the number of outstanding shares available for a stock to trade minus the restricted shares or shares held by insiders and employees. Simply put, it’s the number of shares that are available to trade in the open market. Why does this matter?
Well, traders use the float to identify the supply and demand of the stock. The higher the float means there’s a higher number of shares available to be traded in the stock market. This means when the stock float is increased, there are more shares available to trade and in turn, require more buying and selling activity for that stock to move. On the flip side, if a stock has a low float and volume increases it can result in a more significant price movement for that stock due to supply and demand. You should now clearly see why it’s important to be able to understand and identify stocks with high or low floats.
Making profits with day trading or swing trading is mostly reliant on stock prices increasing. Yes, you can short stocks in the market, but the popular ideology is to buy low and sell high. In order to be able to achieve this, you’ll need to be able to identify bullish stock market chart patterns using technical analysis.
If you’re going to be successful as a stock trader you need to be able to identify continuation and consolidation. A bull flag chart pattern occurs when a stock makes a strong move to the upside. The stock will then consolidate. When this happens we’ll see lower highs creating new support levels that form a flag.
Similar to what we discussed earlier, the volume will be a huge piece of the puzzle for a bull flat chart setup. The stronger the volume, the more confidence the trader has with the setup. The lighter the volume, the more difficult it becomes for the stock to break out.
Next, we have a double bottom chart pattern. This would be considered a reversal pattern which can be extremely profitable for investors who can identify the quality ones. A double bottom happens when the price of a stock reaches the same low two times and then jumps back up. Some say the pattern resembles a “W” on the stock chart.
You may be asking, why is the stock hitting the same low twice a good thing? Well, if the stock reaches those low levels but then quickly bounces off of them, it shows us, traders, that stock has established strong support at those low levels. Traders ideally want to enter their positions when the stock rallies off hitting the second low. This chart pattern can form over different time frames, and it’s all relative to your trading style.
The third is the golden cross. The golden cross chart setup is one of the most popular technical patterns among active traders in the stock market today. The golden cross happens on a chart when a stock’s short-term moving average crosses above its long-term moving average. Most commonly used is when the 50-day moving average crosses above the 200-day moving average.
Generally larger time periods used with the golden cross setup tend to point to stronger and longer-lasting breakouts. If we use the S&P 500 Index as an example, when the daily 50-day moving average crosses above the 200-day moving average it’s among one of the most south-after bullish market signals among wall street and investors.
Last but not least, is the ascending triangle chart pattern. The ascending triangle is a bullish continuation chart pattern. This is because it will generally break out in the same direction as the trends that were in place just before the triangle forms. It is often characterized by an increasing lower trendline and a flat upper trendline that acts as support.
Normally a long trade happens if the stock price breaks above the top of the pattern. While a short trade is taken if the price moves below the lower trendline. Similar to all the other chart pattern setups mentioned in this guide, the increasing volume will help confirm the breakout on the stock chart, as it represents an increasing interest as the price moves out of the patterns.
Is active trading the only way to make money within the stock market? Of course not! You can definitely take a more long-term conservative approach to investing. There’s no perfect strategy, really. It all comes down to who you are and what you are looking for in the market. I will warn you however that if you are thinking of actively trading the markets then you should know it comes with increased risk.
Normally, a shorter-term outlook on the stock market is ideal for day trading or swing trading stocks. However, the increased volatility does increase the risk of that particular trade. However, the goal for any active trader should be consistent profitability. If you look at it like baseball, if you try and hit a home run every time you’ll likely strike out more times than not. On the flip side, if you focus on just sitting singles and doubles, your chances of getting on base will be higher. Similar to trading, don’t focus on trying to make 100% returns for every trade. If you’re a new trader, start small and try to make just $20 dollars a day and build that up to $50, $100, $250, $500 a day, while managing your downside risk.
To become a successful trader, it takes time, discipline, dedication, and education to master this skill. I’m not saying if you do these things you’ll make millions of dollars in the stock market, and that’s ok. The goal is to make money consistently, not try and hit the lotto.
As you can see, there’s no secret or magic pill that can help you make money trading stocks online today. But I hope this guide gave you more clarity on how you can make money trading stocks. To button this up, let’s go over these 5 tips for trading stocks:
Education Is Key
There is a misconception that stock trading is “gambling”. This is only the case for the trader or investor who doesn’t know what they’re doing. Trading stocks is a skill that can be used as a vehicle to generate wealth for you and your family. With that being said, just like any skill, you must first and most importantly educate yourself. I like to compare trading stocks to boxing. It can be fun, rewarding, and if you’re good at it you can become professional and make a lot of money doing it. But you wouldn’t step in the ring with Mike Tyson without knowing how to put on your gloves properly, would you? Similarly, becoming a successful trader is not a get-rich-quick scheme and takes time and dedication to learn.
Trade Stocks Don’t Marry Them
The goal is to literally become a sniper trading robot. Every trade should have a clear and precise plan in place to execute on a strategy. Trading stocks is a tool to make money, not play the lotto. Consistency will be your best friend throughout your trading career. With consistency, comes with letting go of your emotions. You need to remove emotions out of your trading. This includes not falling for FOMO or over hyped stocks that are being talked about on social media or online forums. Always do your own due diligence and remember your job as an active trader is to trade the setup in front of you. There will always be another stock to trade.
Look For Stocks With High Volume
In trading, the volume will always be your friend. High volume stocks give you the ability to enter and exit trades faster. Remember, stocks with low floats and high volume could be a potential recipe for a massive breakout. Though, nothing is guaranteed but understand that higher volume gives you the optimal chance to get the best execution time and price.
Be More Concerned With Risk Management
One thing that my trading mentor said to me that stuck was, “As a new trader be more concerned with how many you’ll lose if you’re wrong, versus how much you’ll make if you’re right.” Too many new traders are more concerned over how much they need to make when they should be focusing on limiting their losses to conserve the capital in their account. Risk management is so important to learn early on because it could be the difference between growing your account or blowing your account up and losing all your money.
You’re Never Too Late To Start Trading Stocks
If you think you’re too old or late to the party of stock market investing then you need to rethink that. Now, for most brokerages within the U.S., you need to be at least 18 years or over to open up your own brokerage account. If you fall under this age group, I’ve got great news, you still have plenty of time to get involved in the stock market. The stock market is arguably the best investment vehicle to create long-term wealth with. With so many stocks to choose from every day, there’s a massive opportunity for new retail investors to join the party. Ultimately, it all comes down to you putting in the time and effort to learn this skill.
Though it may seem easy to start making money with stocks online, it’s not. The hard truth is, active trading like day trading or swing trading may not be the best investment strategy for you. If you can understand profitable chart setups, manage risk, and handle high volatility, then trading may be a good option for you. My suggestion would be to focus on getting a quality education. After that, I’d practice what I learned using paper trading money on a stock simulator before switching over to real money.
Paper trading is a great way to build your confidence so when you transition to investing your money you feel more confident in the stock market as a whole. I really hope this stock trading guide has helped you grasp a better understanding of the stock market and how to make money trading stocks online. If you have any questions, drop a comment below.