Investment 101
It’s important to plan your future and set aside money for investment. This way, the money works for you as you keep on with your busy life. In the future, you get to enjoy the fruits of these investments and live a financially stable life. When you think of investing, think long term and not something you can expect to cash in at the end of the week or month.
It’s better to have the money you set aside work to earn more than keep it at home and it decreases in value. The reason it loses value is increasing inflation rates. It’s advisable to start the investment journey through self-evaluation first. This is the same question most brokerage firms will ask as you set to open a brokerage account with them. It helps to get a clearer picture of your goals.
You can opt to be an active investor and play a more present role in your investments. The other option is to hand over your money and not closely monitor how the brokerage firm invests. A busy life might require you to take a back seat and trust the firm. There are many investment products/securities to choose from including stocks, ETFs, mutual funds, options, among others.
Types of Brokers
Most people opt to use online brokers as they are the most popular and offer great discount accounts. Discount brokers focus on active traders who are more involved in the trade. What they do is facilitate you with the right tools to select and place trades. Many are now available on browsers and apps that can be easily downloaded on mobile devices. They have a wide array of educational content to help you learn as much as you can about trading.
Another type of broker you can opt to use is the full-service firm that gives you a comprehensive package. Basically, you get services such as advice on health care, retirement, and on all financial matters. The reason most people turn to discount brokers is that, full-service ones only deal with high-end clients. They charge high fees that most people find exorbitant and take a percentage of your transactions as well.
Stock Market 101
No one can just start trading in stock without enlisting the services of a stock brokerage firm. That is the rule of the industry and must be adhered to. It’s not as easy as heading to the stores and picking out what you want. Trading in the stock market is complex and requires understanding of the basics. If you don’t, then all that information you see on TV won’t make a lot of sense.
Different exchanges make up what is known as the stock market. Stock markets that you might be familiar with are the NYSE and NASDAQ. Here, stocks are listed for buyers to purchase and sellers to dispose of what they no longer need. It’s a large market place where buying and selling take place. The exchange is charged with the mandate of overseeing the market and keeping track of supply and demand. How in demand or in supply a stock is determines its price.
In the market, traders are not permitted to sell or buy their stocks. They must seek the services of a brokerage firm with many being based online. Even with more platforms operating online, there are those that have physical premises. Some customers still prefer a face to face transactions rather than trading online. A broker deals with the exchange on matters of all the stocks you’ve traded.
To understand how to trade in stocks, have a clue of how it works. It is often described as fluctuating from up to down and vice versa. This is often due to market indexes which are used to track how a group of stocks is performing. It can represent a portion or the whole market. Investors rely on this market indexes to evaluate how their portfolios are doing. They can also use them to determine what investment choices to make.
Types of Stock Trades
Once you select a brokerage firm and start grasping what stock trading entails, the next step is a dive into the market. There are 13 types of stock trades you must be familiar with as a beginner.
a) Market order
This is the most basic type of trade which means you accept to take any price that you get. It applies once the order you’ve placed is executed. There is no room to negotiate or wait for a different price.
b) Limit Order
When trading in stocks, you set the maximum amount you are willing to pay and the minimum you want to buy. The latter order for this should not be executed if it surpasses the placed limit. High chances are, the order ends up not executed as the stock may never fall. Setting a limit has a disadvantage because in case the stock falls lower than the limit, your order is executed at the limit you set only.
c) AON (All-Or-None) Orders
For traders who seek to buy a large number of stocks from one company, this is an important order to keep in mind. Execution of such orders takes time and might be done in portion. Each portion ends up incurring different prices which can mess your budget. Here is where you place the AON order that dictates the entire stock must be bought at one price or none is bought. Chances of the order not being executed are high in case the number of shares available is lower than requested. In this case, you should cancel it.
d) IOC (Immediate-Or-Cancel) Order
This type of order is completed in portions up to where the shares for a set price are no longer available. It’s at this point that trading ends and the order is canceled.
e) FOK (Fill or Kill) Order
FOK orders must be executed immediately or not at all. In case they can’t be met in full then they are canceled and can’t be executed partially as per the rules.
f) Stop Order
These are Stop loss orders that traders use to lock in profits obtained from all trades that were profitable. Once a predetermined stop price is reached, the stop order converts into a market order automatically. After that this order falls under the rules and regulations of market orders.
g) Stop Limit Order
The stop limit order converts into a limit order once the set stop price is reached automatically. It can be executed or not depending on the performance.
h) Short Sell Order
You stand to make a profit when you predict that a certain stock that you don’t own will fall. The prediction you make must be correct.
i) Buy to Cover Order
It comes after the Short sell order and used to complete the short sale. This applies only if the stock price falls as you had predicted. The best way for this to work is to ensure you have a brokerage account with margin privileges. With this, you can trade with more funds than the balance in your trading account.
j) Day Order
Day orders take place up to 4 pm when the stock market closes. After that, they are all canceled. Examples of this type of order are market orders.
k) GTC (Good-Till-Cancelled)
It is an order that remains open until it has been filled to completion or you opt to cancel it. Also, another criteria for this type of order is when a set time limit is surpassed as placed by the broker.
l) Trailing Stop Order
It is the best way to protect the gains you’ve made so far and reduce the losses you are likely to incur.
m) Bracketed Orders
They go a step ahead of Trailing Orders by setting a trailing stop; a fixed sum that is lower than the stock price.
Brokerage Account
To place trades, you must engage the services of a brokerage firm that requires you to set up an account. Each brokerage firm is required by law to open this account for its clients for tax purposes. You must deposit funds into the account using any means you want from a savings or checking account. After the deposit goes through, you can start placing trades that the brokerage firm will purchase for you. Most brokerage firms charge a commission for trading on your behalf but most discount brokers waive these extra fees.
Once the brokerage account is up and running, there are numerous securities you can choose from. These include Stocks, Bonds, Mutual Funds, REITs (Real Estate Investment Trusts), ETFs (Exchange-traded Funds), MLPs (Master Limited Partnerships), CDs, and Money Markets.
There are two types of brokerage account to choose from: cash-only and margin-only accounts. The cash-only one requires you to deposit money before the trades are executed to complete the transactions. Here, the brokerage firm don’t lend you additional funds in case your account runs dry.
The margin brokerage account, on the other hand, gives you access to more funds from the brokerage firm against some assets. This is a type of loan that you pay low interest on. It can be a complex type of account and affect the dividends you are paid on stocks bought.
Most brokerage accounts have no set deposit limits and allow you to access the money whenever you want. The only accounts limited in terms of deposits are traditional IRAs such as ROTH. There are taxes to keep in mind with this type of account depending on the assets you hold with it. The taxes include dividend tax, capital gains tax among others. You have the liberty to open as many brokerage accounts as you want and can manage. Some traders opt to open a brokerage account for each security they are trading in. This can be done in the same or different brokerage firms.
Bull Markets vs. Bear Markets in Stock Trading
The term bear market means the stock prices in the exchange are falling by more than 20%. This occurs across several indexes and causes panic in the stock market. Even though a bear and a bull are fierce animals, it’s the term ‘bear’ that brings shivers down the spines of most traders.
Not many young investors have experienced a bear market as the current one is best described as a bull. This is characterized by rising stock prices which are consistent and stable. It’s the norm for a bull market to be followed by a bear market. That is how it has always been. The market had been enjoying a bull since the recession in 2009.
With the rising Corona virus pandemic, we might witness a bear market soon. To note that a bear market is in the works, most investors start to pull back which is the current situation in the world. Still, bull markets tend to outlast bear markets and those investors that stick to it longer get to benefit once the market recovers.
Diversification of Investments
As you research more about investing and stock trading, you come across the term ‘diversify your portfolio’ a number of times. This mainly means putting together different types of securities. Even if your main focus is on stocks, it’s ideal to follow this principle. Buy shares from different companies in various industries like retail and technology for example. It makes your portfolio more stable and most likely to bear rewarding fruits at the end.
Once you diversify, you significantly reduce the risk involved in stock trading while maximizing the expected returns. This is a concept that most seasoned investors and financial advisors agree with. It won’t protect you from 100% loss but it will shield your investment in a great way. When one stock is underperforming, the others can keep it stable.
There are many reasons why risk comes about while investing in different securities like stocks. Inflation, political instability, fluctuating exchange rates, war among others. All of these affect companies in different ways. While some may crush at these times, there are those that thrive depending on what your investments are. Different securities react in opposite ways when there is a shift in the market.
Try and diversify even outside your country. If your focus is on stocks, then buy shares from companies in other stable markets across the world. Use a brokerage firm with experience in this type of trading. They are better suited to advise you on which companies are the best across the world. Just in case the stocks in your country hit a bear market for one reason or the other, the others in bull markets still benefit your portfolio.
Trading Mistakes to Avoid
As a beginner in stock trading or any other type of security, it’s common to not have it all figured out. It’s okay to stumble and fall but maybe you can learn what to avoid as you get started.
1. Lack of a Concrete Plan
The first question any worthy broker asks is what are your financial plans and goals? Why do you want to invest? You must have a concrete plan laid out before you start trading. This way, you are guided by more than just emotions. With a plan, you can withstand delayed gratification as investing is long term. Start by putting down what you want to achieve then work with that plan in mind.
2. Not quitting while Ahead
Failure and loss are part of the parcel of investing. You must learn when to cut your losses and try something else. Not taking action fast enough can be detrimental to your financial plan. Learn not to be excessively tied to your investments. Know when to stick it out and when to dump it.
3. Ignoring the Volume
As much as a stock price might rise, be careful not to rush into it if it has low volume traded. It matters how many shares have been traded as the price rose. For there to be any significance in a stock moving from one direction to another, it’s important it be supported by strong volumes of shares traded.
4. Passive Investing
It’s s big mistake to just hand over money to your broker and never keep track of the activity in your account. With a good financial plan, you must be interested in this part of the plan. As much as you don’t have time to trade, know what is going on with your money and portfolio. Keep records of these activities and get statements every quarter or end month if you can.
5. Emotional Trading
It’s not productive to trade with your heart, your mind must play a significant role as well. This way, even with a bear market, you decide if its best to cut losses or keep trading until you reach a bull market.
As a beginner, there is plenty to learn and you must be patient. Start small and slowly, learn the ropes as you increase your investments.