Today, several persons describe themselves as Traders, simply because they buy and sell a few securities from time to time.
No wonder there are so many broke fellows carrying this tag all around!
What separates successful Traders from other Traders is the trading ideas they know! This is what makes them stand out.
What are these ideas?
Jump in, let’s find out!
What is trading?
Before we start discussing the top trading ideas you should know as an investor or trader, let’s first define what we mean by trading.
Trading in securities simply means buying securities with the goal of selling them for a profit in a short while.
For instance, if a trader buys 1,000 shares of a company’s stock at $2, and the value increases to $3.60 in 2 weeks. He will quickly convert the shares to cash or trade up, by using them to buy other stocks.
The fundamental difference between Investors and Traders is that while Investors buy securities for the long term, Traders buy securities for the short term (to make a quick profit).
Types of Securities Traders Invest In
Just as investors can invest their funds in all asset classes, so can a Trader invest his funds in all types of assets. However, we shall be discussing a few of the common securities traders love to buy and sell.
Stocks are securities that represent ownership of a fragment of a company. Companies issue their stock to the public as a way of raising funds to expand or maintain their operations. Investors buy shares as an investment to increase their financial worth.
Companies can sell their shares to the public for the first time through a process known as Initial Public Offering (IPO). It is a process through which a privately held company offers its shares to the public for the first time.
An organization can also sell its shares to the public via a process known as “dilutive secondary offering”. This is when a company creates further shares and sells them to members of the public. This process is also known as follow on offerings.
Companies may offer a secondary offering to raise funds to pay off debt, fund growth, etc.
Stocks are sold on a stock exchange market. You can learn more about a stock market and how it works by reading this article https://www.investopedia.com/terms/s/stockmarket.asp.
What is Stock Trading?
Like trading on any other security, stock trading refers to investing in the stock market for the short term, to make a quick profit.
While other investors wait for the value of their shares to grow over a long period, a stock trader sells his shares as soon as his trading goals are met.
If he buys 5,000 shares at $2 per share, and the value of the share increases to $3 the next day, he quickly sells the shares or trades it up.
Stock traders buy and sell stock to capitalize on the daily fluctuations that happen in the stock market. They believe they can make more money from trading or flipping stock than investing for the long term.
There are two types of stock trading, and they are:
Active Trading: Active trading simply refers to buying and selling shares or other securities for a quick profit, after any slight shift in market prices. An active trader only wishes to hold a company’s stock for a short time, usually until they can make any profit.
A trader may be described as active if he buys and sells shares frequently. Whether it is on an hourly, daily, or monthly basis.
Day Trading: Like active trading, day trading is targeted at buying and selling stocks within short time intervals, usually within a day. The focus is to make quick profits on any price fluctuation recorded within the day, in the stock market.
In the past, active trading was only accessible to institutional investors and their likes. Private investors could not trade actively.
However, with the advancements in technology and the internet, individual investors interested in this type of investment can now participate, from the convenience of their homes.
With online stock brokers like Robinhood, etc. you can trade actively from anywhere via the internet. What’s more, you can make as much as your trading skills can permit, through day trading.
How To Trade Stock
If you wish to begin trading stocks, there are a few things you should be aware of. Please find them below:
Open a brokerage account
To trade stocks, you will need a brokerage account. What is a brokerage account?
It is a special type of account investors use to buy securities like stocks, bonds, mutual funds, etc. Just like bank accounts, you can transfer funds in and out of a brokerage account.
However, unlike bank accounts, brokerage accounts give you access to buy shares in the stock market and to invest in other securities.
Opening a brokerage account is not a big deal. You can easily do so through any online broker you prefer.
However, opening a brokerage account is not the same as investing. A brokerage account simply allows you to invest in any security of your choice when you wish to do so.
Nerdwallet.com has compiled a list of the best online brokers that can help you easily start your investment journey. To take a look at it, visit https://www.nerdwallet.com/best/investing/online-brokers-for-beginners.
Decide Your Trading Budget
One key step every successful trader knows to take is to determine their trading budget before they begin trading. What is a trading budget?
It can be described as the amount you wish to trade with. This amount invested in your brokerage account is used to buy the stocks of any company you wish to invest in.
Other things to note as you set a trading budget include:
- Trade only with the amount of money you can afford to lose. Trading is much like gambling. You can’t really predict the direction the market will turn. Hence, the rule is that you should only trade with an amount you don’t mind losing.
- Never trade with any amount you will be needing soon. Whether it is an amount set aside for tuition, down payment, etc. Why so? Because you could lose the money and be in serious trouble.
- If you are not in a good financial situation, ensure to spend not more than 10% of your investment budget on trading. This is because investment has a higher chance of leading you to financial freedom than trading.
Understand how to use Market Orders and Limit Orders
After setting up your brokerage account and deciding your budget, another thing you will need is to understand how to use Market orders and Limit orders. What are they?
A market order is an order to buy or sell stocks at the market’s current best available price.
A limit order however is an order to buy or sell stocks, at a set price or better than the set price. In the case of a buy order, the limit price will be the most you are willing to pay for that stock.
And for sell orders, the limit price will be the least you are willing to accept in exchange for that stock.
If you set a limit buy order, the order will only go through if the price of the stock falls to or below the limit price you set in your buy order. The same principle also applies when you set a sell order.
First Practice with a virtual account
The stock market is quite volatile and could wipe out your investment as a trader if you are not good at your craft.
If you are a beginner and still trying to master the art of trading, it will be best for you to first practice with a virtual account for a while before you start trading in the real stock market.
As the saying goes, practicing makes perfect!
If you will take the time to master your game with a virtual account, you will be ready for the pressures and dangers in the real stock market.
Several online brokers offer virtual trading for new users. Ameritrade, Interactive Brokers, etc. are a few of the several options available online.
Set your trading goals
Before you set out to trade, ensure to outline your trading goals, as it will help you know how well you are performing.
For instance, if you set the goal to make $50,000 in 5 months with an initial investment capital of $10,000. When 5 months elapse, you will be able to measure what you have made against your set goal.
If it meets or exceeds the goal, then you are doing fine. However, if it is way below the set goal, you may want to find out what is wrong, or even try to figure out if trading is for you or not.
Top Trading Ideas Investors Should Know
As an investor, there are trading ideas that will help you easily stand out among other traders. What are these ideas?
Find them below:
Lower your risk with diversification
According to a popular proverb, do not put all your eggs in a basket!
This saying is very apt when it comes to trading. Resist the urge to exhaust all your trading budget on a particular stock, no matter how convinced you are about it. Why?
Doing so exposes you completely to the volatility of the market. If there is a price shift downwards, you will suffer serious losses.
Always diversify your investment! Spread it across several stocks, in different industries. This will ensure that if there is a challenge in any industry, your entire investment is not wiped out.
Be careful with hot tips!
Who doesn’t like a hot tip?
Most investors will give anything to get a tip on the next best thing on the stock market. However, many traders have destroyed their portfolios through hot tips that turned out to be false.
In fact, most of the sources that bring these so-called hot tips are fraudsters that only share these tips to encourage other traders to buy a poor-performing stock they already have in huge quantity, so they could drive the price higher.
As the price increases, they will quickly sell their shares. Since they have a large number of them, this massive sell-out will drive the prices low and leave other investors almost broke.
Do not trust any hot tips! Simply study the market and the prevailing economic condition, and make your own trading decision. You could also discuss this with a broker to guide you further.
Keep Good Record for Tax Purposes
If you are not investing from a fund with a tax-deferred status, it will be in your best interest to keep proper records of your trading, to avoid running into issues with IRS.
Another benefit you may get from keeping good records is that investments, where you made losses, may be used to offset the taxes paid on income through a legit strategy known as tax-loss harvesting.
Choose your broker wisely
The importance of choosing a broker that aligns with your investment strategy and needs cannot be overemphasized.
It is even more pressing for a Trader to choose their brokers carefully, as it could be the difference between success and failure.
If you are a Trader, you may want to consider such things as low commissions, fast order execution for time-sensitive trades, etc. before deciding on your broker.
For new traders, you may want to use a trader that provides a virtual trading account, free trading tutorials, or seminars for users. You can learn a lot about trading through such tutorials.
Other things a Trader should consider before choosing a broker are the availability and quality of stock screening and analysis tools, easy order entry, on-the-go alerts, customer service, etc.
Choosing the right broker that meets your needs will improve your chances of making more successful trades.
Read Also: Forex vs stocks: which should you trade?