Do you dream of being the next Gordon Gekko or Wolf of Wall Street? Many people believe the stock market could be a potential goldmine, if they could only learn how to harness its power. Warren Buffet made nearly all of his vast fortune through investments, but he is a rare case. The stock market isn’t the gamble that most people think it is. Trading requires much more skill than luck. If you are considering investing in the market, you must first understand how it works, and tirelessly research its trends and patterns. Below is a step-by-step guide that will get you started as a trader.
1. Understand the Fundamental Concepts of the Market
The stock market is a complex entity. Entering the trading realm without a fundamental understanding of how it operates can be overwhelming. Like most other aspects of business, the stock market operates on the system of supply and demand. The ideal scenario is for a trader to purchase a stock when the demand is low, and then something compels other traders to buy shares of the same stock. As other traders buy the stock, the value rises. The key to prospering in the market is to know when to buy and when to sell. This knowledge is gained through extensive research and eventually experience.
2. Know Your Risk Tolerance
Although investing in the stock market isn’t a complete gamble, there is considerable risk involved. You need to gauge your financial ability and willingness to risk your capital. When you invest, especially as a beginner, there is a good chance that you could lose it all. You need to make sure that you are in a stable enough financial position so that the loss doesn’t cause hardship. A good rule of thumb is to have six months of salary in a savings account before you put other funds into the market.
3. Research Online Trading Services
When you’re new to the market, you don’t need to go to a brick and mortar stock brokerage. Online brokers have made investing in the stock market more accessible to people who are not super wealthy. There are several excellent options including; E*TRADE, TD Ameritrade, and Scotttrade. All of these online trading sites offer different services at varying prices. It’s important to examine the sites before signing up, and investigate their pricing, investment choices, security measures, and other services.
4. Research Stocks
Whichever online trading service you choose will provide some guidance as to which stocks you should select, however, the choice is ultimately yours. You may want to start with stock in a company that you know well. If there is a product that you use regularly, then you may want to buy stock in that product’s company. Gauge your own satisfaction with the product and the likelihood that you will stop using the product in the future. If you determine that you are satisfied and you can’t see yourself abandoning the product, it may be a good stock to buy. Outside of this approach, you must be a tireless researcher. Consume all news reports on financial websites and television programs and discern what stocks seem to be good investments. You should also examine a company’s leadership, competition, and financial statements.
5. Pay Attention to Fees
Online trading services and the federal government will both take a portion of your earnings when you make money in the stock market. The trading service will charge a transaction fee every time you buy or sell a stock, and the federal government will charge a capital gains tax. For example, if you buy 500 shares at $1 per share, and the next day the value rises to $2 per share, it looks like you’ve doubled you’re money. If you sell that stock, however, $1,000 will not be deposited into your account. The trading service will charge you around $7.00 for buying the stock and another $7.00 for selling it. Then the government can charge you up to 39.6% of the investment for short term capital gains taxes. This lowers the deposit amount to $793.54. The lesson here is to be patient. The longer you wait to cash out the investment, the lower the capital gains tax rate. Long term capital gains rates are capped at 15%.
6. Buy Stock and Enjoy the Ride
The market can be a volatile place and you can lose a lot of money very quickly. It is best to wade into the water and start slow. Start by investing in one or two low-risk stocks. Then once you start making money, use the earned capital for future investments. One of the biggest mistakes that new traders make is to give up on stocks prematurely. Often times, rookie traders will quickly sell a stock at the first hint of a decrease in value. This can be a costly strategy. Not only are you paying extra transaction fees, but you are forfeiting the ability to enjoy the ride. Stocks go up and down frequently and if you give up on a stock too early, you can find yourself on the outside looking in when the value skyrockets. Trading is a long-term investment.
Trading in the stock market can be a profitable and exhilarating experience. It can also be extremely frustrating if you enter the market unprepared. Through preparation and research, you can make money trading in the market and ultimately build a nest egg for your retirement.