4 Steps to Get Started With Online Trading
Thinking of getting started with online trading? Only 48 percent of Americans currently invest in stocks, according to a Bankrate Money Pulse survey. Many people started investing when employers offered matching fund incentives or because their defined pensions were replaced by 401(k)s.
In the past, defined pension plans for employees had been managed by their companies; today, the decision of where where 401(k) funds are invested is the responsibility of each account holder. CNBC reports, however, that most 401(k) owners can't figure out what to do with their 401(k)s. According to a survey from investment firm Charles Schwab:
Most Americans are downright confused over how to manage their 401(k) retirement plans and want a simpler way to know which investments to make."
According to a recent CNN Money report, investing in the stock market can be an excellent way to boost your annual income through dividends (money paid out on each share when companies perform well) and to achieve long-term income through capital growth--if you make sure you know what you are doing first.
Online trading allows you to control your investment by reducing the input of the middleman (the brokerage firm) and allowing you to trade whenever you want. You'll reduce brokerage fees, too. But if you want to get real returns, you'll need to understand markets and trading. Here are some tips to help you get started.
1. Learn the Markets
First of all, educate yourself about the stock market. This means understanding basic terms like "stocks," "shares," and "dividends," understanding basic trading terminology, and learning how to read stock market tickers so you can easily track the performance of the stocks you invest in. NASDAQ's extensive glossary of stock market terms is a good starting point.
At the same time, absorb everything you can about the stock market. Use books, magazines, podcasts, the financial press, and the best investment blogs to see how investors assess the markets and make investment decisions. Whether you research online or offline, there's no shortage of helpful resources to help you expand your knowledge about online trading.
The following video explains the basic principles of investment in clear, simple terms:
2. Analyze Potential Investments
The information you gain will be a good foundation for another important preparatory task: fundamental analysis, knowing the factors that create your investment environment. You will need to understand economic indicators and factors affecting particular industries and business sectors. The more information you have, the better. With online trading and investing, knowledge definitely is power!
When you have created a shortlist of possible investment targets, fundamental analysis includes reading company financial statements, profitability forecasts, news releases, and any other information which will help you decide whether a company is a good risk or not. Check out the "Beginner's Guide to Financial Statements" from the Securities and Exchange Commission (SEC) for help with that.
Risk is a part of investing, so before you start online trading, make sure you are comfortable with the fact that the value of your investments will fluctuate over time. This is normal and, as the video above pointed out, you can insulate yourself against this by having a balanced portfolio (collection of stocks) including companies in different locations and sectors.
3. Strategize and Test
When you invest in the stock market, you're essentially betting on the performance of individual companies--but you're doing it strategically. It pays to have an investment strategy to guide you in your selection of stocks and your decisions about what to buy and sell under what circumstances. Until you develop your own strategies, this guide from Investfly is a good starting point.
The final step before you start trading online for real is to test your hypotheses without spending real money. You can do this by using some of the same online trading simulators that trainee stockbrokers use. One example is Wall Street Survivor which works with real market conditions. The best recommendation is to try using simulators for a while to see if you come out ahead; then you will know for sure that you're ready to invest.
4. Are You Ready for Online Trading?
Sign up for your preferred online trading platform and use whichever trading strategies you have found to be the most successful. Avoid the temptation to gamble hugely on a single risky investment. Especially at the start, you will want to have a good spread of mostly low-risk investments and to set a cap on the amount you are prepared to invest.
Equally, don't fall into the gambler's trap of continuing to spend money on a losing proposition. Start small and test your hypotheses to make sure that you are on the right track. It's worth repeating that spreading your stock portfolio minimizes the risk and gives you the best chance of getting a return on the money you have invested.
Follow these steps and you will be primed for online trading success and income growth in the short, medium, and long term.
DISCLAIMER: I am not a financial planning professional and the information provided here is for informational purposes only; it should not be considered financial advice. You should consult with a financial professional to determine which investment strategy may be best for your individual needs.
