Stock trading isn’t something you can do, or would want to do, if you didn’t have at least a basic understanding of financials and the market. Stock trading can be a risky venture, but in the long-term, very lucrative. Before you jump into large and volatile investing, here are 10 things you should know before trading stocks.
- When is the right time to buy?
There truly is no right or wrong time to buy because no one knows when the market is going to rise or tank. However, the rule of thumb is to buy low and sell high. This works, in theory, for a very simple reason. If you buy the stock at a low price, and release it at a high price, the range of money between the high and low is going to be profit in your pocket. Trading simulators are great tools to practice this technique.
- Nothing is ever 100%
If you’re buddy comes to you and tells you that you should shift your entire portfolio over to this one stock because it’s a “sure-thing”, don’t do it. He or she might believe it’s the best thing going, but nothing is ever a sure thing. Do your research before making a leap of faith off of someone’s word. If it sounds too good to be true, it probably is.
- Have a long-term mindset
First a foremost, every time you make a trade, you create a taxable opportunity. This means the more often you trade, the higher the tax rate you’re going to pay on capital gains. For this reason, many experienced traders try to hold on to their investments for the long-term. Also, profits are higher in the long-term. While you might get lucky and buy a stock a week before some sort of incredible PR stunt and sell at the height of it, the odds of that happening are slim. You want to have confidence in the stock you’re buying that over a longer period of time it will grow, and in consequence grow your portfolio as well. When using a trading simulator it’s more viable to trade short-term because you’re not dealing with real capital, nor real gains or losses.
- Pay attention to dividends
New investors often overlook dividends when they’re first investing in a new company. Dividends are never guaranteed, but experienced companies don’t typically take away their dividends even if they’ve seen a dip in profits. For this reason, many experienced investors won’t buy a stock unless they give out even just a tiny portion of their profits to shareholders. Dividends also minimize the loss that shareholders face when there’s a price drop in a stock overtime.
- The actual price of the stock isn’t relevant
People look at stocks like Amazon, Apple, Facebook, and Google and think, wow those are expensive stocks. Though they are priced higher than other stocks, say Blackberry, that doesn’t make them expensive. You’re buying exactly what that stock is currently worth. So for example, if you buy a stock for $100 and it increases 15% over the next year, you can sell for $115. If you buy a stock for $1 and it increases 15% over the next year, you can sell for $1.15. The same percentage growth leads to differing outcomes depending on how much you initially invested. If you only have a few bucks to invest, the higher priced stock might be too much for right now, but that doesn’t make the $1 stocks a better option. - Do your research
Knowing about the company you’re investing in is an important factor in making an investment. Trading simulators can provide you with up to date streaming quotes, charts, and news, and can aid in a decision you’re going to make with real capital. There are plenty of sources online where you can find the financials and projected financials of the said company.
Investing in stocks for the first time is no small decision. There’s a lot that needs to go into the decision making process to maximize your success monetarily.