Online trading on the stock market has seen massive growth in recent years.
It’s now possible for anyone to invest and trade on the stock market by themselves.
All you need is a computer and an internet connection. And of course, some starting capital.
I’ve been an investor in the stock market for many years.
The stock market is something that I’ve been interested in and have been involved in for over a decade now.
My own active involvement started when online broking services first became available to the general public at low cost.
It’s now possible for anyone to invest on the stock market, even if you only have a small amount of capital.
It’s really easy to open an online broking account. You can be up and running and trading actively within practically minutes on the stock market of your choice – though for some national stock exchanges there can be residence requirements.
Another big plus nowadays is that the Internet gives you access to a wide range of in-depth market data for free – and which until fairly recently was only available to large scale broking firms for a high fee.
So all this infrastructure now exists and is ready for you to utilize. All you have to do is take advantage of it.
There’s more to the stock market than opening an online broking account
However, there’s a lot more to investing on the stock market than just opening an online broking account and buying a few shares.
It’s important to have an understanding of at least the basics of stock market trading before you get involved.
What Type of Stock Market Trader Are You?
You need to decide what kind of trader you wish to be. There are many different trading strategies you can follow. You should choose the one which best suits your interests and your own temperament.
There’s the long term “buy and hold” strategy, where you purchase stocks and keep them for the long term – which can mean a decade or longer. This is generally the safest and least stressful approach to stock market investing.
There’s the trading strategy, where you buy and sell stocks actively to take advantage of market movements. The market movements you base your decisions on can be short eg a few weeks or months, medium term – which could be a year or two, or longer term – such as 2,3, 4 or more years.
At the other trading extreme there is also “day trading”, where you buy and sell within 24 hours. You can make money day trading – but you can also easily lose the lot. Plus the stress levels involved in day trading are very high.
Day trading is a high-risk strategy which I don’t recommend unless you’re already well experienced in general trading.
You can also pursue both strategies – that is, maintain a portfolio for example of index stocks that you hold as your long term “buy and hold” investment, whilst at the same time running an active trading portfolio. Just make sure you keep the two portfolios and funds separate.
An important aspect to consider here in making your choice is your relationship to risk. Risk is generally regarded as proportionate to reward. In other words, the greater the risk, the greater the reward. We all want high rewards. But are we willing to accept the high risk that tends to go with it?
There’s nothing necessarily wrong with preferring low risk over high risk. Each person’s relationship is different. Just make sure you are happy with the risk-reward ratio that you choose for your trading.
Want to Actively Trade on the Stock Market?
If you’re going to actively trade on the stock market, then you’ll need to select a trading plan for yourself – or design your own plan.
Above all, you have to be prepared to learn – and apply, a trading system.
Having a trading plan is actually the most important aspect of all. People who trade without a system usually end up getting burned sooner or later. It’s actually best to design your own plan, or at least to adapt a standard template plan for your own trading style.
Bear in mind that trading on the stock market and Forex currency markets involves reward and loss. There is always an upside and a downside.
Also, remember that prices do not just move upwards. They move in both directions, sometimes erratically and very suddenly.
It’s vital therefore to learn how to trade by minimizing your risk exposure.
This means getting yourself professional coaching and a suitable trading plan that is tailored to your own requirements so that you can trade effectively – as well as to be able to sleep at night.
Specialize in ONE Stock Sector
There is also the whole issue of different sectors as well as different types of companies and stocks. Such as growth, blue chip, high risk, low risk, rising stars, falling stars, take-over candidates, revenue vs capital growth, balanced growth/revenue, and so on.
If you have particular knowledge of a specific sector or niche then it might be worth using this knowledge to research shares in companies operating in this sector that you could invest in.
The stock market is a huge place and it’s not possible for any one person to know everything about all the business sectors and industries represented. But fortunately you don’t need to. You’ll have more chance of success if you specialise in getting to know at least one sector well.
You should beware of becoming emotionally attached to specific companies simply because you like them, because you’re a customer or like their product, or admire their management or whatever. You should always strive to examine an investment situation objectively.
You also have to decide what kind of investment psychology suits your personality best. For example – high growth potential but with high risk, or low risk, but lower growth potential and so on.
The Two Main Ways of Analysing Stocks
Stock market investors and traders have two main ways of analysing the viability of stocks.
The first approach is called fundamental analysis. this is where you examine the trading prospects of the company relative to it’s competitors – it’s product range, it’s research and development, plans for the future, it’s share of the market and it’s sales – and of course it’s profits. You also look at how these aspects are likely to perform in the future.
The second approach is what is known as “technical analysis” – sometimes referred to as “chartism”. This involves examining the share price movements plotted over time.
You look for specific types of share movements which appear in the chart, in particular “topping out” and “bottoming out” and combinations of these. You are basically trying to ascertain a specific trend, be it up or down in the stock price, on which to base your trading decision.
These are the two main – and sometimes opposing schools of thought.
The “chartists” claim that all you need to look at is the share price chart, since all that is known about a stock is already represented by it’s share price movements, as these in turn reflect the sentiment of all buyers and sellers in the market at any one time.
The “fundamentalists” sometimes regard chartism or technical analysis almost as a branch of astrology, trying to make decisions based on patterns alone, which may or may not hold up in the future. In their view, whether or not a share will perform depends on the fundamentals. The share price chart merely reflects these after the event.
In practice, it’s probably unwise to make any trading or investment decision solely by examining fundamentals or charts alone. You might have a tendency to prefer one over the other, but I think that you need to consider both.
Always Diversify Your Stock Market Investments
The one thing you should always do is to diversify your investments. Never invest in just one project, in one asset or one business. Some investments will do less well than others. But of course you don’t find out until after the event. By diversifying you reduce your exposure to risk.
Even if you think one particular investment situation is bound to be a sure winner, never put all your money into it. Always, always diversify. Even “sure winners” can sometimes turn out to be duds.
Take a Look at Unit Trusts
If you find the stock market too complex, you can invest in a unit trust or investment trust scheme – sometimes known as investment funds. There are also monthly unit trust schemes that you can invest in. These are an excellent way for average earners to build up a stake in the stock market relatively painlessly over time.
In my case I’ve done both in the past. I’ve managed my own share portfolio and I’ve also purchased unit trusts. Both unit and management trusts take a management fee cut – which of course reduces your return.
There are literally thousands of different unit trust funds on the market, each with it’s own particular sector specialization.
Practically ever sector and share type and combination is represented. In fact there are now so many that the industry is starting to feel that the vast range on offer is getting too confusing for potential investors.
Exchange Traded Funds – An Alternative to Unit Trusts
Nowadays I’m more a fan of ETFs – exchange traded funds. This is a different arrangement to a unit trust fund. ETFs are investment funds denominated in shares which are traded on the stock market just like other shares. ETFs are also well suited for newcomers to stock market investing.
There are also index tracker ETF funds. These are stocks which represent and track the respective stock exchange index near exactly. For example the Dow Jones, the London FTSE or the German DAX. You can also invest in funds that track indexes in the Far East or in specific industry sectors or commodities.
The advantage of index tracker ETFs is that they are diversified investments and they’re also highly transparent. Plus you can easily monitor the value of your investment, since the stock exchange index is easy to check in the media and online at any time.
They also have lower management costs than unit trusts, because once set up they are run largely by computerized systems. This means they avoid the overhead of having to maintain a team of investment analysts and all the associated hangers-on.
Also with ETFs, you are the shareholder and with that part owner of the ETF business. Whereas with a unit trust, you are just a customer of their financial product – for which they set the price – and not a shareholder in the unit trust business.Disclosures: The above article may include affiliate links for products and services for which this site may receive remuneration. The author or authors may hold investments in the assets mentioned in this article.
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