This article kicks off the Beginner’s Guide to Online Trading, a series of articles for, you guessed it, the trading n00bs out there. In the series I’ll describe my trading methods, the best tools, and real strategies for reducing risk. The information is free in every way so why not subscribe to RSS to get the latest updates.
So let me guess. You’ve done a bit of poking around stock websites online, got some hot stock tips from the office, try to flip on Bloomberg / CNBC now and again, maybe even set up your online trading account. You’re ready to get into the fast-paced world of an equities or forex trader. Ready to take baths in Cristal and find a good source for Montecristos. Sooo now what?
There is a plethora of information, both new and current, about trading the stock markets. Much of it is very insightful while other bits can be absolutely incorrect or completely redundant for the current era. The real problem facing any investor getting started today is sorting through this mountain of information and strategies and coming to the ‘meat’ of the matter. Since we get asked novice trader questions daily in the chat and forums, I thought it would be useful to get a beginner’s guide built for easy reference. Let’s get started…
What is Trading Anyways?
A fundamental concept to any market is risk. Think of the farmer who sells corn. As a seller, he is taking a risk he will be able to produce a crop for selling at harvest time, and often he has a lot invested in his crop. Buyers of his corn are also taking a risk that the corn will be of a good enough quality for them to sell later on, plant themselves, or consume. Further complicating matters, due to supply and demand the price of corn will differ each day as different people buy and sell corn on the open market. You can see how this system also creates speculators buying and selling corn, and maybe even see how these speculators can manipulate prices (but that’s another article).
Okay so you understand how the market works and it’s a fairly simple concept but considering all of this, most of it boils down to this key all important point: buying and selling shares in the stock markets is akin to buying and selling risk.
With every single trade you make, you need to be aware of the risk you’ve bought, sold or leveraged. Every single time. If you don’t you will likely lose your investments fairly quickly, as happens to many new traders. We’ll go into how to calculate and minimize risk later, but for now understand it is critical to being a successful trader.
What are Stocks?
Simply put stocks represent ownership interest or shares in a company. If ACME Corp. has 1,000 outstanding shares and I own 100 of them, I own 10% of ACME Corp. Now keep in mind most companies on the New York Stock Exchange or even OTC exchanges have millions, often billions of shares, but the concept is the same with any traded company.
Most shares you will be buying will be common stock, available to any investor through most any online broker. There are other types of paper as well, like preferred shares, which often come with voting rights, dividends, or other benefits. For now, don’t concern yourself with it as you’ll more than likely be focusing on regular common shares.
Can I Make Money Trading / Investing ?
Statistically it is unlikely you will make money, especially short term. In fact many traders insist there is at least a 90% chance a new investor will lose their investment within the first year. You gotta love those odds! Personally I think the 90% figure is a bit silly, and it’s definitely cliche, but at the same time I know there is a lot of truth to it.
You need to understand going in, that being wiped out financially is a very real risk of playing this game. There is a misconception that stock market investing has a high barrier of entry for the average middle class earner. This is incorrect in my opinion, but without the right tools you stand almost no chance of succeeding. The trick will be significantly reducing your risk through the course of trading, often nullifying it, and I aim to eventually help you do that within the framework of this series.
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