Stock trading basics for everyone
Many of you have been asking how to get started with stock trading or making stock market investments. For this reason I decided to write this post to explain the basics and highlight some it’s risks and dangers. Let’s start with the this: on some transactions I’ve lost over $10,000, sometimes $2-$3,000 overnight, or in just a matter of hours. Stock trading is extremely dangerous if you don’t know what you are doing.
Stock trading in a nutshell
Find a brokerage or an app that allows you to enter the stock market. I use Plus500. Once you have access, you can buy stocks, shares and other instruments at real time market value and sell those with a profit when the price goes up. If the price goes down, you can decide to sell your stock with a loss and investing in another stock that will hopefully make a profit to compensate your loss, or hold on to it hoping that it will recover. If you decide to hold it, your capital will be locked in and you won’t be able to use it to make other trades.
Stocks and instruments
You can invest in many instruments on the stock market. Stocks, shares, indices like indexes of countries and markets, commodities like gold, oil or natural gas and more complicated stuff like futures and options which I don’t recommend for beginners.
Stocks & shares
Stock is a general term used to describe the ownership certificates of any company, and shares refers to the ownership certificates of a particular company. So, if investors say they own stocks, they are generally referring to their overall ownership in one or more companies.
Most brokerages allow to trade with FOREX pairs. These look like EUR/USD, or GBP/USD - basically you are betting on how the exchange rate will change during the time of your investment. It’s important to highlight that investing in FOREX will not make you own foreign currency.
These are my personal favorite, especially farm futures like corn. A commodity futures contract is an agreement to buy or sell a predetermined amount of a commodity at a specific price on a specific date in the future. Buyers use such contracts to avoid the risks associated with the price fluctuations of a futures' underlying product or raw material.
Some brokerages offer leverage. Leverage can multiply your trade volumes. Let’s say you use $1,000 of your capital to invest in Google stocks with 10x leverage, then your total trade size will be $10,000. 1% change will have 10% effect on your capital. It is easy to understand that this model allows larger gains but also put you in risk of huge and quick losses that can blow your account in just a few hours of a downtrend.
How to make a successful trade
There is no guaranteed that your trade will be profitable, but with analysis, attention and discipline you can identify opportunities and minimize your risk of losing money.
Buying stocks and instruments
Putting it simply, you want to buy a stock when the price of it is lower than normal. If you see strong uptrend, wait until the stock declines few percent.
Before buying a stock or other instrument, you should be clear with the following:
For how long are you willing / planning to keep your money in that stock?
Based on the past trends, how much profit it will get you?
In a worst case scenario how much you will lose?
How much money you need to park in this transaction to make a decent profit?
What is your potential profit / risk ratio?
Are there better opportunities that offer a better profit / risk ratio?
There are no rules that fit all situations. If you see a stock falling and you plan to take the opportunity to buy it, always check why it started to decline. If there is nothing fundamentally wrong with it, like the company went bust or something scandalous then you are most likely safe to buy and it will recover so you can make a profit.
Once your stock value increased, your position will be positive and you will be able to quit with a profit. Before selling a position, you need to evaluate if it has to potential to improve further. Keep in mind that winning positions can turn around quickly and your profits can turn into irreversible losses in just a matter of hours.
My suggestion is to sell a stock once you made a decent profit. This decision will be yours, everyone has different techniques, risk tolerance and discipline.
How much money you can make trading stocks?
Most likely you will keep losing till you understand it well enough. Once you can identify good buying opportunities and can decide on good exit points, you will be able to multiply your capital, especially with leveraged trading.
My target is 15% profit on my capital every month. In some months I got out $40,000 from a $2,000 initial investment, while some other times I’ve lost over $10,000 overnight.
I aim to make a 15% on each trade. Let’s say I invest $1,000 in oil, I will sell it when it hits $1,150 then pocket the $150 profit, regardless if it could have increased further. With larger investment in each trade, especially with leverage it is possible to get huge profits.
Let’s say investing $1,000 with 10x leverage and aiming for 15% gain will get you $1,500 in one transaction. I like to keep around 10 trades open at one time, from those 3-4 will fail but 6-7 will reach my humble targets so I can close those.
If you are comfortable to spin around $20-$30,000 monthly on your broker account then you can make reasonable profits with a few hours spent on it daily.