If you’re looking to set up a stock trading account, you’re not alone: a recent study found that the number of Americans who trade stocks has increased by over 20% in the last five years. So if you’re one of them, congratulations: you’re already one of the elite, since only about 5% of Americans invest in the stock market. To make sure you stay one of the in crowd, here are 10 tips to keep in mind as you get started.
Decide how you’re going to invest
Continue Reading Below Deciding how much you’re going to put into the market is, in itself, a big step. You’ll need a game plan before you jump in. You may want to contribute an amount equal to your income, in which case your savings will grow exponentially over time. Alternatively, you might want to start small and add to your holdings gradually, making periodic investments on a daily, weekly, or monthly basis. Then, you can decide how much you want to invest every month, or every quarter, or any other convenient interval. As long as you do your research and select the right investments for your risk profile, you should be able to reap long-term, consistent rewards.
Open a brokerage account
Before you dive in, you’ll need to open an account. To do that, you’ll need a brokerage account. The differences between retail and investment brokerage accounts can be confusing, but for the purposes of this article, let’s ignore the differences. You’ll need a brokerage account to start trading stocks and the brokerage account is a key part of the process. You can start by using your current bank to open a brokerage account. You may be able to use an existing savings or checking account, although you’ll probably want to open a new account to avoid fees. Make sure you remember to request that the bank not do any transactions on your account for the first 30 days, so you don’t incur additional charges. 1.
Select a broker
Brokers play a key role in your trading experience, since they choose and maintain your account. Fortunately, finding a reputable broker isn’t difficult. Brokerages are rated on TrustLink.org. If your broker is not on the list, consider using one of the trading apps available to investors. Choose your account You’ll probably have to sign up for your broker’s account before you can start trading. You’ll probably have to provide personal information, such as your name, address, and Social Security number. You may also be asked to specify the level of risk you are comfortable with. You may also have to provide your bank account information. Choose your trading platform Choosing the best trading platform is crucial: the platform will support your investments.
Pick your portfolio
Perhaps the most important thing you should do is select a strategy for your account — for example, one that focuses on dividend stocks. You can research these in a variety of sources, including this one on Investopedia, but keep in mind that individual companies have many different sectors, meaning that if you only pick the dividend-paying stocks from a particular sector, your portfolio may not be as diverse as you’d like. There are plenty of options. You can invest in a variety of exchange-traded funds, or a single index fund, or a broad market-cap fund — and any of these can be done online. Check out Fidelity for ideas and more information. Investigate your options The first step to picking your portfolio is understanding what options are available.
Choose which stocks to buy
When looking for stocks to buy, ask yourself the following: What type of stock is it? (What is its “characteristic”?): Are you looking for an oil company, a software company, or a food manufacturing company? Are you looking for an oil company, a software company, or a food manufacturing company? Do you want growth or income? Do you want growth or income? Do you want to take the long-term approach or the short-term approach? Do you want to take the long-term approach or the short-term approach? Do you need more information? Before you actually set up an account, take a look at several brokerages and decide which one works best for you. It’s best to take the time to find one you like and that suits your needs, but also to be aware of the risks of each.
Choose your trading frequency
At this point you’re probably thinking to yourself, “Okay, but how do I decide when to trade?” You’re not alone. Over time, many people find themselves stuck in a trading rut, trading the same stock at the same price over and over. The key to trading, in fact, is to choose a trading frequency that keeps you trading. If you want to save a ton of money by trading only every other day, don’t fall for it. Some people believe it will help them trade more effectively, but in fact you’ll only end up trading less often. Rather than opting for “frequency” per se, you should look for a strategy that will let you trade more often. But choose a strategy that works for you.
Review your holdings
A stock trading account needs to be set up with mutual funds. But before you do that, it’s a good idea to take a look at your existing investments. For example, if you have stocks like Wal-Mart in your portfolio, now is the time to sell some of them. Don’t forget the tax implications When you buy stock in a company, you own a piece of the company. A small amount of stock is taxed at the time of the purchase. But there’s more: the same investment (in a company that doesn’t pay a dividend) is taxed as a capital gain at your time of sale. If you sell the stock before you turn 62, the gain you made on that sale will be taxed at your income tax rate, or slightly higher depending on your tax bracket. There are other taxes, too: Capital gains tax are imposed when you buy a stock.
Understand market risk
That means you should understand the risks involved with stock trading. Most notably, there’s the “loss potential.” Simply put, market risk is the degree to which you could lose money in your trades. So if you bought a stock for $100 a year ago and it’s now trading at $250, you’re subject to a loss of 20% — meaning you’d lose $125 (or $250, if the stock does in fact rise back up). Continue Reading Below In fact, if your account has more than $10,000 in it, there’s a good chance you’ve lost money in your trades at least once. While it’s impossible to accurately predict when stocks will go up or down, it’s easy to determine whether or not you’re market-risked: here’s how to figure it out.
Understand your commissions
A stock trading account is all about commissions. Specifically, you pay the fees each time you buy or sell a stock. While brokerages differ in the amount of commissions they charge, most will charge between 1% and 3%, with brokerages like TD Ameritrade charging a flat $7 per trade. Most importantly, the higher the commission, the fewer trades you’re likely to make, since the trading fee eats away the bigger profits from buying and selling at lower prices. It also means that if you start making large trades, you could end up paying a lot more in commissions than you’re making in profit. Here’s what to do if you want to keep things simple and avoid paying high commissions.
Monitor your activity
One of the first things you want to do as a new investor is to monitor how you’re doing. You’ll want to see how much you’re investing, how your account is doing, and any dividends or gains you may have. Do this from a mobile app like StockTwits, which has been around since 2008 and features a number of apps on its website. Also keep an eye on the activity around your account, since you’ll get periodic reports on your account activity. You may also want to check out the charts on the site as well. Choose your brokerage firm carefully If you do decide to invest in the stock market, you’ll want to choose a firm that you can trust. In addition to picking a reputable firm, look for the benefits you get for using that company.