When you have a free sum of money, you ask yourself what to do with it: hide under your pillow, or take it to the bank, or invest on your own on interest even higher than the bank can offer you. The third option seems to be the most tempting.
The word “investments” is commonly used alongside the words “stock market”. The stock market is, naturally, associated with stocks. Hence, we have the question of how to trade stocks. This is what we are going to discuss in this article.
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What does “to trade stocks” mean?
Under trading stocks, we mean buying them and then selling at a higher price. However, you can also borrow stocks from a broker and sell them at the market price, then buy at a lower price, pay the debt off to the broker, and keep the difference between the buying and selling price. This is a riskier type of trading stocks, not recommended to beginners because in the case of a mistake they can lose the whole deposit.
How to choose stocks for trading?
The easiest way is to invest in the stocks of the world’s largest companies that have been in the exchange for several years, demonstrating stable profitability. You can go another way and search for stocks using tech analysis. You will need to master the basics of tech analysis and then make your guesses about the direction in which the stock will probably go. The most popular instrument of tech analysis is the 200-days Moving Average. It helps to determine the direction of the current trend and serves as a floating support/resistance level. If the trend is ascending, the moments when the price approaches the MA are used for buying.
If you are looking for stocks to invest in, fundamental analysis can also help. Key market events are quarterly reports and the forecasts for the management of companies concerning future income. This news is often crucial for investors deciding whether to buy this or that stock.
Fundamental analysis is quite a voluminous thing. It can include the analysis of the financial performance of the company, the sector of the economy, and negative events such as terror acts, disasters, etc. that can influence the company or the whole branch.
This type of analysis is more complicated than a technical one; however, some agencies employ analysts who provide ready-made information. If you get overwhelmed by a load of events, try listening to analysts and following their advice. This is also some sort of a trading strategy that can bring a profit.
Ways of investing in stocks
After you have made up your mind about the method of analysis, decide which type of investing in the exchange you will use. There are several ways of investing in stocks:
Intraday trading means that you speculate stocks during one trading session. You can use scalping, trade levels, look for fast-growing stocks, etc. The important thing is that positions in such trading do not remain open on the next day. This excludes the probability of falling into a gap if some unexpected news comes out. Such a type of trading often includes the use of leverage; unfortunately, it may also be excessively emotional. Hence, intraday trading is not recommended for beginners.
If you invest short-term, you keep your position open for several days. For example, you may wait for a tech analysis pattern to reach its goal, or some news about merging, FPO, dividend payments to be published, etc. In other words, you wait for some events with a limited term of influence on the price.
Long-term investing is the safest option of the three. It does not include the use of leverage. If the quotations of your stock fall, you can buy more of it to drop the average buying price and make a profit in the end.
An additional source of income is dividend payments. Regardless of the direction in which the price goes, you will always have your dividends paid to you.
Risks
Profit always goes alongside loss. There are risks in trading stocks as well. The main danger is leverage. If the investor is not skillful enough to use it, they might buy too many stocks, and a small fluctuation in the price may cause huge losses.
However, even if you do not use leverage, you still risk losing your capital due to the bankruptcy of the company.
A bright example is the investment of a billionaire Carl Icahn in a car rental company Hertz. The investment resulted in the bankruptcy of Hertz, causing a loss of 1.7 billion USD to Icahn. Note the fact that Icahn bought the stocks of the company at their all-time high of 126 USD and sold for 40 cents pr stock. There is no insurance from this as any company can experience force majeure events.
How to buy stocks?
Upon studying the information about stocks, you ask yourself another question: how to buy stocks?
You need a broker that will provide you such an opportunity. The key criteria for choosing a broker are the number of instruments they offer (the more the better; it is also desirable to get access to exchanges of different countries) and competitive commission fees for buying stocks. Then only some technical problems can appear, however, they can be solved overnight.
Each broker has trading platforms that give access to buy and sell stocks. The investor needs to study the platform. However, brokers usually help beginners around the platform. Then things become easy: find a stock and click “Buy”.
Taxation
You buy cheap and sell expensive, keep the difference, and enjoy yourself. However, things are a bit more complicated: you must pay the profit tax. Long-term investing brings you not only the profit from buying and selling your stocks but also from dividends. If you trade US stocks, you pay the dividend tax right when you get dividends paid to you. Then the investor gets the profit to their bank account, and here is where the taxation in the country they live comes to the scene. As long as the broker serves clients from different countries, it is the client who must go to a tax office, declare, and pay the tax on their annual income.
Summary
In this article, we have discussed the steps that an investor has to take before buying stocks. They might seem complicated and scary but in fact, things are quite simple. If you have a favorite company (say, Apple) the stocks of which you would like to buy, find a broker, log in to the platform, and click “Buy”. Seconds later, you can become a shareholder of any company.
By Dmitriy Gurkovskiy, Chief Analyst at RoboForex
