Stock trading for beginners
If you have some money saved up, it can be a good idea to invest it and make some profit. We can find many investment options, but here in Capital Markets we offer you a safe and profitable activity that could give you a considerable percentage of interest. We’re talking about stock trading.
What is this exactly?
In this beginner's guide we’ll explain everything you need to know about how to trade stocks safely.
Key ideas about stock trading
Before starting with your first investment, it is necessary to learn some fundamental concepts of stock trading. Investing in stocks without a base knowledge on the matter can lead to huge capital losses, something that we obviously try to avoid.
Let's start by providing the definition of stock trading. This term refers to the buying and selling of a company's shares on the stock exchange. The purpose of this operation is to generate an economic benefit for traders and to increase their resources.
Generally, stock trading is carried out through a financial intermediary or "broker". A broker can be a person, such as a stockbroker; or a legal entity, such as a bank or an investment company. In other words, the broker is the intermediary who holds the license to operate in the stock market and who offers the trader the possibility to invest in shares.
In the following, we will go into more detail on the concepts of stock exchange and shares.
Stock market and shares
According to the definition provided by the Corporate Finance Institute, “the stock market refers to public markets that exist for issuing, buying, and selling stocks that trade on a stock exchange or over-the-counter.” In other words, it is an institution that allows the exchange of shares, bonds or any similar financial product between different individuals or legal entities.
In stock trading, a person or "investor" who has a certain amount of capital can buy a company’s stocks, also known as equity shares, which represent a fraction of such company. The value of each share is the quotient between the capital assets and the number of shares issued. In this way, the investor is able to help the company grow, enjoy the benefits that come with being a shareholder, or sell the equities at a higher price.
How does an investor make money out of shares?
There are two ways in which an investor can make money out of a company’s equities:
The first way shareholders can make money is by earning incomes from dividends. Dividend distribution occurs when a dividend-paying company distributes the profits among eligible shareholders. The more equity shares of a company investors own, the more money they will receive.
The second way is to resell the company's equity shares at a higher price. When a company increases its value on the stock market, its shares increase in value as well and can be sold at a better price, which generates profits for the trader.
How do companies benefit from stock trading?
Basically, companies need capital or resources to grow. This capital is raised from shareholders, i.e., the people who invested in the company's stock. In addition, by being listed on the stock exchange, companies can generate liquidity. That is, they can convert their assets into cash for their private shareholders.
Stock trading: Useful advice
Stock trading is an investment strategy that can be extremely profitable. By engaging in this activity, you can increase your personal resources, earn money and save for the future. However, it is extremely important to research and become well informed about stock trading before starting, since bad investments may lead to catastrophic losses.
That’s why we have listed some advice to take into consideration before trading for the first time. Continue reading to learn more.
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Learn everything you need to know about stock trading
The first step to follow is to educate yourself in finances and the basics of stock trading. It is not advisable to incur in trading without knowing what equity shares are, what the stock market is, the type of brokers available, how the market works, and what kind of trading strategies exist.
Making money fast is very tempting, and that’s why most novice traders often skip this step. However, if you don't know the basics of investing, you can't build proper stock trading strategies, which could cause you to lose your resources.
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Choose a broker and open a brokerage account
This is one of the most important decisions to make. For a beginner, this step can be a real challenge. Traders need to choose a broker that aligns with their objectives and their budget. For instance, those who want to become daily traders could choose an investment company to operate on their own. On the other hand, investors who aim to save for retirement and have limited time may prefer a full service broker.
When choosing a broker, make sure you are well informed about commissions and fees. Also, make sure that the broker you choose has an excellent reputation and offers a safe service. Once you have chosen a broker, the next step is to open a brokerage account, that is, an investment account that will allow you to buy and sell equity shares, ETFs, bonds, etc. -
Define your trading budget
At this point of the process, it is normal that traders have two key doubts.
Firstly, a beginner trader may wonder how much money is needed to start trading operations. Actually the amount of money required depends on the company’s price of equity shares at a given moment. The price of the stocks can vary from a few dollars to even thousands.
If you are on a tight budget, investing in an exchange-traded fund (ETF) may be best. Mutual funds typically require a minimum amount of $1,000 or more. However, ETFs trading work similarly to stocks, which means that in some cases they can be purchased for less than $100.
The second question often asked is what percentage of your resources you should invest. The general rule of thumb is that you should never invest money that you are going to need in the short term. If you are going to invest in stocks and ETFs, a sensible idea is to allocate a small part of your budget for stocks and a larger part for funds. This is especially useful if you are looking to save for the long term.
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Focus on long-term investing and don’t become obsessed with your stocks
Stock market investments are one of the best ways to increase your wealth over the long term. While market returns have their ups and downs, trading stocks is beneficial regardless of what happens on a day-to-day basis.
A good idea is to avoid becoming obsessed with your investments. Unless you want to dabble in day trading, it is good to avoid the habit of compulsively checking how your stocks are doing every two hours.
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Final tips
Next, we invite you to read these final tips before dabbling in stock trading:
- Study the profitability of each company whenever you are thinking of investing in it.
- If you incur in day trading, learn to manage your emotions and know when to stop. Do not allow yourself to lose more than 2% of your capital.
- Be mentally prepared for losing streaks, since they happen frequently.
- Buy when everyone else is selling, and sell when everyone else is buying.
- Seek expert advice and get a mentor for your first trading operations.
In summary, stock trading is a process that requires a lot of study, a lot of patience and a cool head. With this basic guide you will understand the key concepts of trading in the stock market and the most prudent practices. Now you are ready to start.
Trade equity shares with Capital Markets
We are Capital Markets Elite Group, an investment company and your ideal broker. We offer multiple platform options to trade in the stock market.
Each of our platforms has different pros and cons to satisfy the needs of all kinds of traders. For instance, our CAP it ALL platform is ideal for novice traders, since it’s easy to use, customizable, powerful and practical. Best of all? It doesn’t require platform fees nor commissions, and can be used on both computers and mobile devices.
Capital Markets protects your data and offers fast and efficient service, good customer support and competitive prices for your trading operations. Additionally, with our smart order routing technology, you can get better liquidity and better prices.
Send us your application to start trading, or talk to one of our representatives for advice!