Getting started trading can be downright scary.
As a beginner, you don't even know common trader terminology, surely you don't want to risk your cold, hard cash!
But learning to trade doesn’t have to be difficult. It can actually be fun. But you must commit. As our Director of Education Sami Abusaad said, "do it right or not at all!"
It's your money on the line, and your job is to protect it and grow it.
In this ultimate guide, you will learn how to get started in trading the right way. You also get an introduction to the stock market, a list of what you need to get started, and some simple analysis techniques.
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Introduction to the Stock Market
The modern concept of trading dates back to the Age of Exploration. When a ship was starting a journey where they would trade products (like spices, tea or textiles), they would collect money from the public to fund their travels. In exchange, those who had invested in the journey would receive a portion of the goods the travelers brought back.
All companies that have made the transition from private to public -- or that have allowed members of the public to own and trade stocks, which represents 'shares' of the company’s value -- are listed on the stock market.
Publicly traded companies are represented in the stock market by a ticker, which is a short combination of letters (typically 1-4 letters, usually taken from the company’s name. For example, Apple traders under the ticker AAPL, and JP Morgan trader under JPM.
Stocks are organized into indexes, which are measures of performance for subsets of the entire stock market.
Some of the more well-known indexes include the S&P 500, which tracks about 500 large-cap companies, the Nasdaq, which tracks more than 3,000 stocks, and the Dow Jones Industrial Average, which tracks 30 blue chip (large and well-established) companies.
Traders are allowed to begin buying shares of a company as soon as the company goes public and initiates a Initial Public Offering (IPO), meaning its shares are officially listed for trading.
When a company sells shares to the general public, they typically use the money received to fund future expansion, though in many cases, the owners are simply cashing out.
In return, the traders that buy shares can make money either by receiving dividends from the company or by selling to other investors at higher prices.
The stock market is overseen by regulatory agencies to make sure traders are fulfilled and the market continues to function. These agencies can also prevent abuse and fraud within the market.
What are Sectors, and What Do They Do?
The stock market can be divided into 11 parts, called sectors, that represent different divisions of the economy. Each sector covers multiple different industries; for example, the energy sector covers oil, gas, coal and fuel industries, as well as companies that supply equipment and services to those other industries.
Dividing the market into sectors helps investors understand the performance of different parts of the market.
Understanding each sector can also help you know where to invest. For example, if oil prices start to increase, you can assume the stocks in the energy sector will rise in price.
The 11 sectors are usually grouped into two umbrella categories: cyclical or defensive. Cyclical sectors are dependent on market cycles. When the economy is doing well, the industries in these sectors also thrive. When the economy hits a downturn, these sectors suffer.
Defensive sectors, on the other hand, are not dependent on market cycles. They are much more resistant to economic changes. A great example of the difference between cyclical and defensive sectors are the two consumer-based sectors.
Consumer discretionary industries provide products that are not necessary and may take a hit when spending is decreased, such as retail and restaurant industries. Consumer staples industries provide products that are bought at close to the same rate in any market environment, including grocery stores and household products.
1. Energy - Cyclical
Types of Companies: oil, gas, coal, fuel, energy equipment and services
Names: ExxonMobil (XOM), ConocoPhillips (COP), Royal Dutch Shell (RDS)
2. Basic Materials - Cyclical
Types of Companies: companies that collect and process raw materials
Names: Dupont de Nemours Inc. (DD), Sherwin-Williams Co. (SHW), Albemarle Corp. (ALB)
3. Financials - Cyclical
Types of Companies: banks, insurance and real estate companies
Names: Berkshire Hathaway (BRK.A, BRK.B), JP Morgan Chase & Co. (JPM), Goldman Sachs Group (GS)
4. Utilities - Defensive
Types of Companies: electric, gas and water
Names: Duke Energy (DUK), Dominion Energy (D), Kinder Morgan Inc. (KMI)
5. Industrials - Cyclical
Types of Companies: defense, manufacturing, machinery, construction, aerospace
Names: Lockheed Martin (LMT), General Electric (GE), Caterpillar (CAT)
6. Consumer Discretionary - Cyclical
Types of Companies: companies that are marketed towards consumers rather than businesses; retail, automobile, restaurants, hotels, luxury goods
Names: Chipotle (CMG), Target (TGT), Starbucks (SBUX)
7. Consumer Staples - Defensive
Types of Companies: companies that provide essential products to consumers, such as food, beverages and household products
Names: Procter & Gamble Co. (PG), Coca-Cola (KO), CVS (CVS)
8. Healthcare - Defensive
Types of Companies: healthcare equipment, medical services, pharmaceuticals, biotechnology
Names: Johnson & Johnson (JNJ), Pfizer (PFE), UnitedHealth Group (UNH)
9. Information Technology - Cyclical
Types of Companies: software makers, semiconductors, electronics manufacturers, technological services
Names: Apple (AAPL), Mastercard (MA), Hewlett Packard Inc. (HPQ)
10. Communications - Cyclical
Types of Companies: companies that facilitate communications, content and media producers
Names: Netflix (NFLX), Google (GOOGL), Facebook (FB)
11. Real Estate - Cyclical
Types of Companies: industrial, commercial and residential real estate
Names: SITE Centers (SITC), Boston Properties (BXP), Simon Property Group (SPG)
What Makes Stock Prices Move?
Stock prices are initially set by an investment bank, which looks at a company’s performance and current financial situation. Once trading begins, though, that price will change drastically.
There are quite a few factors that cause a stock’s price to move throughout the day. The overall strength of the market, the changing perception of the company, and news headlines can all impact the amount of stock being bought or sold, which in turn changes the value of each share.
But all of the price-changing forces can be linked to the rules of supply and demand. If there is more demand than supply for a particular stock, its price will rise.
If something happens that causes shareholders to want to sell when there aren’t enough buyers available (perhaps a negative headline comes out that turns potential buyers against the company), the price of the stock will fall.
When the overall prices of stocks in the market are increasing for a sustained period of time, the phenomenon is referred to as a “bull market.” If the overall prices are decreasing for a sustained period of time, the market is referred to as a “bear market.”
Trading
Why Do People Trade Stocks?
Even if you're not ready to trade with the pros, you'll quickly understand why we trade stocks.
The fluctuation of prices within the market is exactly why traders buy and sell stocks - they want to make money.
If you buy a stock at $50 and it goes to $75, you can sell for a $25 per share profit. Buying a stock is often referred to as going 'long.'
Traders can also profit from stocks that are falling in price. This type of trade is known as a 'short.'
When you short a stock, you essentially sell a stock that a shareholder has lent to you. You must borrow the stock on margin, which is money loaned by your brokerage. The brokerage typically requires you to have at least half of the total amount of margin in your account to cover any losses.
Your hope is that the price of the stock will drop, at which point you can buy the stock back at a price lower than what you sold it for.
So if you shorted a stock at $100 and it went to $90, you would earn a $10 per share profit.
What Do I Need to Trade?
- Brokerage account
To make trades, you must first sign up with a brokerage firm that can execute trades on your behalf. Some of the more popular ones are Charles Schwab, TD Ameritrade, and Interactive Brokers. - Computer or laptop
Most traders depend on a computer or laptop to be able to clearly read charts and place their trades. However, more and more traders are starting to trade from smartphones and tablets. - Mobile trading app
Although most traders don’t exclusively trade from their phone, a mobile trading app can help you stay on top of the market and make trades while you are away from your computer. Many brokerages offer mobile apps to clients. - A Fast Internet access (with backup)
A quality internet connection will allow you to place trades and access market data quickly. It’s also critical to have some sort of backup internet connection, such as a mobile hotspot, in case your primary connection fails. - Trading platform
Most brokerages offer a free trading platform to clients. Traders use platforms to place orders nearly immediately. Trading platforms typically offer real-time stock prices, live charts, news, and other features. - Charting software
Traders use charting software to watch stock movements and track trends. Most trading platforms include charting capabilities, though some traders prefer standalone programs with more sophisticated capabilities, like TC 2000 or TradingView. - Stock screeners
A stock screener is a tool that traders use to scan the market and find stocks that fit within specific criteria, like market capitalization or trading volume. This can help traders choose which stocks they should be watching, which is particularly important when there are tens of thousands of stocks available to trade internationally. There are multiple free stock screener options available online. - Disposable capital
Obviously, you need money to start trading. You should only trade money you’re okay with losing.
How Do I Choose an Online Broker?
When you picture trading, the first image that may come to mind is often a swarm of brokers on the floor of a stock exchange, milling about in their blue jackets and initiating transactions in-person. But, while in-person trading still exists, the majority of trades are now initiated through online brokerages.
In order to trade a stock, you must first have an account with a brokerage. Depending on your preferences, you could choose either a traditional broker or an online or discount broker.
A traditional broker can buy or sell assets their client is interested in, but they can also provide financial advice, help plan for retirement or give updates on their client’s portfolio. This means less work for the client, but traditional brokers come with high fees due to the personal attention.
An online broker -- also called a discount broker -- does not have the high fees that a traditional broker does. However, they don’t give the same financial advice or personalized assistance. To place a trade with an online broker, the client can either use an online trading platform or place their order over the phone.
How Do I Apply to a Broker?
Once you’re aware of what you are looking for and which brokerage will best suit your needs, you can begin the application process. All brokerages must collect basic information on their clients, such as their social security number, birth date, address and employment information.
In addition, the broker will often create a profile of their client so they will best know how to serve them and to meet regulatory guidelines. The profile will cover the client’s tax and financial status, including the assets they hold and if they have a checking account, as well as their plans for their investments, like how long they want to hold their investments and how much risk they are comfortable with.
After completing the application, you can open your account. You can fund your account either by providing your bank account and routing numbers or by mailing a check to the brokerage, although the latter option can take around a week to complete. Brokers in the United States do not allow clients to fund an account with a credit card.
How Do I Trade a Stock?
When your account is set up and funded, you can then begin initiating trades.
Typically, a beginner trader will start by paper trading, which uses a simulator that allows them to practice buying and selling trades without putting any of their capital at risk. Many popular brokerages offer paper trading simulators for clients.
Beginner traders may want to start trading by buying very small amounts of shares. This way, you can understand what it’s like to own a stock and how you will react to market volatility, while reducing the risk of incurring major losses.
To execute a trade, you simply have to let your broker know what kind of trade you’d like to make. You should know what type of security you’d like to purchase and how much you want (the position size). You also have to clarify what type of order you want to place. The broker is responsible for making sure the trade goes through and that it meets your requirements.
What Can I Trade?
There are literally thousands of securities to trade. Stocks represent shares of ownership within a company and are the most commonly traded security. They have low expenses and are usually easier for beginners to trade.
But those with more experience may prefer to trade options. Options are a type of asset that derive their value from underlying securities, like stocks. Options contracts give the holder the right to either buy or sell, although they are not required to do either. Traders have more time flexibility with options, but the process of trading is more complex than with stocks.
Similarly, futures are derivatives of underlying securities, but holders are obligated to buy or sell the contract at an agreed-upon price in the future; they don’t have a choice to buy or sell like options holders. Futures are less vulnerable to major price changes, but come with a considerable amount of risk.
Bonds are another way that a company can reach out to the public to raise capital. When a public company issues bonds, they are essentially borrowing money from investors. The company receives money once the bond is bought, and agree to pay the sum plus interest at an agreed-upon future date.
Trading bonds doesn’t come with as much risk as other securities, but doesn’t have a high rate of return. If a company files for bankruptcy, though, bondholders will receive their payment before other shareholders.
What Kind of Trades Can I Make?
Before initiating a trade through a broker, you have to decide if you’d rather focus on swing or day trading.
Swing trading means that you’ll hold onto your securities for at least a day (although you may hold on for weeks) before trading. Day traders, on the other hand, initiate multiple trades a day, and don’t usually hold securities overnight. A professional trader like Scott Redler may place dozens or even hundreds of trades a day.
Because day trading requires a trader to constantly watch the movement of stocks, day traders tend to trade full-time. It can be stressful and there is a high chance of risk, but you can make profits much quicker than with swing trading.
Swing traders don’t need to trade full-time because they don’t have to stay glued to a computer screen or take action multiple times a day. Swinging stocks means that there is often a greater amount of movement between the time that the shares are bought and sold, so both losses and gains can be more than day trading allows.
Order Types
When trading with an online broker, you have a few options as to which type of trade you’d like to make.
When a market order is placed, the order is filled immediately at the market price. Executing a market order with a broker takes a few seconds, so there may be a slight change in price between the time the order is placed and the time it is fulfilled.
Otherwise, you can place one of four types of limit orders. A limit order is filled at a specified price at some point in the future. If the price does not reach that point, the order is not filled.
Buy limits and sell limits are executed as the names suggest - a buy limit means that a stock is only bought at or above a certain price, while a sell limit means that a stock is only sold at or below a certain price.
A buy stop order is an order that should be filled when the stock price has risen above the current market price. If you are bullish on a stock, a buy stop order will purchase a share once your bullish view has been confirmed and the price is rising.
On the other hand, a sell stop order will only be filled if the stock price reaches or passes the limit price, but will not be filled if the stock stays below the limit price. A sell stop order protects against major losses, but there’s no guarantee that the order will be completely filled (it may be partially filled, depending on how many shares are available).
How Do I Choose a Position Size?
The size of a position in trading directly affects the amount of risk being taken on, which, in turn, can greatly change the amount of money gained or lost in a trade. The position size is the number of units being traded - that may be a dollar amount, number of contracts or number of ticks (in futures).
Before finding the correct position size for a trade, you need to know how much risk you’re willing to take on. Risk is typically represented as how much you can lose on the trade.
When this percentage is converted into a dollar amount, it is known as the account-risk figure. For example, if you’re willing to risk 50% of your $10,000 account, the account-risk figure is $5,000.
You must also know the “cents at risk” on the trade. The “cents at risk” is the difference between the trade entry price and where the stop-loss order is placed (where the trade is closed if it loses a certain amount of money).
Once you have found both of these values, you can calculate the appropriate position size for your trade with a simple formula. The position size, or the number of shares being traded, is the account-risk figure divided by the cents at risk. If you are okay with risking up to $500 on a trade that has 50 cents at risk, then the ideal position size would be 1,000 shares.
How Do I Make a Trading Strategy?
Nearly all traders strive to increase their consistency in their trade results. This means they have a regular profit that they make from week to week and that they can reduce the amount of losses. Setting a trading strategy is key to having consistent profits.
Many people execute trades based on their emotions; if you are down money, you might sell your stock quickly in an attempt to cut losses, but you could miss out on an upturn in price. Or you may hesitate to buy a stock because you’re afraid of being wrong and end up not making any profit.
Managing emotions can make a trader more objective. Greed and fear can negatively affect your actions.
A strategy takes potentially harmful emotions out of trading. It contains rules for when to get in and out of a trade, as well as which actions to take when a particular pattern occurs, reducing risk and helping you stick to quantitative observation of the market.
A good amount of research is required before starting to put together a trading strategy. Understanding the different types of securities and potential trades is a good start, but you’ll also need to know how to determine trends, how volume applies to trading, how to recognize patterns and how to size trades, among other things. At the same time, gaining trading experience is crucial to being able to write out a strategy.
On top of establishing rules for making trades, you must center your strategy on your personal trading style. You need to understand your own goals and objectives and build your rules around them.
The rules in a trading plan should be what you are comfortable with, not necessarily what someone else tells you to do.
Keeping a trading journal can help you develop a trading strategy. It can keep track of your successes (and failures), not only maintaining organization but painting a picture of how each strategy is performing and if you should tweak it to improve.
A standard trading journal entry will often include entry and exit price, the amount of money gained or lost, strategies used, time and date of the trade, and how much was risked, as well as information on the market conditions and the trader’s mental state at the time.
Trade Analysis
When creating a trading strategy, you should know how to analyze stock movement so you can better create rules for different scenarios. You may decide to buy a stock when it has a certain amount of volume, or to sell if it crosses a moving average. But in order to include that information in your strategy, you must first know how to find it in a stock.
Moving Averages
Moving averages are indicator lines that can be applied to a stock chart. They analyze the past prices of trades to find the price trend (which direction the price is moving) and support and resistance levels (price points that act as barriers for price movement).
Moving averages have different time periods that they measure, so many traders experiment with each time frame to find the one that best fits their trading goals.
Related Reading: The Ultimate Guide to Moving Averages
Volume
Volume tracks the number of shares traded within a certain time period. It gives analysts an idea of how many traders were involved with a security - whether buying or selling - at the same time, and is typically represented on a stock chart by vertical bars at the bottom of the screen.
The change in volume over time can signal a trend change or confirm the strength of a trend. Rise in volume indicates strength, while low volume can be a sign of a possible false breakout. However, all volume indicators use different formulas, so you may need to test a few different indicators to find the one that works best for your trading strategy.
Scanning for Patterns
If you want to scan through stocks, whether manually or by using a virtual stock screener, you must know what kind of patterns or signals you are looking for in the charts.
What is your plan if you see a stock has moved a large percentage in a single day or if a company has an upcoming earnings report scheduled? These criteria can have an impact on your entry and exit rules.
Placing a Stop
You may choose to include rules on placing stops in your trading plan. A stop-loss order is an order placed through a broker that requires the position to be closed once the stock hits a certain price.
This may mean that a trader who is long in a stock -- hoping that the price rises -- can place a stop that closes their trade if the stock changes direction and drops.
Placing a stop-loss order can protect you against major losses. This doesn’t necessarily mean that you won’t lose any money on a trade that went the wrong way, but you can keep from losing money by stopping the trade before the stock can drop further.
The stop-loss order will be up for sale at the price that is available once the stock has hit the stop price. Unfortunately, if another trader is not willing to buy the stock at that price, the original shareholder may have to sell at a worse price. The difference between those two prices is called slippage.
You need to place your stop at a place that allows for fluctuation within the market, but is not so low that you sustain major losses.
If you are planning to buy a stock, a good rule of thumb is to place the stop below a swing low, which happens when the price of a stock falls and then bounces back up. You want to protect yourself from a big drop in price, but not be stopped out if there’s a small drop within a general upward movement.
Many traders believe they should place their stop just underneath a line of support. They think a break below the support line is a sign that the stock is beginning a downward trend, but because buyers are looking to place their trades at the point that it breaks through, there could be a major jump up soon after. Therefore, you should place your trades well under the support line.
If you are shorting (or selling) a stock, you need to keep the general fluctuation in the market in mind as well. Similarly to a trader looking to buy, a trader wanting to sell a stock should try to place their stop above a swing high, or a small rise in price within a broader upward trend.
You may also want to follow the same rule of placing a stock well above a line of resistance to avoid being stopped out if a large number of shareholders decide to short sell the same stock after a resistance line break.
With the information included in this guide, you will be on your way to becoming a trader! For further trading education and trade ideas, check out T3 Live's educational services.
We'd recommend starting by learning how to write your own trading plan or how to use moving averages to analyze stocks. You can also get beginner tips from pro trader, Sami Abusaad!