With the S&P 500 and Dow Jones Industrial Average reaching new highs, everyone is talking about the stock market – even President Trump. Every day, trillions of dollars in equities trade on the world’s stock exchanges.
Sessions open in Tokyo with the NASDAQ, carry through to the open of the European trading session in the DAX and the FTSE, and then we close off the trading day in the Big Apple at the New York Stock Exchange.
Investing in stocks seems like a myth, no-one teaches any classes about it in school, and if you want to get involved with the stock market, you usually have to go to someone with the financial acumen, and a degree in finance, to be able to gain access to the markets.
If investing in the stock market appeals to you, and you’re finding it tough to find the right information on how to get started with your stock investment portfolio, then this article has everything you need to know.
Choose Your Strategy
Every investor needs a clear and defined investment strategy before they even think about putting a dollar into the market. You need to decide if you want to take an active or passive role over your investments to determine the amount of effort you will need to put into the management of your portfolio.
Some people like a hands-on approach to managing their money. These individuals may do well as traders. If you have always had an interest in the financial markets, and you understand the ebb and flow of supply and demand, then trading is an excellent strategy, with the highest potential returns – and the most considerable risks.
If you prefer a hands-off approach to managing the growth of your money, then you can deposit your funds with a management firm or hedge fund. These companies have teams of dedicated and talented traders that trade with your account. You gain leverage from all the other investor funds in the pool, and you never have to worry about placing an order with the exchange.
The downside of using professional money managers are the fees. Hedge funds typically charge a “2 and 20” fee structure, meaning that they charge you 2-percent of the value of your account, and 20-percent of profits, as their management fees for the year.
You can use your current financial advisor to invest in ETF’s and mutual funds on your behalf. This route is another popular strategy for building your 401(k) nest egg for retirement.
There is no right or wrong strategy for investing in the stock market. Your approach depends on your risk tolerance and time available for managing your money. Let’s take a deep dive into ways you can trade the stock market.
Mutual and Index Funds
Investing in an index or mutual fund is one of the most straightforward strategies for growing your money. You deposit funds with a financial firm, and they pool their clients’ money, using it to invest in a diverse portfolio of assets, such as property funds, stocks, bonds, and other financial instruments, known as a mutual fund.
Mutual funds offer passive returns for the investor, as they do not have to take any action to make a profit. However, returns are usually in the single digits, and nothing to write home about – still, it’s more than you’ll earn from parking your money in the bank.
It’s important to note that single-digit returns are nothing to balk at – The compounding effect of your money increases over time, and if you park your investment with a financial firm for 10-years or more, you could end up making an outstanding return on your investment.
It’s equally important to understand that you are still at risk of losing money, even with this type of strategy. A financial crisis, such as that which occurred in 2008, has the potential to wipe out trillions in wealth on global stocks markets, affecting the value of your portfolio.
Read: What are Index Funds?
Learn How to Trade
For those people that want to be the next Gordon Gecko, trading stocks actively using a brokerage account, software, and a trading plan, will provide the best returns from the market. There are different ways to trade the stock market, each with unique strategies that help you turn a profit from the price action on stocks.
Day Trading Vs. Swing Trading Vs. Investing
Everyone has a trader inside of them that can’t wait to break free. However, when the time comes to start investing in the stock market by yourself – how do you get started?
The first place to start is by identifying the type of trading strategy that suits your personality. Here are three ways you can trade stocks, choose the plan that resonates with your personality and get started.
Day traders take an active role in the market, trading stocks during market hours. Day trading means that you are in and out of the market in one day or less, and you don’t hold any shares overnight.
Most day traders practice a strategy known as “scalping,” where they enter the market in a trade that lasts anywhere between 30-seconds to 15-minutes. Day traders spend the premarket hours looking for opportunities to trade, and most day traders take between three and five trades each working day.
Day trading can be very profitable, but it can also leave you broke. Many day traders struggle with managing their emotions in the early phase of their career. As a result, they fail to develop any consistency, and continuously lose due to not following the rules of their trading plan.
Swing traders take positions in the market that last anywhere between a few days to a few weeks or months. These traders identify long to medium-term opportunities in the market, betting on their hunch that the market will “swing” away from its current price.
Swing trading typically suits risk-averse newbie traders, and don’t enjoy the daily constraint of day trading. By implementing a swing trading strategy, you are allowing yourself to step back from the action for a period, relying on your technical and fundamental analysis of the stock to provide you with a winning trade.
Investing is the final strategies for newbies looking to get involved with stocks. Investors take long positions in the market, not shorts, and they typically hold the shares for the long term.
The world’s most successful investor, Warren Buffet, says that he buys companies, not stock. This statement defines investing, as it’s about doing your research on companies to find an undervalued stock that offers an enormous upside in the years ahead.
This approach is similar to investing in mutual and index funds and suits the investor that does not want to have to check the charts every day.
Selecting a Broker – The PDT Rule
If you decide to take your money management into your hands, and trade stocks yourself, then you’ll need to open a brokerage account. Brokers are firms with access to the market. Brokers provide liquidity to traders, helping them get into trades, and settle after the day ends.
There are different brokers you can use, with U.S and offshore brokerages to deposit your trading funds. However, if you are an American citizen, and you are trading in the United States, then you may have to adhere to the PDT rule.
The PDT rule states that traders taking more than 5-trades a week are “professional investors.” As a result, the SEC demands that all investors have no less than $25,000 in their brokerage account at all time to be able to trade. If your account slips below the $25k mark, you will not be allowed to transact by the broker.
The PDT rule only applies to Americans, so – if you’re a foreigner living in the States, then the PDT rule does not apply to you.
Swing traders and investors do not have to worry about this rule, but many have account limits on the minimum funding limit for your account, with many brokers no accepting accounts under $10k in value.
United States Vs. Offshore Brokers
While U.S brokers need to comply with the PDT rule, there are many offshore brokers founded in tax havens, like the Cayman Islands, that allow you to trade without regard for the PDT rule. It’s possible to start with as little as $500 in your trading account.
However, it’s crucial that you research your broker before you make your deposit. Many offshore brokers are “bucket shops” that run two sets of books for their traders. They provide expert traders with access to the real market, while they front a “fake market” to the newbie traders.
As a result, you end up trading against your broker. The broker may then use software plugins on their trading platform to manipulate market data., as a result, you may find that you get stopped out of your trades frequently, right as the market swings in the right direction.
The Danger of Trading on Margin
When you open an account with a broker, they will offer you a cash account or margin account. It takes two days for trades to settle into your trading account. With a cash account, you have to wait for the funds to clear in your account before you can trade again.
Therefore, a cash account is not ideal for traders, especially day traders that may be taking several trades in a day. As a result, brokers offer “margin” accounts, where they lend you money to use in trading while the funds from your winning trade clear in your account.
While this helps the beginner trader with liquidity when wanting to cash out of a position, it also presents plenty of danger for blowing up your trading account. With margin, your broker loans you the money knowing you’re good for it, but if you take a loss on a leveraged account, you may lose more than your initial investment into your trading account.
For example, if you funded your account with $500, took a trade for $300 and lost it all, then you would have $200 left to invest, However, with a margin account, you can keep trading at a $500 balance until the trade clears. Therefore, should you take another loss for $300 while the deal settles, you will owe your broker $100.
Passive Investing Made Simple with Robo-Advisors
If trading sounds too complicated or risky for you, then you can use robo-advisors to help you start investing in the stock market. Robo-advisors are intelligent algorithms that investment firms use to mage portfolios.
You call into the investment form and receive an onboarding call where a real-life advisor asks you about your investment goals. They then take you inputs and add them into the algorithm, which subsequently trades your funds based on your requirements.
Robo-advisors are different from real-life advisors, both in their investment strategy and their fees. Robo-advisors cost a fraction of what a real investment or portfolio manager will charge you. Robo-advisors can also help you open an IRA or Roth IRA as well.
The Best Robo-Advisors
|$10 Per Month
|0.75% – 0.5%
|0.7% – 0.4%
|0.5% – 0.4%
|0.35% – 0.20%
Budgeting for Funding your Account
When getting involved in investing in the stock market, it’s vital that you understand that all of your money is at risk. While you can take steps to mitigate risk, there will always be a chance of losing your money. It’s for this reason that the SEC introduced the PDT rule we discussed earlier.
Therefore, it’s vital that you only put funds into the market that you can afford to lose. No investor wants to fail, but it’s part of the game. Trading with your paycheck could end up costing you and your family dearly.
Wrapping Up – Get Educated and Take Action
The biggest mistake newbie investors make when entering the stock market – is not receiving the education they need to understand how and why markets move. If you plan on becoming a super-star day trader, then the chances are that you’ll need an intensive education into how to trade the markets profitably.
After receiving the education, you need, it’s time to select your strategy, fund your account and get to trading. While you might spend the first few months trading in a simulator, eventually you’ll reach the point where you’re consistently profitable and able to trade the stock market successfully.