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The previous post I looked at what stock trading was and discussed the terminology a trader would come across when researching stock trading.
In this post, my question is how do beginners buy stocks?
My Experience
Go back to last July 2018 I myself asked this same question. Admittedly I had undertaken many online webinars discussing the benefits and risks of trading stocks. I made it my mission to read anything and everything that came into my email inbox to do with stock trading.
I had strangers offering me free ebooks, again free webinars and free trials to their trading strategies. This was my preparation I felt was necessary before deciding to risk my hard-earned pension pot. Free is OK to start with while you are getting a foundation in stock trading but at some time you have to start laying out some money.
As a beginner, I had to make a decision. Was I ready to start? Maybe, but was there something else I could put in place before actually parting with any money.
I had read in my mounting pile of research that you could sign up for a demo account and paper trade. What exactly did that mean you may ask.
Demo Account
A demo account is a type of account offered by trading platforms, which is funded with pretend money (a bit like monopoly) that enables someone like my self, a prospective customer to experiment with the trading platform and its various features, before deciding to set up a real account funded with the potential traders actual money.
This is an advantage in that you can practice stock trading without risking your initial capital. You can analyse a stock chart, get used to different indicators and different chart patterns of which there are candlesticks, bar chart or peak charts. This can show you an entry price and risk management using stop-loss exit points.
Stock Charts
In order to work off a stock chart, you will need a stock to look at. You may know of companies that trade stocks you can practice with, but you will be putting in the ticker symbol onto the chart to be able to access it. I have not mentioned the names of stocks as this post is just for information and not recommendations.
More often than not, if you look up stock on google it will show you a chart and the ticker symbol. You will be given the current price and show whether it is in an uptrend, downtrend on consolidating.
- Uptrend
- Downtrend
- Consolidating
An uptrend describes when the price of a stock is moving upward or getting higher.
A downtrend is when the price of a stock is moving down or getting lower.
When a market is going sideways it is said to be consolidating or in a correction.
Ticker Symbols
I mentioned earlier that you will be using the ticker symbol of the stock to pull up a chart to check the current price and position in the market prior to deciding whether to enter into a trade. This is also the information you will need once you open your trading platform.
You can continue with the demo account to place your first trade and probably many more until you feel ready to make the jump to trading with your own money. Do not rush this practice.
Trading Journal
From the very first trade you place in your demo account you should record the details of the trade into a trading journal. There are many trading journals available online or you can use a diary as you should enter the date, time, symbol, entry price, stop-loss price and whether you make a profit or a loss.
Once your trade has completed whether you were successful or not you will be able to access what went well or why you were unsuccessful. You will always get some losses but if you learn from these trades you will learn and your wins will increase.
Risk Management
By setting your risk management at a minimum of 2:1, for example, a stop loss of 50 points and a take profit of 100 points, your wins should make up for your losses over time. Your stop loss points will depend on the length of your trades, for example, intra-day, daily, or longer term.
When you place a trade to buy a stock you are buying a number of shares. The normal minimum number of shares to buy is 100, therefore if the stock price is said, for example, $21, you would have to have available $2100 minimum for 100 shares to buy.
If you have set a stop loss for $2.50 and the price of the stock goes down and stops out your trade you will have lost $250. Once you have more experience with your demo account you may set your stop loss at the support or resistance of the price action depending on if you are buying or selling a stock.
Support and Resistance
In stock market technical analysis, support and resistance are certain predetermined levels of the price of a security at which it is thought that the price will tend to stop and reverse. These levels are denoted by multiple touches of price without a breakthrough of the level. Wikipedia
This post has looked at how do beginners buy stock? I have concentrated on using a demo account for the novice trader while skills and experience develop.
In the next post, I will discuss opening your first trade account, setting up and funding it and resources available to grow your account and to protect your investment.
I will not be giving any stock recommendations as these posts are for information only.
It is possible to buy stocks below $10 and these are known as penny stocks but I will go into this type of trading at a later date.
There is also the opportunity to trade Options but again this is a whole new ball game to get your head around.