A good investment strategy can help you plan for your future. For many employees, the first step toward this type of planning is their employer-sponsored contributions. However, the stock market can also help you build wealth for the future if done correctly.
Beginners can feel intimidated by this type of investing because many have heard of the horrors of crashes in the stock market. But stock trading can give good returns and it is easy to learn how to be a knowledgeable investor.
Whether you feel comfortable doing your own trading or prefer to leave it up to a professionally managed online account is up to you.
1. Day trading requires caution
A lot of beginners are influenced by the success stories they have heard about day trading and want to start with it right from the start.
However, with day trading you can end up losing money if you are not careful, and it needs your constant attention. Start investing with long-term goals in mind so that you can learn a bit more about the stock market in the beginning.
Don’t rely on the market price of a stock to make money. When you buy a stock, set a point where you are comfortable enough to sell it. With online traders, you can set a price at which you want the stock to be sold. Some online traders also allow you to set Stop Loss orders to sell stocks if their prices start falling rapidly.
This strategy allows you to have better control of your portfolio and a lowered risk. You will also not need to be online all day watching for sudden drops in stock prices on your portfolio.
2. Avoid rush hour trading and stock hawking
The most volatile hours on the stock exchange are when the markets open and close. Volatility in the morning is a result of orders executed as the markets open. Rush hours do offer opportunities, but as a beginner, you should avoid them and stick to less volatile hours during the middle of the trading day.
Also, learn to not keep an anxious eye on your stocks all day. This can often lead to anxiety which may result in you selling a stock at a loss. Rather stick to the strategy of setting limits which is more likely to be profitable.
3. Only invest money that you don’t need
Stock trading does hide dangers, especially with day trading. Manage your risk by only investing money that you won’t need immediately and will be comfortable losing.
You must always be sure to have savings aside in an emergency fund, and anything over and above that you can use to invest conservatively.
4. Choose the type of market and trading that suits your budget
Short-term stock trading with a day trader account needs you to start with a certain budget. Set that money aside and know how much of it you are prepared to lose per trade. Usually, successful day traders have a limit of no more than 2%.
As a beginner you need to find a market to trade in that allows you to invest an amount within your budget. It should also match your trading style and be in a time zone that is easy for you to follow.
5. Learn from the experts
Use all the tools available to you to learn about stocks and how to trade them. By following successful investors, you can learn how they go about selecting stocks allowing you to make more informed decisions.
If you prefer to have a long-term investment strategy, then opt to invest in index funds and ETFs. These are like mutual funds, are publicly traded on the stock market and you have a more diverse portfolio based on as many stocks as you choose. Your risks of loss are lowered because these are professionally managed and diversified. If you are interested in a conservative investment that will keep up with economic growth, this is the best route.
Final take
If you are fine with taking bigger risks, even if you are a beginner, then you can take the day trading route. With day trading there are more tax implications because the shorter stocks are held, the more taxes you pay.
Also, you are liable for tax penalties if you sell stocks and then buy them or similar stocks shortly again. In trading, it is known as violating the wash day rule. Stock trading can also be expensive because fees and commissions cut into your profits so learn how to avoid them.
Long-term trading may not offer opportunities for fast profits, but it is more stable and tends to have lower taxes.
Jacob Maslow is a native New Yorker with five children. He left his payroll manager position after finding that his true passion was in writing, and has never looked back.
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