Investing

How to Trade Stocks

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The stock market consists of exchanges where buyers and sellers trade shares of a company or funds that package those shares together. Stock markets are typically open during normal business hours, though some types of trading can happen almost 24/7.

Most Americans participate in the stock market, as retirement accounts and pension funds are often invested in stocks. There are plenty of large companies who engage in high frequency stock trading on the stock market too. Individuals can also invest in stocks: brokerages allow retail traders to participate in the stock market.

Stock trading can be complicated, especially for beginners. Before executing any trades, you should know your goals, do some research and create a plan. Once you’re ready, you have some options when it comes to executing trades through a brokerage: some are straightforward, while others can be more complicated.

Here are seven steps for stock trading:

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1. Determine your stock trading goals

Before investing in the stock market, you should think about why you want to invest. Maybe you’re looking to grow a nest egg for your eventual retirement, as some individuals prefer to buy and hold mutual funds as a passive investing strategy. Maybe you hope to turn a quick profit by buying and selling stocks, as some folks actively trade to speculate on the market.

In order to trade stocks, you have to be willing and able to tolerate a degree of risk, as returns on stock investments are far from guaranteed — although the market does tend to broadly rise over the long run. You should probably ensure that your basic financial situation is settled before you invest, especially if you intend to pursue riskier strategies.

Your goals will help dictate how you’ll trade stocks. If you’re investing for long-term goals, you may prefer to hold onto your assets instead of frequently buying and selling them. Maybe you intend to be an active trader. Either way, your goals can help guide your investments. A financial advisor who has experience helping clients set their financial goals and structure their stock portfolios could be a great resource.

Will you be an active stock trader?

In addition to other important considerations — like your time horizon and target rate of return — you should ask yourself whether you want to be an active or passive stock trader.

If you’re seeking a relatively safe and stable return over a long time, you may be better off passively investing. Otherwise, you could be an active trader, buying and selling often. Either way, you’ll need to make sure you’re comfortable with the broker you use to place your trades and hold your assets.

2. Find the right brokerage

In order to participate in the stock market, you’ll need to open an account through a brokerage firm, which places trades on behalf of individual investors and holds their assets for them. Some brokerages offer proprietary mutual funds and exchange-traded funds (ETFs) — which aggregate fractional stocks together as part of a single investment vehicle. Some provide unique educational resources to investors. Others may even let you trade cryptocurrency on the platform.

Large brokerages like Fidelity, Charles Schwab, E*TRADE or Vanguard may have some advantages due to their size, but depending on how you plan on investing, a newcomer like Robinhood or tastyworks may fit your needs better. Most brokerages come with a stock trading app.

Our guide to the best online brokerages can help you determine which firm is right for you.

Robo-advisors

If you want to be more of a hands-off investor, you could consider using a robo-advisor. Those platforms, offered through brokerages, ask you questions about your risk tolerance, time horizon and investment goals to create tailored strategies — and then they manage those investments for you. Robo-advisors aren’t used for active trading, and you can’t buy and sell individual stocks through them, but they’re appealing if you’re looking for a low-maintenance investment style.

3. Research the stock market

There’s plenty of stock market advice out there, but doing your own stock research will help ensure that you have independent information. Plenty of resources are available for free, and some companies sell research and predictions on market performance to give their clients an edge. Past performance doesn’t necessarily predict future results, but investors rely on historical data when putting together their research, as well as a company’s earnings, broader industry trends and several other variables.

Everyone interprets that information differently, but there are two important frameworks investors should consider:

Technical analysis

Active traders in particular tend to prefer technical analysis: they parse large volumes of trading data to assess patterns and trends across the stock market. With that information, they try to stay ahead of the rest of the market by executing short-term trades designed to anticipate price movements.

Fundamental analysis

Some investors choose to focus on the value of a stock with fundamental analysis: by evaluating a company’s finances, as well as other information related to its business practices, an investor attempts to determine the company’s inherent value. They believe that, over the long run, a company’s stock price will reflect that value. Differences between the perceived value and stock price will lead investors to buy or sell.

4. Come up with a stock trading strategy

Once you’ve set your goals, found a brokerage and done your research, you’re just about ready to begin trading stocks. Before you do, though, you should have a specific strategy, including how often and at what volume you’d like to trade. Think about whether you intend to purchase individual shares of stock or if you’d rather invest in a fund that consists of numerous companies. Those strategies can be flexible, but it’s better to plan ahead when you trade stocks.

Practice with virtual trading platforms

Some brokerages offer customers the opportunity to learn how to trade stocks without actually staking money on the outcomes. For beginners especially, the ability to practice stock trading in a no-risk environment can help them feel comfortable once they actually start putting skin in the game. TD Ameritrade, for example, includes risk-free paper trading as part of its Thinkorswim platform. Of course, there’s no return on any “earnings” on virtual trading platforms.

5. Purchase stocks through a broker

After opening a brokerage account, you can fund your account — often by connecting a deposit account from your financial institution — and begin buying stocks. Placing trades through your brokerage is straightforward: you’ll select your stock (or mutual fund, ETF, bond or other asset), choose how much you’d like to buy at a certain price and submit the purchase. The brokerage will then perform the transaction for you.

Most trades are that simple, but there are other more complicated ways to trade too.

  • Market order: This is the most common type of trade: you buy or sell the security as soon as the broker places the trade. If the order is placed after hours, it will be executed when the market opens for trading the next morning.
  • Limit order: Investors can choose to buy (or sell) a security when it reaches a certain price. For purchases with limit orders, the buyer specifies a price at which they’d like the trade to be executed, and the purchase doesn’t happen until the price of the security falls to the limit price. If it never falls that far, the purchase won’t happen.
  • Stop order: Like limit orders, stop orders can be used to buy or sell a stock when it reaches a certain price. When buying with stop orders, the stop price is above the current price of the security. This tactic is generally used to hedge when the investor is in a leveraged position.
  • Futures trading: Investors sometimes trade in “futures,” which means that commodities or financial instruments are bought and sold at a certain quantity and price with the expectation that they’ll be conveyed at a certain future date. For individual investors, it’s a way to speculate on price movements.

Beginners might be most comfortable with market orders until they’re more familiar with how the stock market works. The futures market can involve trading on “margin” — the buyer only has to put up a fraction of the value of the contract at purchase, which can lead to outsized gains or losses.

Costs associated with stock trading

Most brokerages don’t charge you to open or maintain an account, and there usually aren’t commissions on market orders, but you can incur some costs for other types of trades. Options trading (with limit orders or stop orders) tends to involve a small per-contract cost, and brokerages can charge a fee for placing futures trades on margin.

There can be additional costs as well. Expense ratios for mutual funds and other securities are charged to help cover the costs for maintaining the assets — those expense ratios are typically under a percentage point of the fund’s value. Taxes are levied on capital gains after stocks are sold too.

6. Assess your stock trading performance

It’s important to regularly assess how your investments are doing — both relative to your goals and relative to overall market performance. Over time, you’ll gain information on your own historical stock trading performance and you can use that data to help guide your future trading decisions.

The rate of return on investments in popular index funds like the Dow Jones Industrial Average (DJIA), Standard and Poor’s 500 (S&P 500) and NASDAQ are good benchmarks for assessing your own stock trading performance. If you’re outperforming the market, your stock trading strategies are working. If you’re underperforming the market, you may want to reconsider those strategies.

Broad portfolio performance can be compared to those popular stock indexes, but individual stock performance is different. You can compare the performance of certain stocks against competitors in the company’s industry or against similarly sized companies. An individual stock may have more volatile price swings than the broader market, and sometimes there isn’t a great benchmark for how it’s performing.

In any case, it’s important to know where your investments stand. Even if you’re not checking your portfolio every day, you should still check in every so often.

7. Selling off your stocks

Eventually, in order to cash in the value of your stock investments, you’ll have to sell them.

Deciding when to sell

The decision to sell a stock can sometimes be difficult. Active traders buy and sell frequently, but when investors have a buy and hold strategy, selling their stocks is rare. There are several potential reasons why someone might want to sell a stock: maybe they think that the share price will fall soon, or maybe they need some more short-term liquidity. Perhaps they’d prefer to sell a stock so they can buy a new one instead.

Selling stocks through a broker

The mechanisms for selling stocks are very similar to buying stocks — you can place market orders, stop orders, or limit orders through your brokerage for sales. Just like certain kinds of options purchases aren’t conveyed unless a stock reaches a certain price, options sales aren’t conveyed unless that stock reaches that price. Again, market orders are the most common way to sell stocks, and options and futures trading are better for more advanced investors.

Paying taxes on stock trades

When you decide to sell your stock, you’ll be responsible for paying capital gains taxes on your investment if you net a profit (likewise, you can write off capital losses on your taxes). Different rates apply to short-term capital gains — which are incurred if an asset is owned for less than a year — and long-term capital gains. Learn more about the difference between short-term and long-term capital gains.

Stock trading: FAQs
What is day trading?

Day trading is a form of stock market speculation where investors buy and sell stocks or other securities in the same day in order to profit from price movements in the market. Many day traders are professionals, but individuals can participate in the day trading as well.

Quite simply, you make money from trading stocks when you sell your assets at a higher price than when you buy them. Hypothetically, if you buy a share at $100 and then decide to sell your stock at a share price of $150, you net a $50 profit before taxes.

Beginners can buy stock through brokerage firms, which execute trades on behalf of their clients and hold their assets for them.

The “Find a Financial Advisor” links contained in this article will direct you to webpages devoted to MagnifyMoney Advisor (“MMA”). After completing a brief questionnaire, you will be matched with certain financial advisers who participate in MMA’s referral program, which may or may not include the investment advisers discussed.