How to Trade Stocks: Six Steps to Get Started

Trading stocks can be a fascinating and lucrative way for individuals to grow their wealth, but the stock market can be daunting for beginners. It involves complex strategies and online brokers and trading platforms with many tools available. New traders enter the market daily, but many fail to achieve their full potential because of a lack of knowledge, preparation, and proper risk management.

The good news is that anyone can become a successful trader with the right knowledge, mindset, and approach.

#1 Decide What Type of Trader You Want to Be

It's important to choose your trading style before you begin trading. Are you interested in short-term trading or are you looking at the long-term? Do you have the time and dedication to be a day trader or would swing or position trading be more suitable for you?

Consider your personality, your risk tolerance, and the time you can realistically dedicate to trading. This will help you find a trading style that aligns with your goals and abilities.

Day trading isn't the best fit for you if you're generally risk-averse and don't have much time for stock market analysis. It requires constant attention to the markets during trading hours and making rapid decisions under stress so it's not for the faint of heart. Swing or position trading is probably more suitable because they allow for longer holding periods and require less time commitment.

We've sorted the trading styles above based on how long an investor or trade holds onto the stocks. Day traders aim to profit from short-term price moves and typically close out all positions by the end of the trading day so their trades are the fastest.

Next up are swing traders who hold positions for periods ranging from days to a few weeks or months. They aim to capture short- to medium-term trends. This style requires less time commitment than day trading but it still involves being pretty engaged in the market.

The third style is position or long-term trading. This is for those who hold onto stocks for several months, years, or even decades. These investors focus on long-term trends and they may base their decisions on fundamental and technical analyses. This style requires patience and a long-term outlook with less frequent trading.

There's no one-size-fits-all approach to trading. It's essential to choose a trading style that aligns with your personality, risk tolerance, and lifestyle.

#2 Research Brokerages and Choose One Suitable for You

After you've decided on your trading style, you'll need to find a good online broker and open an account. You'll want a platform that caters to your needs. Brokerages have different features and tools, and some are more suitable for your type of trading than others.

Brokerages for Day Traders

A platform with quick speeds (low latency), real-time data, and advanced charting abilities is a must for day traders. These traders often require tools like Level 2 quotes that provide detailed liquidity information about the order book and hot keys for rapid ordering. They may also offer automated or algorithmic trading options, triggers, and technical indicators. Customizable platforms like Interactive Brokers, TradeStation, and TD Ameritrade's thinkorswim are popular among day traders.

Brokerages for Swing Traders

Swing and position traders should look for a platform with a wide range of indicators, research resources, fundamental analysis tools, and risk management features. These traders may also benefit from a platform that offers mobile trading apps that allow them to monitor their positions and trade on the go.

Brokers like Charles Schwab, Fidelity, Robinhood, and E*TRADE are well-suited for swing and position traders because they provide a balance of research tools, user-friendly platforms, and competitive prices, typically with commission-free trading in most stocks and exchange-traded funds.

Brokerages for Long-Term Investors

A brokerage with a strong educational component and user-friendly interface is likely the best choice for long-term investors or those new to trading. Robo-advisors such as Betterment and Wealthfront can be good options for those who prefer a more automated approach to their portfolio. These platforms use algorithms to create and manage diversified portfolios based on the investor's risk tolerance and goals.

Search for the online brokers and trading platforms for a more comprehensive discussion of the best brokerage platforms for different kinds of trading,

#3 Open a Brokerage Account and Fund it

It's time to open and fund an account after you've chosen a platform that suits your trading style and needs. The process is straightforward and can be accomplished in minutes.

1. Provide your personal information: You must supply your name, address, date of birth, Social Security number, and other basic personal information. This is required by law to verify your identity and prevent fraud so you can't avoid doing so by going elsewhere.
2. Choose your account type: Brokerages offer several account types, such as individual taxable accounts, joint accounts, and individual retirement accounts like traditional and Roth IRAs. Select the account type that best fits your trading goals and tax situation.
3. Complete the application: Fill out the online application. It may include additional questions about your employment status, income, net worth, and trading experience. This helps brokerages follow regulations and assess your risk tolerance. The information may also be used when you're applying for account features such as margin (borrowing to trade) and options. Be sure to read and agree to the brokerage's terms and conditions that outline the services provided, fees, and your rights and responsibilities as a client.
4. Fund your account: You must deposit money before you can begin trading. It may take a few days for the funds to become available for trading after you've funded your account. The delay depends on the funding method and your brokerage's policies. Most brokerages offer several options to fund your account:

• Bank transfer: Link your checking or savings account to your account and initiate an ACH transfer. The funds will generally appear in your account within a few days.
• Wire transfer: You can send a wire transfer from your bank to your brokerage account to get trading faster. Wire transfers are usually cleared the same or the next business day but there's often an extra fee.
• Check deposit: Some brokerages allow you to mail a physical check to fund your account, but this is obviously the slowest funding method.

Ensure that you understand the minimum balance requirements and any maintenance fees associated with your account. Some brokerages require a minimum initial deposit or they charge fees if your balance falls below a certain amount.

#4 Research the Stocks You Want to Own

You should research the stocks you're interested in before you begin investing. This involves analyzing the company's fundamentals and the stock's price as it moves over time. Combining fundamental and technical analysis will give you far more confidence when you're finally diving in.

• Fundamental analysis: This approach best suits position traders and long-term investors. It involves evaluating a company's financial health, competitive position, and growth prospects. Review each company's financial statements to assess its profitability, debt levels, and liquidity. Look for companies with consistent and growing earnings over time because this can indicate a robust business model and effective management. Learn a bit about the company's industry and its position as you narrow your list of potential investments. What's its market share? Is this a sector set for growth? Don't forget to research the company's management team and track record.
• Technical analysis: Day traders and swing traders often use technical analysis. This involves studying past prices and volume data to identify trends and patterns indicating future price moves. You might look for recognizable chart patterns such as head and shoulders, triangles, and wedges. These price patterns reflect the behavior of market participants and can help signal potential trend reversals or continuations. Moving averages can help identify trends and potential support and resistance levels. You would employ oscillators such as the relative strength index and stochastic oscillator to gauge momentum and identify when a stock is set to rise or fall. Many platforms provide these technical analysis tools.
• News and sentiment analysis: Monitor news and investor sentiment for the stocks that interest you. Review earnings reports. Earnings call transcripts will typically reveal specific areas of concern to investors. Look at management guidance, analyst ratings, and any geopolitical or macroeconomic events that could impact the company or its industry.
• Diversification: It's important to invest across sectors, market capitalizations, and geographic regions to manage risk as you build your stock portfolio. Diversification helps mitigate the influence of any single stock or sector that's underperforming.
• Continuous learning: Expand your knowledge by reading financial articles, stock market books, and website tutorials. Tune into Bloomberg TV and stay informed about market trends and economic indicators that could affect your holdings. Adapting to new information is essential for long-term success as a trader.

Research and analysis is an ongoing endeavor. You may want to refine your research methods and develop a more personalized approach to stock selection as you gain experience and knowledge. It's also important to regularly review and assess your portfolio to ensure it aligns with your trading goals and risk tolerance.

#5 Place Your Order to Buy or Sell Stocks

It's time to place orders with your brokerage when you've developed a trading plan and researched a range of stocks. You'll have to specify the stock ticker symbol, the number of shares you want to trade, and the type of order you want to use when you're placing an order.

• Market orders: These are the simplest type. You ask your brokerage to buy or sell a stock at the best available price. Market orders are executed quickly so you can be sure your trade will go through. You can get an unfavorable price, however, especially when there's lots of market activity or when you're dealing with stocks that don't trade frequently. Market orders are best used when you want to make a trade quickly and you're willing to accept the present market price.
• Limit orders: You set the maximum price you're willing to pay for a stock with these orders if you're buying or the minimum price you're willing to accept if you're selling. Limit orders give you more control over the execution price but they don't guarantee that your order will be filled. Your order won't go through if the stock never reaches your limit price. These orders are useful when you have a specific price in mind and are willing to wait for the market to reach that level.
• Stop orders: These are triggered when a stock reaches a specific price known as the stop price. The order becomes a market order and is filled at the next available price when the stop price is reached. Stop orders can limit losses on a trade or protect profits should your stock start to fall. Your order could be filled at a price significantly different from your stop price, however, in fast-moving markets.
• Order modifications and cancellations: You may be able to cancel or modify your order before it's executed, such as by changing the limit price or number of shares. But keep in mind that your order may be filled in fast-moving markets before you can do so.

You must also specify the time in force when you're placing your order. This is how long it's active. This table provides the most common options, along with their abbreviations, that are offered by the best online brokers:

#6 Manage Risk

You must manage your risk when you're finally up and running and real money is at stake. This involves identifying, assessing, and ranking potential risks to minimize their impact on your portfolio. You can protect your hard-earned capital, limit losses, and improve your trading performance by implementing effective risk management strategies.

• Diversification: Spread your investments across stocks, sectors, and asset classes. You can reduce the impact of an investment's performance on your overall portfolio by diversifying. This is especially important for long-term investors but keep in mind that diversification doesn't guarantee profits or eliminate the risk of loss.
• Emotional discipline: Don't underestimate the importance of emotional control when it comes to managing risk. Fear and greed can significantly affect your trading decisions. Fear can have you exiting a position too early and greed can cause you to hold onto a losing stock long after hope for a recovery is gone. You can make more rational decisions and avoid impulsive trades by managing your emotions and sticking to your trading plan.
• Hedging: For more advanced traders, this involves investing in a position to offset the risks they're taking with another trade should the price not move as you expect. It's suited to more advanced traders. You could buy a put option to protect against a potential decline in the price if you own a stock. Hedging can be complex and involves certain costs but it can be quite effective in managing risk.
• Position sizing: This refers to the number of shares or contracts you trade in relation to your account size. Proper position sizing helps you control your risk exposure and avoid putting too many eggs in one basket. A general rule of thumb is to risk no more than 1% to 2% of your account on any single trade.
• Risk-reward ratio: This compares the potential profit from a trade to the potential loss. A common risk-reward ratio is 1:2: You risk $1 to potentially earn $2. Maintaining a favorable risk-reward ratio ensures that your winning trades are larger than your losing ones and this helps you achieve overall profits.
• Stop-loss orders: These critical risk management tools automatically close your position if the stock price reaches a preset level. You can limit your potential losses and protect your capital by setting a stop-loss. Consider the stock's volatility, support and resistance levels, and your risk tolerance when you're placing one. A trailing stop is a type of stop-loss that adjusts automatically as the stock price moves in your favor. This allows you to lock in profits while still limiting potential losses. The trailing stop-loss moves up with it as the stock price rises, maintaining a fixed distance from the current price. Your position will be closed, securing your gains, if the stock price reverses and hits the trailing stop-loss.

Risk management is an ongoing process that should be regularly reviewed and adjusted. You can adapt your strategies as your trading skills, life circumstances, and economic conditions change. Prioritizing risk management is a must to protect your capital, minimize losses, and increase your chances of long-term success.

The Bottom Line

Start your trading journey by bringing yourself up to speed on the financial markets. Then dive into company fundamentals, read charts, and watch the prices to see if they meet your expectations. Test these strategies with demo accounts to practice trading then analyze the results and make adjustments. You can research stocks after that and pick a brokerage to begin your first trades. That brings you to the beginning, not the end, of your investing journey.

Disclosure: Investopedia does not provide investment advice. The information is presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor, and might not be suitable for all investors. Investing involves risk, including the possible loss of principal.