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5 Tips for Getting Started with Individual Stock Trading

Despite what you might think or have heard, not all investing is created equal. There is a big difference in investing in the stock market and investing by trading individual stocks. Both are classified as investing. But in reality individual stock trading is quite different from traditional investing.

The biggest difference relates to time frames. Individual stock trading is more focused on short-term movements in the market. Trades are done frequently based on the up and down movement of the individual stock. Stock traders try to gauge the momentum of the market and use things like technical analysis to give them an advantage in trading.

Traditional investing has a more long-term focus, spanning years and even decades. Instead of focusing on individual stocks, long-term investors traditionally rely on mutual funds as their investing vehicle of choice. Mutual funds provide more stability and spread your investing dollars around over many different stocks. In that way, they create instance diversity for your money.

There are times in the markets history when stocks have been red hot. In fact, in the last couple of years, the indexes have been climbing higher and higher, setting new records along the way. At times like this, individual stock trading becomes enticing. And with new options to invest in, like the few bitcoin stocks that are moving higher, people can be drawn into this time of investing.

It’s important to remember though that there are things to consider before trading in individual stocks. Even when things are going great, you must always be aware of the risks. Otherwise, you might get yourself into a lot of trouble. Keep these tips in mind if you are interested in individual stock trading.

Know Your Budget for Stock Trading

Before getting in too deep, you’ll need to figure out precisely how much you’re going to be able to invest. Some people have more money to spend than others. That is fine. Nevertheless, you can still make good money by investing a few hundred dollars. Just make sure that you know precisely how much you can afford to lose. You don’t want to overdo it and jeopardize more important financial issues.

I would only consider investing in an individual stock if I could afford to lose 100 percent of the money I’m investing. The volatility of an individual stock can be high. Bad market news, bad company publicity or a bad earnings report can devastate your investment overnight. If you can’t stomach that, best to step into a more conservative investing vehicle, like mutual funds.
Related Content: How to Prioritize What’s Important When You Make a Budget

Do Your Research

Before investing in stocks, you’re going to need to do a significant amount of research. Research the companies behind the stocks to ensure that you’re making the right move. You need to read the company’s profile and understand their financial balance sheet.

You will also need to research the markets as a whole. You are investing in individual stocks, yes. But even individual stocks are subject to broader market action. You need to learn how the markets move so that you can time your investment properly. That can prove difficult.

And you should never attempt to invest in the latest and greatest stocks that might be a fad. Don’t touch cryptocurrency stocks until you’re familiar with Bitcoin, its value and its risks. These stocks could be a great investment, but they offer extreme levels of risk.

A good rule of thumb is never invest in something you don’t understand. If you can’t explain the investment to a friend and describe what the company does, you shouldn’t be invested in it.

Don’t Be Afraid To Hold

When it comes to investing in individual stocks, the common perception is that investors are in and out of these stocks often. However, you should never be afraid to hold. In fact, it is often best to only buy stocks that you’re willing to hold for a few years. Be careful about exiting a stock after a quick gain. You’ve locked in profits, but you may be missing out on an even greater move in the stock.

This all goes back to the continuing research you will do on the company. Make sure that they’re stable and that their revenue is climbing progressively higher. If that is happening, the company’s stock price is bound to climb over the years. You will be rewarded for your patience.

Related Content: The Ultimate Beginner’s Guide to Investing Money the Right Way

Learn How to Use a Stop Loss

At the end of the day, there is a good chance that you’re going to lose money at some point. Just remember that you’re not losing anything until you actually sell the stock. Still, you shouldn’t let the price dip too low. If you do, there is a risk that you’re going to lose a significant portion of your money.

This is why you should use a stop loss order. Every broker is going to provide you with this option. When you use the stop loss, you’ll be able to force the computer system to automatically sell the stock when it dips to a certain level. This can keep you afloat and save you money.

Choosing your stop loss helps take the emotion out of investing. You won’t be scared to hold when the stock price goes down. If the stock rebounds, great. If not, your losses will be minimized.

Choosing A Broker or Trading Platform

Before doing anything, you’re going to need to choose a stock broker. There are plenty of them out there, but they are not created equal.

Most people will select an online broker (or trading platform), because it will give the ability to trade at home and on the go. When attempting to choose a stock broker, you’ll need to consider several things, including the broker’s security, commission fees and minimum deposit. Also, make sure that the broker you choose is going to provide you with the research tools that you need to make the right investments.

These are just a few of the things to consider before trading in individual stocks. If you don’t have an investing background, I would start with something more traditional, like mutual funds. Once you gain the experience and have some excess cash laying around, then it could be a time to consider some individual stocks.

Questions for Discussion: What has been your experience with individual stock trading? What other tips could you give for those interested in trading individual stocks? What is the best single stock you’ve ever invested in? 

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Comments

  1. Thank you for this informative post. These tips are very essential for people who wants to start trading. The younger you begin your investing avocation, the greater the final results , always remember to walk before you begin to run.

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