We’re going to let you in on a little secret: You, just as you are right now, can trade in stocks. You don’t need to be the second coming of Gordon Gekko, strutting around in an 80s-power suit and yelling “SELL, SELL NOW” into a mobile phone the size of a brick, in order to trade. Although it sounds intimidating and you definitely need to do your homework if you want to get it right, trading stocks can be a good way to expand your experience and reach as an investor.
How to get into trading
Before you get into trading, it’s helpful to first understand how to buy stocks (can’t really trade them if you don’t have them to begin with, after all). Once you have stocks, you can trade them on the stock market. There are physical markets, like the New York Stock Exchange on Wall Street, where traders sit and make trades, but more and more stock exchanges take place online now.
So why is it called stock trading? When you buy a stock of a certain company like General Motors, you’re not actually buying stock from General Motors proper. Instead, you’re buying stock from someone who currently is in possession of that stock—another investor. It’s the same when you sell; you’re not selling your stock back to the company, but instead selling it to someone else. If you want to buy a stock at its current price, you’d place a market order, which is basically like a bid. Then that order is matched up with a seller who’s listed their stock at your desired price, and boom—a trade is made.
You’ll need a broker who will do the trade for you, or an investment platform where you can trade yourself. Most trading nowadays occurs online, so online brokerages and trading platforms offer a variety of services, depending on how much you’re willing to spend and what kind of trading experience you’re looking for. More on that in a minute.
Budding investors need to also decide what kind of investing they want to be doing. When we think about the traders yelling on the floor of the stock exchange until they’re red in the face, we’re thinking about day trading. Day trading refers to trades that are always carried out within the course of one day, and stop when markets close up shop for the day. As you can imagine, this can get pretty hectic—and quite risky. Day traders sometimes use margin—credit—in order to make trades, which can get problematic when they lose out. Day trading is also a full-time job. You can’t just pop in during your lunch break to check how the market’s doing and buy up some stocks. You need to be constantly monitoring the market and be prepared to act upon the minutiae fluctuations of the day within a moment’s notice. There’s a reason those traders look so stressed out all the time.
Then there’s swing or active trading, which involves holding on to securities a bit longer, usually for a couple of days or even weeks. This means it’s way less intense than day trading (although still pretty intense because you still need to monitoring the market pretty closely, just not on a minute-to-minute basis). Swing trading is also way more accessible to the average investor than day trading is, since day trading is quite laborious and needs a lot of software and a high-end trading platform in order to compete with hedge fund managers and other market professionals. Swing trading just requires signing up with a brokerage or an online platform.
How to trade
Don’t start putting all of your money on one share of Apple stock just yet (in fact, please don’t do that at all). Before you can hit the market, you need to evaluate a couple of things to make sure you’re ready and that your bank account doesn’t walk emerge from the experience shell-shocked.
1. First of all, is trading even the right strategy for you
We get it. The Gordon Gekko cosplay sounds fun, we know. But trading is not for everyone, and that’s totally fine. After all, it’s incredibly time and effort-intensive and has its fair share of risk. You’ll have to research the kind of stock you want to buy, research the companies, look at projected yearly earnings, look at the market, etc. And will have to keep track of expenses like trading commissions and account fees. For many people who don’t want to or can’t deal with this, going with a robo advisor is probably a much better choice.
2. Decide what stocks to trade
If you decide to forge ahead, then it’s time to research, research, research. Trying to find “winning” stocks is a strategy that will most likely fail you, as even the famous trader Warren Buffett has argued that picking individual stocks is not a strategy he’d recommend. Instead, we usually advise to spread yourself out across various industries and sectors and have an overseeable number of stocks if you’re just starting out. You should have a good mix of companies that have historically proven to generate steady, high returns—such as Proctor & Gamble and Coca Cola—and companies in important sectors like tech and the food industry. If you’ve got the nerves and the extra cash for it, go ahead and take a chance on stock from that new cannabis cupcake startup that all your friends are super excited about—just be sure you’re okay with taking a loss if it doesn’t take off like your friend Dave promised it would. We’re also fans of the 5% rule: This states that proper diversification means that no one investment or sector should account for any more than 5% of an entire investment portfolio. This is how you achieve the cardinal key to investing peace-of-mind: diversification.
3. Choose a platform
Once you know what you want your portfolio to look like, it’s time to choose what platform you’ll be trading on. Will you be doing it the old-school way (aka offline) by selling over the phone or filling out forms with the help of an investment manager or an expensive financial planner? You could take that route, but it would be costly, extremely time-consuming, and probably inefficient. After all, you don’t have to physically go to the bank to make a transfer anymore; that’s what the Internet is for. So use it. If you choose to trade online (which is most common these days), then you have plenty of options to choose from. Plenty of trading platform offer different perks, but watch out for fees. Some platforms will require account minimums, commission for trades, and/or charge for additional access to data, financial advice, and educational resources. Some trading platforms, on the other hand, don’t charge you for any of this.
4. Determine your order
An order refers to the kind of trade you want to make. The most common is a market order, which is a request to buy or sell a stock at the price it’s currently listed as on the market. The order is usually executed immediately, but if you’re trading a stock that’s pretty active and other trades have been queueing up before you to trade, there is a chance that the price may have fluctuated by the time your order goes through.
That’s where a limit order may be of more use. A limit order only goes into effect when a stock hits a specific price that you set. This avoids any nasty surprises with sudden price changes. The problem with limit orders is that you have to make sure your set price is within a realistic range. If you’ve over- or underestimated the price, your trade won’t go through.
5. Make the trade.
Now that you know how, what, when, and where, it’s time to play. If you’re investing online via a trading platform, it’ll be pretty intuitive—it’s basically like online shopping, if you will. You’ll have to decide how many shares of the stock you want to buy or sell, what kind of order type you want to make, and whether you want to keep that order active for a set time period. You click “trade” or “place order,” and voilá! You just made a trade!
Pros and cons of stock trading
Let’s first get to the obvious benefits of trading: the payoff. The potential for wins is high when trading on the stock market. If you assemble a portfolio with companies that have historically guaranteed a return on equity, you could potentially enjoy steady, high returns. Or you could even pick out the next Apple, for all we know (although again, we have to stress that you shouldn’t go into the stock market aiming or expecting to do this).
But with the potential for high reward comes high risk. Picking stocks yourself is a risky endeavour. Think about it this way. You think you’ve picked out a winning stock and are ready to buy for $100 a share. But on the other side of that transaction is someone who’s ready to sell that stock for $100 a share. Both of you have access to the same information. What makes your intuition right, and the other person’s wrong? What are they seeing that you’re not? By individually picking stocks like this, you run the risk of big losses.
Then there’s also the time and effort of the whole thing. You need to research, get acquainted with stock market terminology and its machinations, and do a deep dive into the individual companies you want stock of. And even with the best research, you still run the risk of potential losses. So part of being prepared to trade on the stock market is being prepared for some losses, particularly in the short-term.
If all that sounds like a lot of work, there’s always the robo advisor choice. Robo advisors are basically automated investment services that will do the job of investment advisors by using sophisticated algorithms to help you pick stocks and create a portfolio based on your financial goals and your risk tolerance.
One benefit of robo advisors is that it’s cheaper than trading yourself. The services tend to have low fees and usually create portfolios consisting of inexpensive ETFs instead of individual stocks. Investing in ETFs also has the benefit of lowering your risk because your money is spread out across various industries via stocks, bonds, real estate, and other assets.
If you’re not able to take on any risk at all at the moment—because, say, you’ll need your $10,000 on hand quickly once your teenage kid starts university in three years—you’re better off sticking the money into a high-interest savings account. Investing usually works out better in the long-term anyway—meaning that if you want to see consistent high returns, holding on to stocks and playing the long game is probably the better way to go.
If you'd like to brave the stock market with some guidance by your side, then Wealthsimple will help you create a low-fee, diversified portfolio, calibrated to your risk tolerance and managed with expert knowledge. Sign up today.
