How to Trade Stocks Online

Co-authored by Michael R. Lewis

Trading stocks online seems complicated and confusing when you’re just getting started, but with research and careful strategizing, it can become simple and even enjoyable. With the right plan, online trading can help you earn money from the comfort of your own home.

Part 1

Part 1 of 4:

Researching and Choosing Stock

1
Perform a technical analysis. Technical analysis is an attempt to understand market psychology or, in other words, what investors as a whole feel about a company as reflected in the stock price. Technical analysts are normally short-term holders, concerned about the timing of their buys and sells.If you can detect a pattern, you might be able to predict when stock prices will fall and drop. This can inform you about when to purchase or sell certain stocks.^{[1]
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- Technical analysis makes use of moving averages to track security prices. Moving averages measure the average price of the security over a set of period of time. This helps traders more easily identify trends.^{[2]
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2
Identify patterns. Patterns identified in a technical analysis include identifiable price boundaries in the market price of a stock. The high boundary, which the stock rarely surpasses, is known as the "resistance." The low boundary, which the stock rarely dips below, is called "support." Identifying these levels can let a trader know when to buy (at resistance) and when to sell (at support).^{[3]
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- Some specific patterns are also detectable in stock charts. The most common one is known as "head and shoulders." This is a peak price then drop, followed by a taller peak then drop, and finally followed by a peak similar in height to the first. This pattern signals that an upwards price trend will end.
- There are also inverse head and shoulders patterns, which signify the end to a downward price trend.^{[4]
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3
Understand the difference between a trader and an investor. An investor seeks to find a company with a competitive advantage in the market place that will provide sales and earning growth over a long period. A trader seeks to find companies with an identifiable price trend that can be exploited in the short-term. Traders typically use technical analysis to identify these price trends. In contrast, investors typically use another type of analysis, fundamental analysis, because of its focus on the long term.^{[5]
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4
Learn about different orders traders make. Orders are what traders use to specify the trades that they would like their brokers to make for them. There are numerous different types of orders that a trader can make. For example, the simplest type of order is a market order, which purchases or sells a set number of shares of a security at the prevailing market price. In contrast, a limit order buys or sells a security when its price reaches a certain point.
- For example, placing a buy limit order on a security would instruct the broker to only purchase the security if the price fell to a certain level. This allows a trader to specify the maximum amount he or she would be willing to pay for the security.
- In this way, a limit order guarantees the price the trader will pay or be paid, but not that the trade will occur.
- Similarly, a stop order instructs the broker to buy or sell a security if the price rises above or falls below a certain point. However, the price that the stop order will be filled at is not guaranteed (it is the current market price).
- There is also a combination of stop and limit orders called a stop-limit order. When the price of the security passes a certain threshold, this order specifies that the order become a limit order rather than a market order (as it does in a regular stop order).^{[6]
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5
Understand short selling. Short selling is when a trader sells shares of security that they do not yet own or have borrowed. Short selling is typically done with the hope that the market price of the security will fall, which would result in the trader having the ability to purchase the security shares for a lower price than they sold them for in the short sale. Short selling can be used to make a profit or hedge against risk, however it is very risky. Short selling should only be done by experienced traders who understand the market thoroughly.
- For example, imagine that you believe that a stock currently trading at $100 per share is going to decrease in value in the coming weeks. You borrow 10 shares and sell them at the current market price. You are now "short," as you have sold shares that you didn't own and will eventually have to return them to the lender.
- In a few weeks, the price of the stock has indeed fallen to $90 per share. You purchase your 10 shares back at $90 and return them to the lender. This means that you sold shares, that you didn't have, for $1,000 total and have now replaced them for $900, netting yourself a $100 profit.
- However, if the price rises, you are still responsible for returning the shares to the lender. This potentially unlimited risk exposure is what makes short selling so risky.^{[7]
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Part 2

Part 2 of 4:

Choosing a Brokerage Partner

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Interview online brokers. Don’t rely on a tip from a friend or neighbor. The right brokerage service can make the difference between financial success and failure. Before choosing an online brokerage, ask about details like pricing and the available investment choices. Find out about the customer service they provide and whether or not they offer resources for education and research. Finally, find out about their security practices.^{[8]
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Decide which brokerage tools are important to you. Depending on the amount of experience you have, you may require different levels of service from an online brokerage service. Some services offer personal advice, which may be beneficial to beginners. You may pay higher fees for these services, but if you’re just starting out, you may think the fees are worth it. Online brokers that offer tools and advice to help beginner traders include E-Trade, ShareBuilder, Fidelity, Scottrade and TDAmeritrade.^{[9]
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- ShareBuilder also offers an ATM card that gives you access to uninvested funds.
3
Work with a discount service if you have more experience. If you can do all of the research yourself and don’t need personal advice from a broker, then consider working with a discount online brokerage. You can start with a smaller sum of money. Also, you have access to more investment choices. In addition to stocks, other investment choices may include options, mutual funds, exchange-traded funds, fixed income funds, bonds, certificates of deposit and retirement accounts.^{[11]
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Part 3

Part 3 of 4:

Learning to Trade Stocks

1
Educate yourself about financial performance indicators. Read the news and financial websites. Listen to podcasts or watch online investment courses. Join a local investment club to learn from more experienced investors.^{[13]
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- Books to read include "The Intelligent Investor" by Benjamin Graham (Harper Business, 200), "What You Need to Know Before You Invest" by Rod Davis (Barron's Educational Series, 2003), "The Art and Science of Technical Analysis" by Adam Grimes (Wiley, 2012) and "Contrarian Investment Strategies" by David Dreman (Free Press, 2012).
- For a list of massive open online courses (MOOC), visit MOOC List.
- Stanford offers an online course to learn about stocks and bonds.
- Kiplinger has published a list of mutual funds for socially-responsible investors.
2
Practice with an online stock simulator. An online stock simulator is a fantasy market game that simulates online trading. Using these allows you to practice your skills with zero risk. Many come with tutorials and forums to discuss investing strategies.^{[14]
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- However, keep in mind that simulators don't reflect the real emotions of trading and consequently are best used to test theoretical trading systems. Real profits are much more difficult to achieve than imaginary profits.
- Online stock simulators to try are Investopedia, MarketWatch and Wall Street Survivor.
3
Trade penny stocks. Many companies offer stocks that are traded for a very low cost. This gives you an opportunity to practice leveraging the market without much risk. Penny stocks are usually traded outside the major stock exchanges. They are generally traded on the over-the-counter-bulletin-board (OTCBB) or through daily publications called pink sheets.^{[15]
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- Many legitimate brokers will not accept penny stock orders due to the frauds and scams inherent to this market.
- Be warned, however, that penny stocks can be risky investments. The Securities and Exchange Commission (SEC) says that it is complicated to accurately price them, and it can also be difficult to sell them once you own them (they are illiquid). These thinly-traded stocks are also susceptible to large bid-ask spreads (differences between buying and selling prices of the security), making it difficult to make money trading them.
- Also, dishonest brokers prey upon inexperienced investors by making false promises about how companies are expected to perform and using celebrity spokespeople to market bad investments.^{[16]
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Part 4

Part 4 of 4:

Making Smart Investment Decisions

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Decide what you can afford to trade. Begin slowly until you learn to make smart decisions about what to trade Only trade with what you can afford to lose. Once you start making profits from your stocks, you can reinvest the profits. This process helps your portfolio to grow exponentially.^{[17]
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- You can also trade with borrowed money using a margin account, allowing you to potentially magnify your returns. However, this incurs equally magnified risk and may not be for most traders, even those with high risk tolerances.
2
Diversify your portfolio. Realize that stock trading is an unreliable source of money; what was profitable today may not be tomorrow. Diversifying your trading portfolio means choosing different kinds of securities in order to spread out your risk. Also, invest in different kinds of businesses. Losses in one industry can be offset by gains in another.^{[18]
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- Consider investing in an electronically traded index fund (ETF). These are a good way to diversify because they hold many stocks, and they can be traded like regular stocks on the market.
- Note again that trading is separate from investing. Investing involves holding the same securities for long periods of time to build value slowly. Trading, also known as speculation, relies on quick trades and exposes the trader to more risk.
3
Approach trading like a job. Invest time in your research. Keep yourself abreast of the latest financial news. If you don’t have time to do the research yourself, consider investing in more ETFs in order to spread your risk. Or, you may have to enlist the help of a professional broker instead of trying to do the work yourself.^{[19]
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4
Make a plan. Think through your investment strategies and strive to make smart decisions. Decide ahead of time how much you plan to invest in a company. Set limits on how much you are willing to lose. Establish percentage drop or increase limits. These automatically schedule orders to buy or sell once the stock has dropped or risen by a certain percentage.^{[20]
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- Two commonly-used automatic orders are "stop loss" and "stop limit" orders. Stop loss orders immediately trigger a sell order when the price of the security falls below a certain point. Stop limit orders, on the other hands, still trigger a sell order when the price falls below a certain point, but also will not fill the order below a certain price.
- This means that the price of the stock could continue to fall below your order is filled with a stop loss order, but the stop limit order will prevent you from taking too much of a loss on a sale. Instead, your order will go unfilled until the price rises to your established limit.^{[21]
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5
Buy low. Resist the temptation to buy well-performing stocks when the price is high. Do a technical analysis of the stock’s performance. Try to detect a pattern in how the price swings, and predict when the stock price will drop. Try to get in on the stock when the price is at its support level.^{[22]
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6
Trust your research. If you see a stock plunge, don’t sell out of fear of losing your investment. If possible, leave your investment intact. If your research is correct, your goal price point may still be reached. Bailing on a stock during a downward turn can end up costing you a lot in unrealized profits when the stock begins to climb again.^{[23]
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7
Minimize costs. Brokerage fees can undermine your returns. This is especially true if you participate in day trading. Day traders quickly buy and sell stocks throughout the day. They hold the stocks for less than one day, sometimes for only seconds or minutes, looking for opportunities to make quick profits. Day trading or any strategy in which you are frequently buying and selling your securities can get expensive. For every transaction, you may be charged transaction fees, investment fees and trading activity fees. These fees add up quickly and can significantly cut into your losses.^{[24]
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U.S. Securities and Exchange Commission
Independent U.S. government agency responsible for regulating the securities industry, which includes stocks and options exchanges
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- Day trading can be very punishing and difficult for inexperienced traders; 99% of non-professional day traders lose money and eventually quit the market.
- Instead of executing a high volume of trades, minimize your cost to brokers and other middlemen by making long-term investments in companies in which you believe.
- The SEC and other financial advisors warn that day trading, while neither illegal nor unethical, is not only very risky but also very stressful and expensive.
- While timing purchases and sales of securities is important, banking on the intrinsic value of the company in which you are investing pays off in the long-term.