Investing in the stock market is a prudent financial strategy for many people, since it has historically provided returns that exceed those of many other investments. The stock market, however, is not for everybody, nor is it appropriate for every situation, as it involves the risk of losing money. Although it may be simple to get started, investing requires research and due diligence to ensure that the portfolio created is appropriate for your situation.
Try Paper Trading Before Risking Real Money
Paper trading is the practice of trading without risking real money. The term "paper trading" comes from the pre-Internet days when there were no stock simulators like Wall Street Survivor and beginning traders had to literally write down on paper the price they wanted to buy or sell a stock within a fictional portfolio. Paper traders had to look up the price of a stock in their local newspaper every morning or evening and make decisions whether to buy, sell or hold. Luckilly, the Internet now makes online paper trading possible which greatlty accelerates the learning curve for any beginning investor. If you haven't yet, create a free fantasy stock portfolio here at Wall Street Survivor, and start practicing and learning the art of trading.
Use the fantasy portfolio to get the hang of all the different order types available: limit orders, stop orders, and shorting. Then, start to develop a trading strategy that fits your style. There are as many way to invest as there are people in the world. No one style fits everyone although there are many popular trading strategies like Swing Trading, Value Investing, Buy and Hold and Day Trading. Many traders use the style that they believe will work best in the current market conditions. So use the fantasy portoflio to experiment and above all, learn which trading style you are comfortable and good at.
Open an Account
Once you feel comfortable risking real money in the stock market, the next step to get started investing is to open an account with a brokerage firm, such as E-Trade, TD Ameritrade, Charles Schwab, Fidelity, etc. Each company has its advantages and disadvantages, so be sure to research several options and select the best for your situation. The typical differences among the brokers are the amount each charges in commissions per trade (which typically range from $6 to $40 or more), the amount of research provided, trading tools, minimum balances, additional fees, and customer service.
Make a Trade
Once you deposit some money with the brokerage firm, you are ready to make your first trade. Most brokerages allow you to manage your account online, and most also allow you to speak with a Registered Representative who can also assist you with your investing (be careful, since brokers often charge higher commission to place a trade with a person). Once you decide on the stock or mutual fund you wish to purchase, you must specify how you want to make the trade. Either online or with a broker, you must state what you want to do (buy, sell, sell short, etc.), the quantity of shares you want to trade, the ticker symbol of the security (each security has a ticker symbol consisting typically of several letters to identify the security, such as DIS for Disney, MSFT for Microsoft, etc.), and the order type.
Order Types
Understanding the order type is important to ensure you buy and sell your securities at the best price. There are two main types of orders: market orders and limit orders. Although there are several variations of these orders, such as stop limit and stop market, it is key to first understand market and limit orders. A market order means you will make the trade based on supply and demand at the time of the trade. As soon as you place the trade, the broker will find the best available price to complete the transaction. When making a limit order, you specify the price that you want to make the trade. The broker must make the trade at the price that you specify (or a better price). If there is no market at that price, the transaction will not happen.
Although the process of making an investment is relatively simple, it is difficult to construct an investment plan that will work for your individual circumstance. It takes a great deal of research and dedication, and often times requires the assistance of a professional.
Steven F. Schreiber holds a BA in Economics and International Studies from the University of Richmond, as well as an MBA with a specialization in Finance from the University of Miami. He is a Chartered Financial Analyst, a member of the CFA Society of Orlando, and a member of the CFA Institute.