Welcome to our brand new series, Get Rich Quick. One of the easiest ways to get rich quick, from the convenience of your home, is online trading. Stock trading was once something that was done solely by Wall Street. Today, thanks to online brokerages, anyone can be an online trader.
In the past, not so long ago, you would remember that people had to rely on the services of a stock trader to place their trades. That’s no longer the case today. You can place buy and sell orders yourself and it takes a fraction of seconds to place orders worth tens of thousands of dollars on the computerized trading platform.
While there is no question that you can make a LOT of money from buying and selling of stocks, you can just as easily lose everything if you are not careful enough. If you want to become a top online trader, then it is important that you should pick up critical skills and equip yourself with the tools for online trading.
Before we discuss more about online trading, let’s quickly understand how stock markets work.
How do Stock Markets Work?
Stock markets, like all businesses, are based on the law of demand and supply. So when you buy a stock, it will appreciate in value if more people want to buy the stock than to sell it. So once the stock becomes a hit on the stock market, there will be a lot of traders who would compete to own it. So as more people bid for your stock, its value goes over the roof.
There are several reasons why a stock becomes successful. It could be that the company has come out with a new product that has got a lot of attention in the market. Or, it’s possible that the fundamentals of the company are so strong that the market is finally recognizing its value.
Whatever the reasons are for the stock price to rise, the traders who purchased it when it wasn’t so popular as it is now will be the ones to make the most money on selling it. So the whole point in stock trading is to predict the rise of a stock well in advance and to profit from the rise by selling at the right moment.
How to Pick Winning Stocks for Online Trading?
So, how does one pick winning stocks, stocks that make money, in the short-term and the long-term? Stock traders use a combination of fundamental analysis and technical analysis to analyze a stock. Fundamental analysis involves studying a company’s public statements, other financial reports to study the profitability of its business.
Among the things that a fundamental analyst studies, are the income statements, balance sheets, yearly reports, quarterly reports and latest company releases. Most of this information can be searched online and you will find a plenty of tutorials and ebooks that teach you how to study these statements. Some of the things that a trader studies are market and industry trends, historical analysis, latest media publications, etc.
Next, we come to technical analysis. Technical analysis is not as popular as fundamental analysis, but many traders swear by it. Traders believe that the movements of stock prices follow specific patterns, and the way to profit from them is to detect these movements in advance.
The best traders follow fundamental analysis, but do perform a technical analysis as well, and study the technical charts of a given stock, before taking a decision on whether to buy or sell.
You must research the company thoroughly and study the quality of its management and how it is positioned in relation to its competition. Sites such as Yahoo! Finance can be very useful here. You will find detailed financial statements, history of the stock prices, technical charts and more about the company.
There are many sites where you can benefit from advice given by professional stock market analysts. Now, not all stock market analysts can be relied upon; do look into their past record before deciding to follow any of them. Whatever you do, never trust a stock market analyst blindly.
It’s Time to Get Trading – Select an Online Brokerage Service
Okay, it’s now time to get serious. If you are going to buy and sell stocks on your own without the aid of a stock broker, then you will need to sign up with a reliable online brokerage service. Be very careful when selecting your brokerage partner. It should be a company that has a solid reputation in the industry. Study their pricing, security practices, technologies, service and quality of the management before signing up. Don’t just sign up with the first online brokerage that you chance upon, or just because it comes highly recommended by a friend.
Do your research.
Some of the online brokerage services that have a good reputation in the industry include: E-Trade, ShareBuilder, Fidelity, Scottrade and TD Ameritrade. You cannot go wrong with these companies.
Stick to basic buying and selling of shares to start with. As you go along and as you pick up critical experience, you can pick up advanced trading skills including short selling and margin trading.
Practice, Practice, Practice
A real trader learns on the job and learns something new every day, regardless of how many years they have been trading. Read the financial news, browse business websites, watch CNBC and Fox Business, listen to podcasts and investing courses and pick up information.
Talk to more experienced traders and learn something from them. You will also do well to practice your skills on online stock simulators which function in the same manner as stock markets do. You will find some of the best online stock simulators on sites such as Investopedia, MarketWatch and Wall Street Survivor.
Advice for First-Time Traders
We realize that online stock trading is not easy. There is serious money involved in online trading. Just as there is no cap on the profit you can make from it, there is also a possibility that you could lose everything and have nothing to show for it. Follow the tips given here on online trading.
Tip #1: Only invest as much money as you can afford to lose – remember, there is always a possibility that a trade may not go your way and you could lose everything. So never bet your house on a trade, if you can help it.
Tip #2: Practice money management and always trade with a stop loss. Know when to get out of a trade and when to buy more. Setting a stop loss will help you do that. One of the greatest mistakes beginner traders make, and which costs them dearly, is not to set up a stop loss.
Tip #3:Diversify, don’t just put all your money into a select group of stocks. True, some stocks may appear to you as surefire winners, but there is no way to predict the future. Remember what happened with Enron? The company was literally flying one moment and a few months later, gone, vanished, busted! So invest a part of your money in exchange traded funds or ETFs, they are highly diversifies and cushion a fall. Loss in a few stocks is easily cancelled by gains in other stocks.
Tip #4: You must take your time to research. Don’t do anything in the stock market without having studied the market conditions and the fundamentals of the company that you are investing in. As an online trader, not doing your research before trading a stock is as stupid as stupid can be. Yes, you may have a couple of lucky breaks, but it will prove to be no more than a flash in the pan and eventually you will end up losing your shirt over it.
Tip #5: Plan your trade. A smart trader plans meticulously. Don’t buy a stock without having a plan in place on when to sell it. You should not risk more than 20 percent of your account on a single stock, no matter how successful it is at the moment. Have limit orders put in place and never be emotional when trading in the stock market. Always have an exit strategy in place. Know when to get out of a trade and when the moment comes to get out of it; don’t hesitate even for a bit.
Tip #6: Many stock traders make the mistake of buying into the market when it’s on a high. This is called the herd mentality, buying when everybody else is buying and getting scared and selling when the rest of the market is selling. A smart trader is one who looks for bargains when nobody is looking for them. A smart trader is capable of predicting the rise of a stock which is still unpopular. He does his research on the stock, knows everything there is to know about it, but waits and waits and waits and buys it only when it is at a lower entry point.
Tip #7: A great online trader is someone who is never scared. He is not scared of losing his money because he has proper mechanisms in place. He doesn’t despair when a stock plunges or there is a stock market crash. He trusts the fundamentals of the company that he trades in, and is in it for the long haul. Even when he is day trading or short-term trading, he doesn’t get scared with every single movement of the market. He has a plan in place for every situation, such as a stop loss, and can limit his losses even in the worst of times.
Great Books on that Every Online Trader Should Read
There are some great books you should read that prepare you for stock market trading. Some of them such as Benjamin Graham’s “Intelligent Investor” are real classics and have benefited some of the greatest stock market investors of our, such as Warren Buffett. Here are some of the great books on stock market trading and investing that every online trader, especially beginners, must read.
- “The Intelligent Investor” by Benjamin Graham (HarperBusiness, 2006)
- “The Art and Science of Technical Analysis” by Adam Grimes (Wiley, 2012)
- 5 Mutual Funds for Socially Responsible Investors (Kiplinger)
- Stocks and Bonds: Risks and Returns (Stanford)
- “Contrarian Investment Strategies” by David Dreman (Free Press, 2012)
- “What You Need to Know Before You Invest” by Rod Davis (Barron’s Educational Series, 2003)
Investment MOOCs (MOOC List)
So, How Much Money Can You Make from Trading Stocks?
That’s the one thing about trading that you really want to know, don’t you? How much money can an online trader make? Well, the answer to that is that there is no uniformity in how much online traders make. Some online traders make millions of dollars (remember we called online trading a “get rich quick” scheme) while others barely get by. But a vast majority of online traders make more than the national median income, whether in the US, UK, Canada, Australia or Germany. They live very comfortably with what they make from online trading.
To be more specific, how much money you make as an online trader depends on what you are trading. Stocks are very capital intensive, so you will need more money to start with if you want to make major profits out of it.
So if you are starting with an initial investment of $20,000, someone who starts with an investment of $40,000 will make more money than you provided you invest in the same or similar stocks. This should be obvious, but it needs to be stated.
To make money in the stock market, you will need to manage your risks properly, do your research, and get yourself educated. Follow the advice given here and you will surely be able to strike it rich in the stock market. Be patient and disciplined and have a plan in place. Yes, you should know your exit strategy well before getting into any trade. Finally, stay alert and keep your eyes wide open. You will surely be able to earn a decent income as an online trader.