Learning how to trade in stocks is a useful skill to have. Who hasn’t met or heard of a person who claims to have earned a sizable amount of money trading stocks? As at August 6, 2021, the S&P 500 (the market-cap-weighted index of the 500 largest companies listed on the US stock exchanges) has delivered a one-year return of 32.47% and a 5-year annualized return of 15.24%.
It’s tempting to believe that stocks are a fast, sure way to wealth. It’s just not so. Stocks can indeed provide opportunities to achieve good returns, but there’s also risk involved. Some years will be up, some down and individual stocks themselves will vary in their returns. It is therefore essential to first have a good understanding of the market before you start trading.
If you've never invested in the stock market before, learning how to trade in stocks might look intimidating. Here are 7 simple steps to get you started:
1. Understand why
Establish your goals. Your first step in learning how to trade stocks is to know where you're headed. You need to establish your goals clearly and understand why you want to invest. That depends on several qualifying factors, including your age, your income level, your short-term financial needs (for example, saving for a wedding, a new baby, or a new home), and your long-term financial needs (saving for retirement, paying off a home, starting a business, or saving for college, are all good examples.)
Once you've established and prioritized your goals and established a timeframe for reaching them, you can start the process of choosing the investments and time frames that best meet your unique goals and needs.
2. Get to understand the basics
Like in everything else, having an essential toolkit and understanding the basic principles will make your trading more enjoyable and potentially rewarding. Let’s touch on some of the most popular tools that help both traders and investors:
- Charting: Charts can assist traders in deciding when to buy and sell. Simply looking at the graph will tell you whether the stock price is going up or down. Understanding the basic chart movement will help you trade according to the market conditions.
- Research: Various brokerages and websites offer a vast array of third-party investing research. The insights are there to be discovered. All you need is the time and patience to look deeper.
- Technical analysis: This is the study of price movements in the market, whereby traders make use of historic chart patterns and indicators to predict future trends. Technical analysis can help investors make better- informed trading decisions.
- Fundamental Analysis: focusing in on a company’s foundations, such as their income generating capacity, statement of cash flows, or balance sheet, will help build a more informed picture of the company’s investment quality and overall company value per share.
Utilizing these tools will support your investment journey and help you in identifying potential opportunities and managing your risks more confidently.
3. Determine how much you want to invest
How much can you comfortably afford? There are no fast rules. You can start trading stocks with a small amount. It depends on two key questions: your time horizon and your tolerance for risk. Let’s break down these two components individually.
- Time horizon. How long are you willing to invest to achieve your financial goal? Months or years? Decades? Younger investors with longer time horizons may feel more comfortable with risk because they can wait out the volatility of the stock market. It is often the case that investments focused on capital appreciation will likely generate better returns over this longer period. Conversely, older investors (especially those in retirement) may prefer less risky investments because their time horizon is shorter, and they will have less time to ride out volatile periods.
- Risk tolerance. Your willingness to take on riskier investments for the potential of higher returns defines your “risk tolerance.” An investor with a tolerance for risk will be more comfortable with the potential of losing money on their investment in return for a chance of potential higher rewards.
4. Start with a practice account
If you’re new to trading or simply want to build your investing skills without risking real money, consider a practice account. The Scotia iTRADE Practice Account will provide you with a fictional portfolio worth $100,000 CAD and $100,000 USD.
You can invest in stocks, test your trading strategies, and try the various investing tools (like research, stock screeners, and charts) risk-free.
5. Open the brokerage account
With a little practice, you’ll soon be ready to open your brokerage account by completing a simple application. How do you choose the best trading account for your needs?
Your investing experience and goals will be the main factors that determine the right brokerage account for you. Here are the main types of brokerage accounts available to Canadian investors:
- Online brokerage account, like Scotia iTRADE
- Managed or full-service brokerage account, which is managed by a qualified investment advisor
- Robo-advisor brokerage account – the providers of these accounts use algorithms, not human supervision, to plan and execute investment decisions
Once you’ve selected the right brokerage, you’ll need some personal documentation to create your account. You’ll be asked questions concerning your goals, investing experience and risk tolerance. These will help the brokerage better understand your needs and expectations.
6. Fund the account
Once approved, simply deposit money into your new brokerage account and you can begin to invest in stocks and other securities including ETFs. You can fund your account in several ways including wire transfers, cheques, pre-authorized deposits, Interac e-transfers and bill payments via your online banking.
7. Time to pick your stocks and buy
Your account is open, and you’re ready to start investing in stocks. You will find a good summary and financial profiles of the companies on your brokerage platform. You can get additional information from Scotia iTRADE’s research reports and professional analyst opinions, along with recent company news and risk ratings.
Top tips for successful trading in stocks
- Avoid emotional trading: Don’t let feelings and emotions like panic, impatience, fear, or over-confidence influence how you trade.
- Protect your profits and cut your losses quickly.
- Keep a record: Keeping track of your trades and earnings is a good habit to form early. If you can quickly look back and see where you went wrong, you can identify gaps and address any pitfalls. That way you learn from the past and train for the future.
- Learn how to lose: You’re going to lose sometimes. Everybody does. There’s no such thing as a perfect investing record. The important thing is learning to lose while guarding the health of your account.
- Finally, try to stay cool: Over time, you will get a better understanding of the market. Learn to keep calm and do not be easily alarmed by short-term swings or repeated news headlines.
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