Due to the sub-prime credit crisis, the US stock markets haven fallen by more than 40% year-on-year. But eventually they will bottom-out, and when that happens, it will pay to know how to buy stocks to make money from the best value investments on the market.
As a beginner investor, it’s crucial not to buy stocks before learning the basics. The following is an easy guide to trading stocks – including how to open a stock trading account, how to do stock research, and other useful trading tips.
How to Open a Stock Trading Account
Investors need a stock broker to invest on the stock market. The broker will open a stock trading account and trade stocks on the client’s behalf. There are two types of stock broker:
- Full Service Stock Brokers – offer a variety of financial products, as well as specific investment advice and stock research. But this hand-holding comes at a price, and each trade usually costs more in commission.
- Discount Stock Brokers – only execute trading instructions; they do not advise on the stocks being traded. Discount stock brokers usually offer an online stock trading account, and only charge a few dollars per trade, no matter how big or small.
There are many stock brokers offering their services online; a quick search on Google will reveal the leading names and their typical trading charges. Many offer the option of setting up a stock trading account online, which can then be funded with money from a bank account.
How to do Stock Research
Stock picking is all about research. There are two ways to do stock research:
- Fundamental Analysis – considers the underlying business performance, such as revenues, profits, dividends, growth potential, risks, competitive advantages, etc.
- Technical Analysis – considers the historical performance of the stock in terms of price, demand, volatility, etc.
There are strong arguments for both types of stock research. Beginner investors should probably being with fundamental analysis, focusing on industries they are already familiar with and can judge the market potential and risks. Technical analysis often works as a good back-up measure, checking the facts against how the market currently values the stock.
Other methods of stock selection include:
- Stock tip sheets
- Investment publications
- Broker research notes
Useful Stock Trading Tips
- Brokers – beware of stock brokers who call up out of the blue and offer a stock that is “guaranteed to skyrocket any time now”. These brokers work on commission and only care about getting people to make trades so they can skim a profit.
- Volatility – smaller stocks are often more volatile than blue chip stocks. This means they are inherently riskier, and should be approached with more caution. While they offer huge potential returns due to the discounted nature of a young stock, they also run the risk of folding at short notice.
- Long term investing – for many investors, stock trading is a long term game. It is unusual to profit from single stocks in a matter of days without some insider knowledge or market manipulation. Often, investors buy stocks and allow them time to increase in value, maybe over several months or years.
- When to sell – stocks can be sold when the valuation (annual profits in relation to the stock price) becomes too high. Stock tip sheets, investor publications, and broker research notes often publish new stock valuations after some major news or financial accounts go public.