Stock Trading 101

Many of you have been looking for ways to make money investing and often don’t know where to begin. This post is meant to be an educational tool for beginner to intermediate level investors. I will cover the basics of how to trade stocks/ETFs/mutual funds and tell you the basic factors you should look for when trading.

Step 1: Open a Brokerage Account

This might sound obvious but you can’t trade stocks or other securities without an eligible account. A brokerage account is a specific type of financial account that allows you to trade stocks, bonds, mutual funds, ETFS, etc. You will need to open up a qualified account with a reputable brokerage firm. For beginners, I recommend Fidelity, TD Ameritrade, Charles Schwab or E-trade. I personally have used the first three and can attest that they are all user friendly. Alternative options include Robinhood, Stash, Webull, and Merrill Edge. Many brokers have zero minimum deposit requirements however you will need to fund the account before you can make any purchases. The funding amounts vary from Brokerage to Brokerage and you should research at minimum two companies before opening an account.

Step 2: Fund your Account and Begin your Research

Next, you will need to make a deposit into your newly opened brokerage account. Typically, you can transfer money directly from your bank account to your Brokerage account. Note it may take up to 3 days for your funds to become available for trading depending on the brokerage and method used to send the funds over. Once your funds have been posted you will need to create a Watch list. A watch list is essentially a wish list of stocks/mutual funds/ETFs that you’d like to purchase.

I’m sure you’re wondering how I choose the stocks/investment options to put on my watch list. It’s very simple… think of the companies you support in your day to day life and/or enjoy their products or services. These are the companies you should start investing in. Think of it this way you are spending money with them daily/weekly/monthly, why not become an investor in their company and get some of your money back by way of stock profits and dividends?

Secondly, think of industries you’d like to invest in. Stocks are divided into 11 sectors including Information Technology, Healthcare, Financials, Consumer Discretionary, Communication Services, Industrials, Consumer Staples, Energy, Utilities, Real Estate, and Materials. Next, you should follow the daily stock tickers to see which direction the market is trending up or down. The Dow Jones Industrial Average, NASDAQ and S&P 500 are the three main indexes that track the US stock Market. You can view the stocks tracked on these indexes by clicking on the appropriate resources link below.

When the markets are down you will typically see down arrows and red to signify a decline, alternatively green/up arrows indicate market increases. The top stocks measured on these indexes generally indicate the overall direction of the market from day to day. Rule of Thumb: You want to buy your stocks on red days when the markets are down. The reason being is that you will pay less for your stocks of interest these days in most cases. I recommend watching the stocks in your Watch list for 5-7 days and attempting to buy on a day when the stock market is declining. I’m sure you’ve heard the term “Buy the dip”, well this simply means buy stocks when they are down.

Step 3: Execute a Trade

Okay so now you’ve created your watch list and decided which companies you want to invest in, and are finally ready to pull the trigger so what next? In order to place a trade, you will need to log in to your new brokerage account and click on Trade. You will see a trade page that asks you to enter the ticker symbol for your stock. If you are not sure of the symbol, you can type the company name in the search box to search for your company of interest. Note if you search by name be very careful to select the correct stock, there are many companies with similar names trading on the major stock exchanges. For example, Apple’s symbol is AAPL, however, there is a totally different company called Apple Hospitality that trades under the ticker symbol APLE.

Next, you will need to determine the number of shares you wish to purchase. You can enter the number of shares or a dollar amount you’d like to spend and the system will calculate the share total for you. Last but not least you need to Select Market Order or Limit Order. A market order means you pay the price of the stock at the time the order is filled. A limit order means you want to pay a set price for the stock and you do not wish to exceed that limit. For limit orders, you will need to put in a specific price you wish to pay based on the trading range for that day. Example: let’s say Apple opened at $170.00 and throughout the day went as high as $180. Because prices fluctuate every minute in the stock market, depending on the time of day you could have purchased the stock at $170 while the next person could pay $180.

A limit order would allow you to declare the amount per share you wish to pay. You could choose $175 for your order, in which case your shares would only be purchased if the price hits $175 or below. If the price stays above $175, then the limit order will not be filled. As a beginner investor, you will mainly use Market orders. The exception is if you are purchasing a stock that has significant movement from day to day (known as volatility) example: Tesla. Tesla is a stock that can move upwards or downwards by $50-100 on any given day. In this instance, you would want to use a Limit order to avoid overpaying for the stock.

Step 4: Stocks Tip/Knowing What to Look For

Once you start buying stocks you will want to follow these stocks to determine how they are performing throughout the year. Each publicly traded company has a quarterly earnings call. This is essentially a report of their performance for quarters 1-4. You should pay attention to a company’s EPS (Earnings per share) to determine the profit or loss a company reports in a quarter. This report will also specify the dividend amount that will be paid to shareholders. Note: not all stocks pay dividends but those that do essentially share a portion of their profits with investors by way of a dividend payment. Also note if a dividend is much higher than other stocks, it’s possible that the stock is oversold and may be poised for a sharp decline. Do your RESEARCH before purchasing any stock or security. Last but not least if you do not feel comfortable investing in individual stocks you can purchase mutual funds or ETFs. These are professionally managed funds that include a host of stocks chosen by the fund manager. Let’s say you want to invest in multiple tech stocks, but you only have $2000 to invest. Due to the price of many tech stocks, you wouldn’t get many shares purchasing them individually, however, you could invest your money in an ETF or mutual fund and get access to several of the companies on your watch list via the professionally managed fund. Investing in this manner reduces your risk if one stock crashes but gives you access to gains/profits when the various companies in the fund see a rise in stock prices.

Bonus Stock/ETF Picks

Below is a list of stocks that I either own or have added to my watch list to purchase. The information contained in this blog post is not to be construed as financial advice and is intended for educational purposes only. I highly recommend that you research all investments before placing a trade. Additionally, you may want to consult a Financial advisor or CPA for Tax implications. Please note when you sell a stock for profit you are required to pay Capital Gains taxes to the IRS. Retirement accounts are protected until you make a withdrawal from the account, however brokerage accounts must report all earnings/losses to the IRS annually. Please review the below article regarding Capital Gains Taxes. It is important to understand that as long as you own the stock/investment you are not responsible for Capital gains taxes. Capital gains taxes are due only if/when you sell the underlying asset (i.e. stock, bond, mutual fund, ETF, cryptocurrency, etc.).

Favorable stocks: Tesla, Apple, Microsoft, Amazon, Google (alphabet), Home Depot, Netflix, Facebook, Visa, Nvidia, CVS, Walgreens, Fed Ex, Lowes, Walt Disney, Sherwin Williams, Chevron, Exxon, Adidas, Nike, Qualcomm, AMD. ETFs: SPY, QQQ

Best of Luck in Trading!!!

Resource Links

www.fool.com/investing/stock-market/market-sectors

www.markets.businessinsider.com/index/components/s&p_500

www.investopedia.com/articles/basics/03/052303.asp

www.nerdwallet.com/article/investing/how-to-invest-dividend-stocks#list

www.investopedia.com/articles/exchangetradedfunds/08/etf-mutual-fund-difference.asp

www.investopedia.com/taxes/capital-gains-tax-101/

www.kiplinger.com/investing/etfs/604075/great-growth-etfs-for-2022