Investing in stocks can be intimidating for someone who has never done it before. There are so many options, unknowns, and questions. How do you get started? How do you know which stocks to buy, and when do you sell? If you don’t have very much money, how do you diversify properly?
Investing in stocks is challenging, but it doesn’t have to be intimidating. To make it easier, here is a six-step process to help beginner investors get started.
Step 1. Open an Account
Buying stocks today isn’t like it was in the 1980s, as portrayed in movies like The Wolf of Wall Street. You don’t pick up the phone and call a broker to make trades.
Instead, investors can open trading accounts online, through an array of providers, called custodians.
Many readers may have heard of Robinhood, which is an online brokerage platform offering commission-free trades. Robinhood is a reputable company where investors can open accounts, but there are plenty of other commission-free options like Charles Schwab, Fidelity, and others.
Opening a brokerage account -- which is the type of account to open for trading stocks -- is easy pretty much no matter what custodian you choose. Just make sure they are a reputable brokerage that is also a SIPC member.
Step 2: Determine How Frequently You Want to Trade
It’s important to have a game plan, which is often called an ‘investment discipline,’ before you start trading. Do you want to take the Warren Buffet approach of intensely researching stocks that you plan to hold for years or even decades? Or do you want to buy and sell more frequently with a goal of generating short-term profits?
New investors should take time to think deeply about what type of investor they want to be, because stock market volatility is famous for luring investors into emotional decision-making. Which is to say, poor decision-making.
So, make a game plan, and think about how you want to trade.
A short-term trader generally holds investments for a few hours, days, or maybe a week or two. This style of investing is designed to turn a bunch of small gains to one big gain over the course of time.
Being a short-term trader requires a great deal of time (and skill) on the trader’s part. Short-term traders often use software and/or trading platforms to help them generate trade ideas. In some cases, the software or trading platform will have Artificial Intelligence capabilities, which investors can use to run analysis and generate trade ideas.
The intermediate-term investor is usually in stock trades for a few weeks to a few months. This style isn’t as active as the short-term trader, so there isn’t as much turnover in the portfolio. Being an intermediate-term investor still requires time to monitor your positions and market conditions and make changes to the portfolio.
The long-term investor looks for investments to hold for many months or even years. Typically, the longer an investment is held, the possibilities of big gains are greater, but so are the risks of big losses. Stocks don’t typically move 20% or 30% in a matter of days or weeks, in either direction. The larger moves tend to happen over long periods of time, whether it is a 50% gain or a 50% loss. Long-term investors tend to favor diversified portfolios designed to perform over long-periods of time.
Step 3. Research Potential Investments
There are two main analysis styles—fundamental analysis and technical analysis.
Fundamental analysis involves evaluating the company based on metrics like earnings, sales, growth in key segments, and so on. Investors should ask questions like:
Are the company’s earnings growth from quarter to quarter?
What about the revenues? Are they growing or shrinking?
What about management? How efficient is management at providing a good return on equity?
These are the types of data points gained by doing fundamental analysis. Looking at fundamentals works better with a long-term investment strategy, but they can also play a role in the short-term as well.
Technical analysis focuses on a stock’s price, analyzing how changes in price form patterns. Pretty much everything involved in technical analysis can be found on a securities’ chart—moving averages, overbought/oversold indicators, trading volume, etc. There are hundreds of technical indicators that have been developed over the years.
Technical analysis can play a significant role in the short-term movements of a stock, but they can also play a role in long-term movements as well. One of the most common mistakes investors make is thinking like a short-term trader and only looking at the daily chart. When you do this, you can miss signs on the weekly or monthly charts. For example, a stock may look like it has broken support on the daily chart, but when you look at the weekly chart, you find it is sitting right on a long-term moving average that could provide support.
The various analysis tools can be overwhelming for beginner investors. But don’t despair – there are tools at your disposal that can help you evaluate fundamentals and charts quickly and effectively.
Tickeron's Screener tool allows investors to pull up company fundamentals in seconds, and even provides proprietary fundamental analysis for the trader. For technical analysis, Tickeron has an array of Artificial Intelligence tools that can identify chart patterns and generate trade ideas with odds of success.
Step 4. Understand Your Risk Tolerance
The fourth step to take before investing in stocks is to determine your risk tolerance level. How comfortable are you with taking losses? What would you consider a big loss? Are you so worried about losses that you can’t sleep at night?
Investors with a high tolerance for risk may be comfortable with trading more frequently, while those less comfortable with risk may prefer a buy-and-hold strategy limited to large-cap stocks. Knowing your risk tolerance can inform how frequently you trade and the types of stocks you trade.
You should also factor-in your investment goals. What you plan to do with the money could be very important in determining how you want to invest it. If this money is just to try your hand at investing, and you do not need it to live, maybe you will be comfortable taking more risks. If this money is earmarked for retirement or a big life purchase, like a home, you may want to be more cautious about your approach.
One thing to keep in mind about your personal risk tolerance assessment is that it isn’t etched in stone. You may become more tolerant of risk as you become more experienced in stock investing and trading. Your goals and needs will likely change over time, so keep evaluating them along the way.
Step 5: Practice!
Before committing real money to the stock market, it probably makes sense to do some hypothetical trading. This way you can get a feel for how the stock market fluctuates over time, and also give you a better understanding of how you react emotionally to price changes.
Practice can also offer investors the opportunity to develop skills and investment disciplines, so you can have a repeatable process as part of your strategy. You can attempt to track your trades and profit/losses on your own, but there are also platforms that allow you to manage ‘virtual portfolios’ with ‘paper money.’ You can try your hand at stock investing for free here.
Step 6: Diversify
An easy rule to remember is that the fewer the holdings in the portfolio, the more inherent the risk. Individual companies carry specific risks—a bad earnings report, a product recall, or a denial from the FDA on a new drug. All of these things can send a stock falling sharply.
The general goal of diversifying your portfolio is to make sure that a big loss on one holding doesn’t have the same impact on the portfolio as a whole. If you have ten holdings in your portfolio and one of them drops by 20% while the others remain constant, that means the overall portfolio is only down by 2% if the holdings have equal allocations. In the same scenario, a holding drops 20%, but with only two holdings, now the portfolio is down 10%.
Diversification is a good way to control risk while also offering an investor exposure to different sectors and regions.
Step 7: Monitor Your Portfolio
Now that you have chosen your investments and have built your portfolio, the last step in the process is to monitor your investments. Going back to your investment style, the shorter your time horizon is, the more frequently you will want to check on your portfolio. If you are day trading, you pretty much have to watch your computer all the time. If you are trading for a few days or a few weeks, checking in every few hours should be the minimum.
The longer your investment time frame, the less you will need to check on the portfolio. If you are in the intermediate timeframe, checking your portfolio once a day might be enough unless the market is in a period of increased volatility. For some long-term investors, they may only check on their portfolio via their monthly statement at the end of each month.
As for how to monitor your portfolio, there are a number of ways you can do that. Almost all brokerage firms offer an online portfolio tracker of some sort. Most even offer an app of some kind that will allow you to set alerts on your phone should an investment breach a certain level—up or down.
Even if your brokerage firm doesn’t offer a portfolio tracker, sites like Yahoo Finance and Tickeron offer them for free.
While these sites will help you monitor the price action, they won’t help you re-evaluate the stock, either from a fundamental standpoint or technical standpoint. This is another area where Tickeron can help. Building a watchlist with your portfolio in it and then checking it each night can help monitor any new developments on the stock.
This six-step process is pretty easy to follow and it should allow you to learn more and more about investing along the way. There are ways to get more help when you are first starting out and then the methods can get more advanced as you get more comfortable. One of the biggest keys to being successful is forming a discipline and using investment tools, where available, to guide the process.
We invite you to check out our other premium products -- they’ll help you be best prepared to take on the market. Some of the premium products that might be helpful for a new trader are the AI Pattern Search Engine and the AI Trend Prediction Engine. For a continuing trader, AI Real Time Patterns and our Screener are a great way to pinpoint exactly what you’re looking for and to monitor the securities for an extended period of time.