A Step-by-Step Guide to Buying Shares

Welcome to your step-by-step guide to buying shares. In this portion, you will learn 9 steps you need to take to become a trader, the reasons why you must go through them and instruction to facilities that aid you in completing every step.

We suggest that you bookmark this guide page so you can readily return to it!

Introduction

Before you start, take note that becoming a trader often requires time, depending on a variety of factors such as how fast you learn trading strategies to how long your brokerage account takes to start working, etc. Patience is necessary; however, the prize you reap by making regular profits far overshadow the difficulty needed to learn how to trade! If you are not absolutely certain about becoming a stock market trader, then perhaps, you should try the concept first with a free practice trading account.

Know the basics

If you are seriously thinking of trading shares so you can make some big bucks, here are some steps to follow:

First, you need to acquire a basic knowledge about shares and the stock market. Without knowing how the stock market works, it is impossible to achieve your goal to make money. It Is not that complex; you can acquire such basic knowledge of the stock market in the basics section of the website.

Here are the chief concepts you need to familiarize yourself with before moving on to learning the ropes of the trade:

  • Learn the basic concepts of a share, e.g. dividends; bid/ask price, its chart, etc.
  • Acquire the information (via software/websites) needed to buy shares.
  • Study how the stock market functions
  • Learn the risks involved in trading shares

It is vital that you get this knowledge before paying precious money for a trading course (step 4) to allow you to completely understand the concepts being imparted. Without any basic stock market knowledge, some portions of the courses could easily bypass you, giving you a hard time to catch up with the information that you will have paid for!

Open a practice account

Opening a practice account allows you to accomplish step 1, as it will aid you in gaining understanding of the process of buying and selling shares in the stock market. Plus500 provides an extremely easy way to grasp the idea of buying and selling shares.

The beneficial thing about practice trading is that you can experiment with methods without losing any money! You do this by using 'pretend' cash balances which you can adjust to represent the amount of money you would actually want to trade with. Practice accounts also provide free charting tools which will allow you to familiarize yourself with technical analysis.

However, while practice trading may have many advantages, a fair warning is due here: Whatever you do, do not assume that successful "pretense" or practice trading, minus a solid education, qualifies you to trade on the stock market. People can frequently get lucky by buying in a bull market, for instance, and making money in the process, and end up thinking this qualifies them to become a competent trader. Step 2 is merely to ease you up to gain a firm foothold within the general concept of trading shares and, hopefully, lead you on to appreciate how much money can be made from trading on the stock market.

Take a look at a list of suggested practice accounts.

Subscribe to a news site

If you subscribe to a news site, you will obtain news before, after and, oftentimes, (depending on the website) within a market day. Immersing yourself with news from the city helps you appreciate what economic factors affect the movement of the stock market. The morning news report, in particular, is helpful in foreseeing whether the market will move up or down, which, consequently, will allow you to make better (that is, more-informed) trading decisions.

News sites usually go side-by-side with practice account; where you find one, you will find the other. If you register to one of our suggested practice accounts, you will have the choice to receive commentary of the stock market through e-mail.

Educate yourself

Step 4 is the most important stage before trading shares.

We would strongly suggest paying for a course when learning how to trade, for some reasons enumerated below. In connection with developing your basic knowledge through our step-by-step guide, paying for a course signifies a big commitment to becoming a trader, a commitment you need to make if you seriously consider making a sizeable amount of money from the stock market.

Check out our section on trading courses and our suggested courses you can take.

Open a brokerage account

You have to open a brokerage account soon after acquiring a firm education in the stock market as this will enable you to maintain your momentum towards becoming a successful trader. It is essential to choose the right brokerage account for your unique style of trading. For instance, some accounts charge inactivity fees which would be disadvantageous to position traders (traders who rarely trade) whereas some have high trade fees which would be a bad deal for day traders (traders who make several trades a day).

Check out our section on brokerage accounts and our list of suggested brokerage accounts.

Obtain charting software

Charting software is important when making trading decisions. Charting software gives you accurate fundamental and wide-ranging technical analysis which significantly enhances the chances of making profitable trading decisions.

Charting software will need monthly payments which can drive away people from using it and choosing free charting websites instead. However, having firm and comprehensive data from charting software, before trading, will quickly enhance your stock picking decisions and readily justify spending for charting software.

Check out our section on charting software and our suggested charting software.

Subscribe to a quality newsletter

This is not an essential step because some people want to make trading decisions by themselves. Nevertheless, some people see newsletters that provide tips as a confidence-booster to help them enter into trades.

Moreover, aside from providing tips, newsletters also publish beneficial insights into companies and the stock market.

Visit our section on our suggested newsletters.

Start practice trading

Unlike step 2, where practice trading is encouraged to aid you to comprehend concepts, this practice-trading process is designed to simulate the trading strategies you have acquired and will put to actual use during actual trading. It is important that you become adept at practice trading over a certain duration of time (we suggest 8 weeks) before you try the real deal in trading. This is to ascertain that your strategies work and that your first beginner-mistakes (we all make them!) do not eat into your real cash balance!

Strive to ascertain that you constantly make profits before using your own hard-earned cash to trade with.

Visit our section on practice accounts and check out our suggested practice accounts.

Start real trading

If you have followed the previous 8 steps and everything has gone well, then it is time to begin real trading!

Improve your trading

Here are 5 golden rules to help you enhance your trading skills:

The 2 % rule portfolio management rule

The 2% rule involves everything that deals with portfolio management. The rule simply states: Do not risk more than 2% of your portfolio on one trade.

Illustration:

  • If you have a $4000 portfolio, two per cent of that is $80.
  • Hence, you should limit your losses to only $80.

This rule allows you to keep control over your stock market portfolio. Following this rule prevents the risk of losing big chunks of money in one instant; losing a sizeable amount of cash can discourage any trader from investing.

The risk-reward ratio

The risk-reward ratio is the concept that states you should risk less money than your potential reward. When trading a stock, your stop loss should be your risk point and your exit point (where you intend to exit the trade) would be your reward point. The risk-reward ratio should always be 1:3. Hence, if you apply this ratio, you can lose more than 50% of your trades and still acquire earnings. Here is how it works:

  • If you enter into 3 trades and your stop loss is at $200 while you have a risk-reward ratio of at least 1:3, trade 1 loses $200 and trade 2 wins $600 whereas trade 3 loses $200,
  • You gain only 33% of your trades, yet the net profit and loss would be +$200!

For more information on the risk-reward ratio, check out this link.

Develop trading strategies

Do not enter into trades without strategies. Whether they are long-term strategies and you have performed enough research on a company (fundamental analysis), or they are short-term strategies and you have meticulously evaluated a company's chart patterns (technical analysis), it is essential that you have a strategy in our bag. One of the most common occurrences in the stock market is a person pursuing a stock tip from their 'pal at work' and not evaluating the stock themselves and, subsequently, losing money (yes, it does happen quite often!).

Record your trades

Keep records of your trades. If your broker does not keep records of your trades (which they must), then you should meticulously record them using Excel or a similar spreadsheet program.

By doing this, it becomes easier to scan over your past deals, discover what you have been doing right and what you have been going wrong. It is a key step in analyzing your trades which will help you improve as a stock market trader over time.

Use stop losses!

This is the last golden rule but the most important rule to investing! Stop losses aid you limit your losses and significantly lessen the risks involved in stock market trading.

A popular stock market quote is: "Poor traders let their losses run and cut their profits short; good traders cut their losses short and let their profits run". Stop losses enable you to limit your losses, which means, if you use them you are already halfway to becoming an excellent trader! All you need to do after that is allow your profits to run!

Check out more for examples and more reasons to use of stop losses.

Are you ready to apply the 5 golden rules to trading stocks? Try your hand at them with a free stock market practice account or if you are motivated enough, open up a brokerage account!

Risk-reward ratio

The risk-reward ratio is a fundamental component to day and to swing traders' strategies. Together with technical analysis strategies, it can provide regular, consistent earnings.

The risk-reward ratio can be applied to the stop loss point and the target (exit) point of a trade. The risk being the point you place or set a limit for your losses (stop) and the reward being the point at which you limit your trade (close).

The golden rule of risk-reward is that from each trade, your reward should be at least 3 times your risk. This means the risk-reward ratio should be at least 1:3. This is based on the concept that if only 33% of your trades earn, then you will still gain a profit.

To illustrate:

  • Risk [1] $100 : Reward [3] $300 – trade loses – $100
  • Risk [1] $100 : Reward [3] $300 – trade wins – $300
  • Risk [1] $100 : Reward [3] $300 – trade loses – $100

This means in 3 trades, only 33% (1 out of 3) is successful; but $100 final profit is still achieved!

Ok, this is just an elementary example; but the theory works. This is a primary tool in any trading strategy for it means you need not be successful at all times and you still make a profit! If you trade regularly or desire to trade regularly and do not know about the risk-reward ratio, then I recommend you look at some stock market courses to enhance or make your own strategies.

If you reside in the UK, Knowledge to Action conducts a free seminar on stock market fundamental and discusses the risk-reward ratio more fully. Of course, they will not give away all their secrets for free; but having attended the course, I highly recommend that you go and attend the "free taste" seminar.