You’ve probably been investing for some time, especially if you’re enrolled in your company’s 401(k). A 401(k) can make investing fairly straightforward: contributions can be automatic and employers often match part of your contribution.
But if you’ve ever wanted to invest beyond your 401(k) and try your hand at buying and selling stocks, learning how to trade stocks online can be more challenging.
There are plenty of ways to trade individual stocks, whether you’d like to trade stocks in an IRA (individual retirement account) or an after-tax account, which is typically a non-retirement account. If you’re ready to start learning how to trade stocks, here are five steps to get you started.
1. Know Your Stock and Stock-Alternatives
Stocks, which are shares of ownership in a company, generally come in two varieties, common and preferred. When most people talk about buying and selling stocks, they usually mean common stock.
Common stockholders have voting rights and access to dividends, the disbursement of some of the company’s profit.
However, in a company’s bankruptcy and liquidation, common stockholders get paid last among bondholders, creditors and preferred stockholders.
With preferred stocks, owners can claim assets in a liquidation. They may or may not have voting rights, but they get to participate more fully in company profits because their dividends are set perpetually. Unlike common stock, however, preferred stocks can be “called” by the company, which means it can buy back those shares at any time and usually at a premium price.
Most common stocks traded on the major markets can be priced anywhere from a few dollars a share to six figures, and those high-dollar stocks can prevent many investors from buying them. That can also make diversifying your portfolio difficult.
Diversification means holding a variety of stocks to minimize risk, so when one stock loses value, other stocks may retain or gain value. If you only owned one stock, or even one kind of stock, you might lose all your investment if the company fails.
A widely popular stock alternative are exchange-traded funds, or ETFs. They’re similar to mutual funds because they pool many stocks into one fund—an inherent way to ensure diversification. Generally, ETFs track a market index, like the Standard & Poor’s 500 or Dow Jones Industrial Average, by pooling stocks that make up that index.
ETFs are easy to buy and sell on the open market, just like stocks. Investors like them because they’re relatively inexpensive, they generally track the general market, and they offer diversification with one-stop shopping.
2. Learn to Trade by Educating Yourself and Practicing
Like any endeavor, it helps to spend time learning about the nuances of stock trading: How to analyze company financials, how to judge whether a particular company’s stock is a good investment, and where to find trustworthy daily news on the companies you follow.
Each public company is required by the government to disclose its performance through regular financial reports. As you learn how to trade stocks online, you’ll mainly be looking for a company’s balance sheet, income statement, and the cash flow statement.
It’s also a good idea to look at each company’s retained earnings statement and its shareholders’ equity. Between mastering those reports, the ratios, and the investment nomenclature, it can be a daunting task for beginning investors to get up to speed at first. However, it’s worth the time and effort when buying and selling stocks. Use a good online glossary of terms or investors’ stock ratio cheat sheet to understand key analytical techniques.
Before you actually invest, you may want to try out some stock market simulator “>stock market simulator games. They’re a fun way to see if your stock picking is on the mark or needs more work. Finally, keep your eye on some of the more widely respected financial news sources. MarketWatch , The Wall Street Journal , CNBC , and Bloomberg are just some of the more common and reliable sites.
3. Find Good Resources to Research Companies
Many companies offer stock market research you can use for your analysis. Some sites offer its information for free, but sites that offer deep fundamental and technical analysis, such as Morningstar , charge a subscription fee. With that fee, you also get analysis reports, company profiles, and market research from experts.
4. Set Reasonable Goals and Budgets
What is stock trading except a way to build income or supplemental income over time? But how much do you want to save? It pays to think about why you’re investing. Is it to supplement your retirement or to buy a second home? Are you saving for your kid’s college education? Whatever the reason, write down your goals and how much you want to end up with.
As you move toward your goals, decide how much cash you plan to devote to buying and selling stocks.
How frequently do you plan to invest? How much can you afford to invest above and beyond your other expenses and savings?
5. Make Smart Investment Decisions and Keep Calm
As an investor, it’s important to keep a level head. If you’ve made good decisions on the stocks you’ve picked, and you’ve diversified your portfolio, then you should feel confident weathering the market storms that surely will come.
There have been more than 30 bear markets since 1900. In those years, the value of all stocks dropped 20% or more . In the most recent recession that started in 2007, the market sank 57% before rebounding almost two years later.
Many investors panicked, selling at a loss and losing much of their investment. That’s why it’s so important to keep calm and determine if carrying on is the best option for you.
If you’re ready to start buying and selling stocks, consider a SoFi Invest® account, where you’ll find complimentary advice and other benefits that can help your overall financial well being.
External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . The umbrella term “SoFi Invest” refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.