How to Trade Stocks [2024] Stock Trading 101

Investing in stocks is often touted as one of the most efficient ways to grow your wealth. The average returns from the S&P 500 since 1970 have been anywhere from around 7% to 10% per year. These returns can really add up over time to help you build financial security. 

But if you’re new to investing, the prospect of building up your stock portfolio might seem daunting. Here’s a look at how to trade stocks for beginners and what to keep in mind as you open your first brokerage account. 

What Is Stock Trading?

A stock is an asset that represents a portion of ownership in a public company. Stocks are a very popular investment vehicle due to their potential for financial growth. 

The price of each stock fluctuates based on the number of people buying and selling the stock each day. When more investors purchase a stock, its price increases, and when investors sell a stock, its price decreases. These decisions are influenced by a number of factors, including the company’s perceived value, economic trends, and current events. 

Ideally, investors purchase stocks at a relatively low price and sell them at a profit after the price has increased significantly. Many people use long-term stock trading strategies as a way to save for retirement. However, learning how to trade stocks can also help you achieve short-term financial goals when done carefully. 

What Are the Different Types of Stock Trading?

Investors use several different types of stock trading to achieve their financial goals. Each of these trading strategies has the same end goal of selling stocks for a profit. But they each trade on different timelines and use different methods to achieve their goals. 

Scalping

Scalping is a unique short-term trading strategy in which investors hold stocks for just a few minutes or even seconds at a time. These investors strategize to take advantage of the small fluctuations in the market. 

Scalping successfully requires a deep understanding of investment strategy and an ability to think on your feet. Scalping can also come with hefty transaction fees, as investors are making so many trades throughout the day. Because of these challenges, this strategy is not appropriate for beginner investors. 

Day Trading

Day traders buy and sell stocks within the same trading day, although they hold their positions for longer than a scalper would. This allows traders to take advantage of market fluctuations but doesn’t require the same lighting-fast decision-making skills as scalping. 

This strategy still requires a very in-depth understanding of market trends, so it’s not ideal when you’re first learning how to invest in stocks. That said, many experienced professional investors rely heavily on day trading to maximize profits. 

Swing Trading

With swing trading, investors hold their positions for a short period of time ranging from a few days to a few months. The investor keeps a close eye on current events and market trends and makes trading decisions accordingly to capitalize on market fluctuations. 

Swing trading comes with fewer transaction fees than day trading or scalping, making it a more accessible strategy for many investors. This strategy is also easier to learn for beginners who are interested in short-term trading. However, it still comes with risk, which is why it’s essential for investors to research their strategies thoroughly before buying or selling. 

Position Trading

Position trading involves holding stocks for an extended period of time, often multiple years. This approach requires patience, but it’s less risky for casual investors than short-term trading strategies. This is because long-term positions aren’t necessarily affected by short-term fluctuations in the market. 

Automated Trading

Automated trading uses AI tools or programmed algorithms to make trades for you. This strategy has become very popular over the last few years as AI technology has improved. Many tools that focus on investing for beginners offer automated features to make the process less daunting. 

If you use automated trading tools, you should still research your positions on your own and adjust your stock portfolio accordingly. Stock trading is subjective, and there are times when automated tools may not align with your risk tolerance and preferences. 

How to Trade Stocks 

If you’re learning how to trade stocks for the first time, the process might feel daunting. Here’s a step-by-step breakdown to help you get started. 

Choose a Brokerage Account

In order to start trading, you’ll need a brokerage account. There are many different types of brokerage accounts on the market, and you’ll need to research them thoroughly to find an account that’s most appropriate for your trading style. 

If you’re a beginner investor focusing on long-term position trading, look for a brokerage that offers educational support and automated features to support you. With some brokerages, you can even get investment guidance from in-house financial advisors. Check out our article “What Is a Financial Advisor?” to learn more about how these professionals can help you. 

If you’re interested in short-term trading strategies like swing trading or day trading, look for a brokerage with advanced stock charts and other analysis tools. This scenario also requires a brokerage with real-time, up-to-the minute information. 

Regardless of what trading style you choose, you’ll need a brokerage with a robust online platform to streamline the investment process. Additionally, you’ll need to consider trading fees and minimums to find a brokerage that’s appropriate for your budget. 

Fund Your Account

Once you’ve chosen a brokerage, the next step is to fund your account. You’ll need funds in your account in order to trade. Most brokerages allow you to fund your account with a simple bank transfer or wire transfer. 

Most brokerages will also require you to complete an application before you can start trading. You’ll need to provide information about your employment and income as well as your investment experience and risk tolerance. This helps the brokerage provide personalized guidance. 

Research Stocks

Before you start trading, you’ll need to research the stocks you’re interested in. Consider each stock’s price history as well as the current health of the company. Learning how to read stock charts is essential for this step in the process. On top of that, look at broader market analysis and current events and consider how these factors could affect stock prices moving forward. 

Risk is a key factor to consider when learning how to trade stocks. If you have a low risk tolerance, try to stay away from stocks that are historically volatile. Diversifying your portfolio with stocks from different industries can also help you reduce your risk. You can also supplement stocks with alternative investments to diversify even further. 

Develop a Strategy

After conducting thorough research, the final step is to develop an investing strategy and make your purchases. Consider your goals for each stock purchase and decide when you’ll sell them. For example, you may decide to sell a stock when its price drops below a certain threshold, or when major changes happen in the company’s industry. 

There are a few different types of orders you can use to buy stocks through your brokerage. These include: 

• Market orders: Your brokerage buys or sells the stock at its current price. These orders are processed as quickly as possible. 
• Limit orders: Your brokerage buys the stock under a maximum price point you set, or sells the stock over a minimum price point. This gives you more control over your cash flow. However, there’s no guarantee the order will go through, as the stock price could change. 
• Stop orders: A stop order tells your brokerage to buy or sell a stock once it reaches a specific price. 

Who Should Trade Stocks?

Anyone can benefit from investing in the stock market. However, not every trading strategy is right for every investor. 

A buy-and-hold investment strategy is the most appropriate option for your average investor. There’s less risk involved when holding investments for the long term, and you’ll have more time to develop and execute your strategy. Most beginner investment tools are also designed around this strategy. 

Short-term trading strategies like day trading or swing trading require an extensive amount of time and effort. Many people who use these strategies consider trading their full-time job. If you are interested in short-term trading, you’ll need to educate yourself thoroughly on key financial concepts and market patterns. You’ll also need a considerable amount of capital to get started. 

Commonly Asked Questions About How to Trade Stocks

Should a Beginning Investor Trade Stocks? 

Stocks are one of the most popular investment choices for beginners. If you’re just getting started, focus on a long-term investment strategy to minimize risk. Additionally, look for brokerages that offer educational materials and professional support to guide you.  

Best Way to Trade Stocks for Beginners? 

If you’re learning how to trade stocks for the first time, you have plenty of options. These include: 

• Traditional brokerage: Select an option that offers plenty of beginner-friendly tools and professional investment support. 
• Robo-advisor: These tools use automated algorithms to manage your stock portfolio. The algorithm makes decisions based on your risk tolerance and financial goals. 
• Investment apps: Mobile apps like Robinhood and Webull have similar features to a traditional brokerage but use a beginner-friendly interface to make the process more accessible. Check out our Robinhood review to learn more. 

Trading Stocks With Little Money? 

If you’re interested in learning how to trade stocks but don’t have much money to start with, look for a brokerage with no minimum purchase requirements and the option to buy fractional stocks. This will allow you to start building your portfolio regardless of your budget. 

Should I Trade Popular Reddit Stocks? 

The Reddit investing community is full of posts about trendy new stock picks. However, Reddit stocks can be very volatile and often drop quickly in price after the hype dies down. Instead of trading Reddit stocks, focus on long-term position trading with companies that are more stable.