Welcome to the ultimate beginners guide on how to buy stocks. Below you can find the necessary steps to follow in order to get started:
To get your appetite started, here’s what would have happened if you would have invested $2,000 evenly in 2 different stocks:
- If you would have invested $1,000 in Amazon stocks in the year 2005 at $42 each, right now your investment of 23 shares would be worth around $80,000.
- If you would have invested $1,000 in Apple shares in the year 2008 at $3.5 each, right now your investment of 8,000 shares (quantity of shares increased due to stock splits, which will be explained later on during our guide) would be worth around $1,228,000.
If this is not convincing enough, we don’t know what else can be. The stock market is a vehicle to create wealth for the patient man. If you didn’t have the time to get involved, then it’s time to make it happen, you’re never too late.
If you want to make money in stocks, you need to do your homework. There is no way around this. You must learn the purpose behind stocks, what moves their prices, how to deal with the risks associated with investing or trading and many more things that will train your stock picking eye to detect valuable opportunities.
This guide will open your eyes to the reality of the stock market and ensure that you are able to judge and make decisions on your own without having to rely on anyone else’s logic.
If you read till the end, you’ll open yourself to a whole world of profit generating opportunities where you can finally get more value out of your own money and build wealth.
No one ever got rich through an APY of 0.5% on a savings account, rest assured of that.
Here are the required tools for this guide:
For the sake of simplicity, we recommend the following:
If you’re new to trading and you want simplicity in your platforms, here are the best choices:
- eToro is the best choice for UK, Europe, Australia and Asian countries investors
- Robinhood is the best choice for United States investors
Please avoid doing the process of opening a trading account, studying charts and learning about these brokers on a mobile device. Nothing is better than grabbing a nice cold Coca-cola and sitting on a desktop computer to take notes and get familiar with a platform.
Once you’re familiar with everything you can download the apps and go mobile.
So, let’s dive in!
Step 1: Set a Budget
Defining your budget will allow you understand if buying stocks is meant for you at this current stage of life or not, so let’s start with a simple question:
Can you really afford to buy stocks?
The answer to this question can only come from within yourself as sadly we don’t have the ability to help you unless we know your current income and savings. What we can do is giving you a good example:
- Tom, a 42 years old father of 3 has a monthly income of $2,500. His current living expenses are $2,350. Tom’s savings account has $2,500 and he has no one else to rely on (no parents, siblings or anyone to give him a hand if he’s stuck). Can Tom afford to buy stocks?
No he cannot and he definitely shouldn’t. Anyone that tells Tom that he can generate a secondary income through the stock market and climb out of his situation through buying stocks should burn in hell.
Tom hasn’t got the ability to hold losing stocks patiently or ride the crazy waves of a volatile market. If Tom loses his Job and it’s not entitled to some unemployment benefit, Tom will end up homeless. Bottom line, no stocks for Tom.
What is the key to being able to afford buying stocks? Well, having a backup! For example:
- Joseph, a 60 year old retired teacher with $100,000 in savings and a monthly pension of $2,000
- Mary, a 45 year old high school teacher with $20,000 in savings and a monthly income of $3,000
- Mark, an 18 years old kid with a monthly income of $800, no savings and a wonderful family in a great financial situation that can help him out if he goes down. Being young is one of the best times to get started, especially if your family has got your back.
See the similarities? All the above people are able to afford making mistakes in life. If you can’t afford them, don’t invest a single cent in the financial markets and focus on making money, getting a job, opening an online business, etc. The time for stocks will come later on.
The importance of being able to afford buying stocks will be extremely noticeable in the psychological aspect as soon as you enter a situation where you need money to live and you realise that you can’t hold your stocks because you need to pay rent.
Both trading or investing are endeavours where only the ones who can afford patience, win.
Now, assuming that you are able to afford investing in stocks, let’s move on to the next question:
How much should you invest in stocks?
To decide how much to invest in stocks you need to have clear two things:
- What are your expected returns?
- What is your risk tolerance?
Let’s start with an example of expected returns:
- Let’s imagine that a stock has a proven track record of generating 10% yearly returns
- If you wanted to generate $1,000 in profits, you wouldn’t be able to do so investing a one time sum of $10
- For a $1,000 return, you’d need to have invested $10,000
A very important point to note is that past performance is not an indicator of future performance. Just because a particular stock has maintained a 10% yearly return it doesn’t mean that it’s bound to do so, maybe the next year it does 170%, 50% or -50%, remember that anything can happen in the stock market and this leads us to the next point, risk tolerance.
- If you’ve decided to use $10,000 to buy stocks, are you able to hold peacefully while watching a 50% loss on your portfolio?
If you’re not able to risk those $10,000 then your risk tolerance is not at that level and you need to find a comfortable level for yourself.
In the stock market it’s not likely to see a big company like Apple generating a 50% loss but you never know what can happen in the world and you must always be prepared to assume worst case scenarios. This will allow you to patiently ride panic waves or uncertain events and come out winning.
The key takeaways from this step are:
- Make yourself sure that you can actually afford buying stocks by analyzing your financial situation and ensuring you’ve got a steady income and 6 months of living expenses worth of savings as your bare minimum or some form of strong financial backup
- Define expected returns and risk tolerance using the numbers obtained from your own personal financial analysis. You need to know how much money you want to make and how much you can afford to risk.
Step 2: Define your strategy (Trading Vs. investing)
Now that we’ve established our affordability to buy stocks, our expected returns and our risk tolerance, we need to define how we are planning to approach the financial markets.
There are two ways to buy stocks:
- Trading them (buying and selling in short periods of time)
- Investing in them (buying and holding for long periods of time)
Let’s discuss both of them.
If you’ve got time availability, a very high risk tolerance and a desire to speed up the potential returns process, trading might be for you.
Trading consists in frequently buying and selling assets with the expectation to profit in short periods of time. There are several styles of trading such as:
- Scalping: Opening and closing trades in extremely short periods of time such as seconds or minutes
- Day Trading: Opening and closing trades within the same trading day
- Swing Trading: Opening and closing trades in periods of days to weeks
- Position Trading: Opening and closing positions in the range of months
Let’s start right away by telling you that scalping and day trading are the equivalent of hardcore gambling on steroids, both are dangerous techniques for beginners, intermediate or sometimes even advanced traders.
The best styles for beginners should be Swing trading or Position trading. You won’t be stressed looking at your trading platform every 10 seconds and you’ll be able to enjoy life, which in the end is the main objective of making money.
When comparing trading vs. investing, there is a clear winner for the average person and it’s none other than investing.
Investing in Stocks
Investing in stocks it’s the ultimate long-term play. It’s as simple as throwing money into companies you like and holding your stocks for years.
There are several ways to invest in stocks:
- If you’ve got plenty of funds available you can enter the market in big numbers
- If you’re doing it from a monthly paycheck you can invest a particular amount every month and work your way up
When it comes to investing, nothing is too little or too much. What matters is that if you made the decision to invest, you can create a plan according to your financial situation and work your way up to a certain long-term goal.
This may sound very funny, but in reality the stock market has had only one direction for the past 50 years:
There can be crashes, bad events, companies that go broke, scams, etc but in the end, the overall direction of the market is “up” and it’s never too late to get involved and learn the art of savvy investing.
The key takeaways from this step are:
- Choose your approach (either trading or investing) as they will determine the amount of time you need to dedicate to your stock buying endeavors
- Being a trader involves a bigger time commitment accompanied by higher risks and rewards
- Being an investor requires patience and dedication over long periods of time
So far, we’ve determined our budget, expected returns, risk tolerance and our buying strategy. This leaves us standing in a solid position for what comes next which is understanding the basics of the stock market itself. By now all these answers must be written down on paper and you should have something like this:
- My monthly income: $2,500
- My savings: $30,000 (12 months of living)
- My expected returns: $1,000 in my first year
- My risk tolerance: $10,000 without affecting my life
- My strategy: Long term investing as I’m not very well experienced and i don’t want to engage in too much risk or time consumption
Step 3: Learn the basics of stocks
Now that you’re well set and prepared, let’s get started with the basics of stocks.
To be truly good at something, you need to understand it from its roots. You can’t simply open a brokerage account and start throwing money in some stock because it sounds nice, you need to understand everything about what you’re getting yourself into, so let’s do the following: if you’re able to correctly answer the below questions, you can skip this step, if not, read on!
- What are stocks or shares?
- Why do companies issue stocks?
- What is a stock exchange?
- What moves stock prices?
- What are dividends?
- What is the earnings season?
- What is a stock split?
- What is a reverse stock split?
Let’s analyse briefly each one of these questions, they will serve as your foundation for analysis, stock picking and portfolio monitoring.
What are stocks?
In simple words, a stock is a little piece of ownership in a company. A share is nothing more than a unit of stock.
A company is a legal entity, meaning that it can own things, buy, sell or interact with the world just like a person would (under different circumstances of course). A company issues shares which serve as certificates that entitle the holder to various types of benefits such as:
- Voting on decisions
When you own shares in a company, it doesn’t mean you own the company. It means you own shares which give you certain rights, benefits or obligations.
Why do companies issue stocks?
Companies issue stocks to sell them and raise capital to expand their operations, develop their products, etc. In simple words, the answer is: money.
The only purpose why a company would make the decision to issue stocks and sell them to the public is to raise more capital for the business.
Investors buy stocks with the expectation that prices increase and they can profit from a healthy growing stock and also with the expectation to receive dividends from the company’s profits.
What is a stock exchange?
A stock exchange is a marketplace where buyers and sellers coincide to exchange stocks or other types of financial assets. Exchanges can be electronic platforms, physical locations or a mixture of both.
Each country has its own exchange or several of them, for example:
- United states - NYSE (New York Stock Exchange), NASDAQ (National Association of Securities Dealers Automated Quotations)
- Germany - FSE (Frankfurt stock exchange)
What moves stock prices?
Stock prices fluctuate thanks to the natural forces of supply and demand. Let’s summarise both concepts:
- Law of supply: The higher the price, the higher the quantity supplied. The lower the price, the lower the quantity supplied.
In plain english, this means that at a higher price, people are more willing to sell stocks and at a lower price, people are less willing to sell their stocks.
- Law of demand: The lower the price the higher the quantity demanded. The higher the price, the lower the quantity demanded.
In plain english, this means that at a lower price people are more willing to buy stocks and at a higher price people are less willing to buy stocks.
Both forces act naturally and constantly clash with each other giving birth to price determination. So ultimately we can say that people are the ones responsible for moving prices by the constant changing of their buying and selling patterns.
Understanding how stock prices are determined is extremely important as it will allow you to reach the following conclusion:
- A stock can be issued by a completely worthless garbage company with no future potential, but if everyone falls in love with it and starts buying, they will move prices up and abracadabra! You’ll see a worthless share trading at extremely high prices.
Remember, supply and demand are the natural forces of the market that determine prices and ultimately market participants are the ones responsible for it.
What are dividends?
Dividends are a contribution made by a company to its shareholders as a reward for the stocks they own. For example:
- A company called TTBCOM generated net profits of $20
- The company decides to keep $10 for continuing business as usual
- The company takes the remaining $10 and spreads it across their shareholders as a dividend payment
- If TTBCOM has 2 shareholders and the first one owns 20% of the shares and the second one owns 80%, then the first one will receive a dividend of $2 and the second one a dividend of $8
This was an extremely simplified example, but it makes the case. One of the most powerful reasons that investors want to buy shares is to get paid dividends on a regular basis. Most companies paid dividends every quarter (in the U.S) or yearly (in Europe), others can choose different schedules.
What is the earnings season?
The earnings season is a repetitive event that happens every quarter during a regular calendar year where publicly traded companies announce their earnings per share.
Earnings per share (EPS) are not the same as dividends per share. EPS is a measure of the total net profits of a company per stock. It’s used as a health indicator of the profitability of a company.
During the earnings seasons you’ll watch stock prices fluctuate dramatically in most cases depending on the outcome of the EPS.
What is a stock split?
When the price of a stock becomes relatively “high” according to the optics of the company itself, companies can do something called “stock split” where they recall shares and redistribute them in a new even proportion. For example:
- A 2 for 1 stock split means that if you had 1 share of $100 then you would end up receiving 2 new shares of $50
Stock splits are often used as a psychological tactic to ensure a stock is not so expensive and allows smaller investors to get in at a lower price point.
What is a reverse stock split?
When the price of a stock becomes relatively “cheap” according to the optics of the company itself, they can do something called “reverse stock split” where they recall shares and redistribute them in a new even proportion, for example:
- A 1 for 10 reverse stock split means that if you had 10 shares worth $10 each you would end up receiving 1 share worth $100
Reverse stock splits are usually not a positive move as they’re mostly done to falling stocks to give a better image of the company or to prevent being delisted from a stock exchange (which has a minimum stock price requirement).
Now that you’re familiar with the basic concepts and the fundamentals of stocks, we can move on to how to pick a stock.
Notice that so far we haven’t even touched a trading platform, we’re still preparing the right foundation before that. In the end, trading platforms are just interfaces with buy and sell buttons that allow you to perform transactions, the real complexity of trading or investing is in the decision making process prior to any execution.
Step 4: Learn how to pick stocks
There are thousands of sophisticated ways to pick stocks using metrics like: Price-to-earnings ratio, dividend yield, discounted cash flow modeling, price-to-sales ratio, technical analysis indicators, etc. For the sake of simplicity, we’ll focus on the most valuable and simple methods for a beginners guide, don’t bother overcomplicating yourself with advanced techniques and keep it simple.
Picking stocks for investors
Let’s go back to price determination and ask ourselves this question:
- What would make everyone want to buy the shares of a particular company?
The answers could be:
- Expected high performance in business
- Future prospect of gaining a lot of market share in their field of business
- Beating the competition with innovation
- Because any of the answers above, results in a more valuable share
- A more profitable and successful business that also has a bright future will tend to have a well appreciated share that continues to grow and pays healthy dividends
This is the key to everything. You need to understand the business that you’re investing in so you can judge the future potential of a company or not.
Let’s use a very cool example with two companies: Netflix and Blockbuster.
Remember in the early 2000’s when we used to drive to the Blockbuster shop and rent a movie, take it with us, watch it and then drive back to return it?
Well, Blockbuster was a very successful company which everyone loved, the issue is that they didn’t care about what was happening around them and that the internet revolution was on the verge of a major breakout.
Enter Netflix - the streaming giant.
Netflix saw a huge gap in the market at that time. They also created a DVD rental service that operated online. When people wanted to watch a movie they would rent it through their website and receive it via mail in the comfort of their homes. After watching the movie, they would post it back to Netflix.
This was a breakthrough for the current industry, it allowed hundreds of thousands of customers without access to a DVD rental nearby to finally get their hands on the movies they wanted.
As time passed Netflix saw an opportunity to get into the streaming business. Instead of having people drive to a shop or perform online orders to rent physical DVDs to watch movies, why not offer them a rental service over the internet where they have access to a massive library of movies at the cost of a tiny monthly subscription?
And so they did! Netflix started offering their services and growing slowly. For your information, here’s how the share price of Netflix looks like since 2002 (when they first became a publicly traded company):
In July 2009, a Netflix share was worth around $6. Currently at the moment of writing this article, a single Netflix share is worth $582. Can you believe it? Well, I can!
They went into business with a clever idea, a well structured business model and a plan to kill their competitors and so they did.
Thanks to Netflix, you don’t need to wait one week for each episode of your favourite series to be aired out, or deal with satellite TV providers or driving to a shop to rent movies. Netflix saw a gap in the market, a bright future and took a strong bet on it.
Now, here comes a little fact, but don’t let your head explode:
- If you would have invested $1,000 in Netflix shares in the year 2009 at a price of $6 you would have made $679,000. Not bad, right?
Just to clarify, Netflix so far had two different stock splits:
- One in 2004 with a 2:1 ratio
- One in 2015 with a 7:1 ratio
In our previous example we bought in 2009, meaning that $1,000 landed us approximately 166 shares. Then by holding them they became 1,166 shares (due to the 7:1 stock split). So multiplying our brand new 1,166 shares by the current trading price equals a total investment worth of $679,000.
A fun fact worth mentioning is that nowadays Blockbuster ceased to exist, they filed for bankruptcy in 2010. They had the opportunity to acquire Netflix for $50 million or to partner with them, but Blockbuster’s CEO laughed at them. Not so funny now I think.
This example should land you a crystal clear understanding of the value of businesses. Investing in stocks is nothing more than having a clear analytical mind and going through the process of analysing a business to see how it could potentially perform in the future based on their current situation and plans.
All companies that become publicly traded (meaning that their shares can be found in stock exchanges) are under the obligation to file a lot of publicly available information such as annual reports, plans, etc.
As an investor, you can search in google for a particular company and find a lot of interesting information that can serve you to analyse what potential fate awaits them.
A good business is meant to grow, expand and beat their competitors with clever strategies. The share price of such a business will be a clear reflection of the decisions made by a company.
Bear in mind that any bad news that signals a loss of confidence in a company’s management will also reflect strongly on its stock price.
As an investor you’re now prepared to understand and judge that if a company has:
- Amazing vision
- Great products
- Solid business plan
- Advantage over its competitors
- Big Investors
Then this company is on the path to success and so are its shareholders.
On the other hand, if a company hasn’t got a good score on any of the above points, then it’s likely that its share price won’t perform well at all.
Also remember that even a good company can go down by big mistakes from management, lack of adaptation to current market competitiveness or negative news that deeply affect profitability.
Your true mission as an investor is determining if any particular set of news or events is permanently damaging a company or not. For example:
- News that a natural disaster destroyed Apple’s Iphone factories in China is a short term bad situation as Apple won’t meet their expected sales targets, but it doesn’t mean that their business suddenly became bad, it means they had a setback.
- News that a company’s CEO stole funds and funded terrorist groups is clearly a bad signal of poor management, secrets and bad practises. This can permanently destroy the image of a company and cause it to go to bankruptcy.
Determining both fundamentals and the lasting impact of news or events will allow you to choose effectively good stocks to keep in your portfolio.
Research process for investors
Now that you know the basic analytical steps to follow for picking a stock, let’s get to the practical side of things:
- Open our stock screener and take a look at the top right corner, you’ll find a dropdown menu that allows you to change your filter’s parameters, for example: order them by highest paying dividend, top gainers, losers, etc.
- Each stock will be referenced on the left side using something called the “ticker symbol” which is nothing more than a unique code used to efficiently refer to a stock. To find tesla in any exchange or trading platform, you search is using its ticker symbol which is “TSLA”
- Start awakening your curiosity and search on google for one of the symbols, for example: as I’m writing this guide, I randomly selected a symbol: “SEB”
The search result was that “SEB” is the ticker for Seaboard Corporation, which according to Reuters is:
“An agribusiness and transportation company. The Company is primarily engaged in hog production, pork processing and ocean transportation. Its divisions include Pork, Commodity Trading and Milling, Marine, Sugar and Alcohol, Power, Turkey and Other.”
So far, it’s the first time I hear about this stock, but it sounds cool and interesting as it allows me to write the guide from your own perspective. I know nothing about agribusiness or transport stocks!
Continuing our process:
- Open your price charts and in the top left corner enter the symbol “SEB” (or whichever one you were researching about)
After studying the price carefully, it turns out that this stock was worth around $200 in the year 2000 and now it’s worth $4,168! Doesn’t seem like they’re playing around, the pork and transport business must be paying off well.
- Now open Yahoo finance and enter “SEB” (or whichever stock you chose) in the search box located at the top of the page.
As you can see, Seaboard corporation is not flowing in action like tech companies, there are not many news, yet one of them caught my attention:
How Many Seaboard Corporation (NYSEMKT:SEB) Shares Did Insiders Buy, In The Last Year?
That sounds spicy and here’s why: Insiders usually refer to people with access to privileged information about a company, yet in the publicly traded arena everything needs to be disclosed and this means that when any relevant person working in that company wants to buy or sell shares, it must be disclosed.
This article explained that one of its lead Independent Directors bought $53,000 worth of shares at $3,525 which was way above the current trading price of that time ($3,125).
This clearly means that someone knows, something could happen and they are very optimistic on the stock’s fate.
The date of this piece of news was 11th of January 2021 and well, we can see the stock trading at $4,168.
Investigate each news and try to give them meaning. In the case of Seaboard, it’s dry land. So it’s time to move on to the next step as there is not much news available.
- Start researching the company, google it’s name, visit their website and search for their investor relations page.
The first thing that came to my attention is their history page. This company has been around since the year 1918!! I didn’t imagine they had so much history. Take a look:
Seaboard Corporation’s history
After reading their timeline in the most recent years a lot of amazing things are coming to my attention, here are a few:
- Acquired 100% Of ContiLatin Del Peru S.A, An Importer And Trader Of Grains, In Peru
- Acquired An Interest In Les Grands Moulins De Mauritanie (GMM), A Milling And Pasta Business In Nouakchott, Mauritania
- Seaboard Acquired Substantially All Of Groupe Mimran Which Operates Flour And Feed Milling Businesses In Ivory Coast And Senegal And A Cereal Trading Business In Monaco.
- Seaboard Acquired A 50% Non-Controlling Interest In A Flour Milling Business Located In Gambia.
- Seaboard Acquired A 50% Non-Controlling Interest In A Flour Production Business In Brazil.
Are you starting to see the connections?
This company is quite a big operation and clearly their business is pork, transportation and agricultural commodities. They are also expanding into emerging markets by acquiring controlling interests, which means they are investing in their own industry as well.
Now here comes the golden analysis: Based on their operations, this company depends heavily on the price of agricultural commodities, here’s why:
- After googling what do porks eat, the results are “corn” and “soybeans” which are traded commodities
- After googling what is flour made off, the result is “wheat” which is another traded commodity
- Thinking it through, they also depend on weather conditions to transport merchandise and countries policies as well
Now remember, any major events that affect any of these commodities or logistic situations will also affect Seaboard’s stock price. We’ll come to a conclusion very shortly, now, let’s dive into the last piece of the puzzle:
In here you’ll find all sorts of interesting pieces of data about their company, for example:
- Mandatory reports filed to the SEC (Securities and exchange commission in the U.S)
- List of companies they own
- Investor presentations
This will only continue providing you new pieces of information to keep analyzing what their plans, their achievements, their current standing, etc.
By now, your piece of paper should look quite full of interesting facts about the stock itself. Now it's the time to think about a few interesting points and make your conclusions:
- If the price of corn and soybeans rise, feeding pigs will become more expensive which will cause the prices of pork to climb and reduce the demand for them. This could have a negative impact on Seaboard stock’s price.
Now you need to think about the potential causes that could alter the price of these agricultural commodities. If everyone is talking in the news about a new plague that destroys soybeans or corn, then you know what can happen in the long term to the stock of Seaboard.
Let’s continue our analysis:
- If new data appears saying that all cows and chickens on earth will die, we know that the remaining choices for meat eaters are usually pork or lamb. Such news can drive the demand for pork all the way up to the sky and this is definitely amazing news for a company like Seaboard.
- If the vegetarian trend continues and ends up dominating the world, where will companies that produce pork end up?
By now, you should definitely be in the loop about how to research and pick a stock. What we’re doing is literally gathering information and using it to think about what’s happening and what could happen in the future.
Based on your research, you can then add each stock to your favourites list and continue to repeat the process until you’ve gathered several stocks.
Picking stocks for traders
As a trader, you’re not bound to be in love with a company’s fundamentals. While it definitely helps to be trading a stock with solid ones, it’s not a requirement.
Traders have thousands of strategies, but the ones that are best suited for a beginner to learn are: News trading strategies and Price action.
Both strategies are great for picking stocks that are bound to have a potentially strong movement, let’s go over the basics:
As we mentioned in our quick review of the basic concepts of stocks, people are the ultimate driver of prices as their actions will be translated into buying or selling. Now think about this for a second:
- Breaking news! The CEO of super company “X” went to jail for fraud, he spent the money of the company on buying yachts
How do you think such news can affect the price of a stock? Well, clearly these types of news will have a negative impact on the price of stocks as they clearly signal bad stuff going on in a company.
As a trader these types of events become opportunities as volatility is meant to come for sure to the price of that stock.
The question lies in determining if the bad news is just a temporary setback that will trigger a healthy reduction in the stock’s price to buy it cheaper or they are a disaster signal.
Judging correctly through clever analysis (as explained before in the stock picking process for investors, will get you closer to the truth).
Research process for traders
Now it’s time to get into the practical side of things and also explore the price action method to analyse and pick stocks.
Here’s what you’ll need to do:
Let’s get started:
- The first thing you want to do is find stocks that are making headlines for some reason, for example: Apple launches new iphone, SpaceX builds new rocket, etc.
- If there are no stocks on the headlines of major financial news (which would be extremely rare) then you can proceed to open the stock screener and play with the filters at the top right corner to find the top gaining or losing stocks of the day.
- Then proceed to open your price charts and analyze each stock using the daily timeframe (it’s recommended that you read our technical analysis for beginners guide and our price action guide).
After having read both guides you’ll be 100% clear on the concepts of support and resistance, but in case you didn’t, here’s a brief explanation on price action.
Price action is the study of how an asset’s price behaves over time. It means also using a lot of past data to try and forecast what can happen in the future. Overall it means that you’ll try to trade a stock only by looking at its price chart.
A good example of this would be the following:
- For the past 2 years, every time the stock of company “X” reaches $30, it bounces back up
- For the past 2 years, every time the stock of company “X” reaches $100, it drops dramatically.
As simple as that, you’ve just detected support and resistance levels.
The strategy of a price action stock trade would be trying to find key psychological support and resistance levels of a stock and take advantage of them.
The main objective is buying at the support levels and selling at the resistance levels, both are nothing more than psychological key points where high concentrations of supply or demand lie.
Your mission during the research stage would be gathering information on several stocks and writing down what are their key support and resistance levels.
Step 5: Create a portfolio of stocks you like
To create a portfolio, we’ll need to use all the techniques mentioned above to filter several stocks depending on our profile, either as investors or traders.
To create a portfolio of stocks, there is one big requirement to keep in mind: Diversification.
As an Investor, you don’t want to put all eggs in one basket. Just because you love the gold mining industry it doesn’t mean your portfolio should only be made of stocks belonging to gold mining companies, otherwise, what would happen if suddenly gold is deemed as a worthless metal?
- Your shares will be worth nothing as all your risk and exposure was in a single particular industry
See the importance of diversification? Well, if you do, then it’s time to build a well diversified portfolio, for example:
The idea is to create a portfolio where you find many companies you like in several industries and then expose yourself in a healthy proportion to all of them. That way you maximise your chances of generating profits and minimize your exposure to unforeseen events that can affect a whole industry.
Use the analysis techniques we explained before to gather as much information as possible and slowly start building your list.
As a trader you’re bound to stay alert of major news or events happening in the markets and also to look at thousands of charts to judge price action.
The more, the better.
This means that you need to dedicate time to constantly scan and get familiar with the behaviour of particular stocks in terms of price and news.
That way the key terms “support” and “resistance” will be dancing in your mind and you’ll have an efficient measure of what is “cheap” or “expensive”
Step 6: Open a brokerage account
Opening a brokerage account is quite a simple and straightforward process. In pretty much all cases you’ll require some basic documents such as a valid identification (id, passport, etc) and a proof of residence (utility bills, banking statements, etc). In other cases you may be required to present a proof of source of funds (usually when you’re depositing large amounts of money into your account).
As mentioned before, here are the best choices for beginners (you can click on the name’s link to directly visit their websites):
eToro - (For U.K, Europe and Asia investors)
Robinhood - (For United States investors)
Step 7: Buy your stocks
By now, you’ve learned everything you need to know about stocks, picking them, analysing them from different perspectives and more. Now the remaining part is figuring out how to buy and not end up getting confused with trading platform terminology.
When you want to buy stocks using any trading platform or mobile app, it gets a little bit more tricky than just clicking the buy button as there are different types of trading orders available to meet the demands of each market participant.
If you’ve got the time, read our full trading orders guides to get familiar with them, if you don’t have the time, we’ll give you a brief summary of the most important order types to buy stocks.
When you select a market order and click the buy button, it means that you’ll buy your stocks at whatever price is available in the orderbook of your broker or the exchange.
To illustrate this in a better way, imagine that right now you want to buy 10 Apple shares because they’re trading at $50 and you think it’s a good price.
If right now you click the buy button, many things can happen, for example:
- You receive 10 Apple shares at $50 as there was the availability to cover your order
- You receive a few shares at $50 and maybe others at $55 because there was not enough availability of shares at the price level you wanted
Get the point? Market orders guarantee execution at the available prices. They don’t guarantee specific prices. So don’t be surprised if there are slight differences when placing your market orders and receiving your shares.
When you select a limit order, define a price and click the buy button, your trading platform receives the instruction to only get you the price you requested or a better one. For example:
Suppose you decide that Apple shares are too expensive at $50 and you’re only willing to buy at $45. You proceed to set up a limit order with your specified price and click buy, here’s what could happen:
- Apple stock’s price keeps going up and you never get to buy them
- Apple stock’s price drops and your limit order gets activated and you receive your shares at $45
Great! Now you know that you can buy your shares either at their current market price or at a specific desired price.
Timing your entry
Using everything you’ve learned before, you can arrive at very solid conclusions of when is it the best time to buy a stock, for example:
- For investors: when there is a prominent and amazing future ahead of the company you’re investing in and no potential major risks that can hurt the company’s growth
- For traders: when a stock is approaching previous support levels or when its temporarily undervalued due to the negative impact of news that are meant to pass in the short term
Step 8: Manage your portfolio
Great! By now, you have:
- Defined if you could afford to invest in stocks and how much
- Defined your strategy
- Soaked yourself in the fundamentals of the stock market
- Picked a couple stocks based on your preferences and built a portfolio
- Possibly bought shares that you liked or have open trading positions in them
There are all sorts of options at this point, for example:
- Reinvesting dividends from your stocks
- Cutting underperforming stocks where you have lost faith in the company’s future
- Investing more on a monthly basis or according to your affordability to increase your position size
What happens now, it’s completely up to you and that is the beauty behind this guide. We didn’t give you bread, we taught you how to make it, at least the basics.
Now you’re able to choose by yourself, analyse stocks and enjoy your time having interesting discussions with other people about the potential future of many businesses.
To finalise, there is one more question that needs to be answered, and it is:
When is the right time to get out?
The answer to this question depends on many factors such as if you’re profitable or in minus.
If you’re in the negative, the only reason to get out of a position is a strong logic analysis that indicates that a company has lost its ability to be profitable in the long run or will lose it, meaning that you’ve lost faith in it.
If you’re profitable, that’s where it gets tricky.
Remember the first examples we gave in the beginning of this guide about how much money you would have made if you invested $1,000?
Well, bear in mind that those examples involved 15 and 13 years of patience. The most impressive thing is that they can continue to grow and produce mind-bending returns, so the real question is:
How much money do you really need to be happy and when do you want this money to become real?