Contents
Stock Trading vs. Stock Investing
Should You Trade Stocks?
A Trader’s Guide to Stock Markets
How to Get Started Trading Stocks
How to Make Stock Trades
How Stock Charts Work
How to Analyze Trends, Support, and Resistance in Stock Charts
How to Use Technical Analysis Indicators to Analyze Stock Charts
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How to Get Started Trading Stocks
It doesn’t take much time or money to start trading stocks, and you can trade from any location that has a computer with internet access. To get started stock trading, you’ll first need to take the following steps:
- Decide which type of broker to use.
- Open a trading account.
- Set up a trading station at home.
Decide Which Type of Broker to Use
As a trader, you’ll need to decide whether to work with a discount broker or a direct-access broker.
- Consider using a discount broker: If you’re a beginning trader or if you’re experienced but plan to make 10 trades or fewer per month. This way, you’ll be able to trade but will pay less than the average monthly fee that direct-access brokers charge. The leading discount brokers include e*Trade (www.etrade.com),TD Ameritrade (www.tdameritrade.com), Fidelity (www.fidelity.com), Scottrade (www.scottrade.com), and Charles Schwab (www.schwab.com).
- Consider using a direct-access broker: If you’re an experienced trader; if you want access to the most comprehensive suite of real-time market data, charting features, and markets (including ECNs); and/or if you intend to place more than 10 trades per month. The leading direct-access brokers are TradeStation (www.tradestation.com), CyberTrader (www.cybertrader.com), MB Trading (www.mbtrading.com), and Terra Nova (www.terranovatrading.com).
Broker Fees
Before you decide on a specific broker to use, it’s essential to know the types and amounts of the fees that the broker charges.
- Discount brokers: Discount brokers typically charge a commission (fee) of $7–50 for each trade (regardless of the number of shares you trade) but charge no additional monthly fees. That means that if you plan to make five trades per month with a discount broker, you can expect to pay about $35–150 per month in commissions. Look for a broker who charges no more than $10 per trade and who offers an “active trader” package with reduced commission rates for traders who place a certain number of trades per month.
- Direct-access brokers: Direct-access brokers usually charge substantial monthly fees ($99–300) for all accounts. Typically the fee is higher for accounts that fail to meet certain trading minimums or maintain a minimum account balance. For instance, TradeStation, the leading direct-access broker, charges a $99 monthly fee on stock trading accounts, though it waives this for accounts that meet certain criteria—if your balance exceeds $1 million or if you trade more than 5,000 shares per month, for instance. In terms of fees, the main benefit of working with a direct-access broker is that they often charge commissions per share rather than per trade. For instance, TradeStation charges just $1 for 100-share trades. Since most traders trade in 100-share blocks, called round lots, a pricing structure like TradeStation’s can save you money on a per-trade basis.
Broker Bias
Many brokers have an active role in the trading of specific stocks. For instance, some brokers are also market makers in many of the stocks that their clients trade. These arrangements can lead to conflicts of interest that can harm traders, so it’s best to work with an agency-only broker. Agency-only brokers have no stake in the stocks or other investments that they help you trade. Before you choose a broker, ask whether they’re agency-only. If they aren’t, ask for a detailed breakdown of the investments in which they maintain a stake that could lead to a conflict of interest.
Real-Time Market Data
If you plan to make fewer than 10 trades per month, Level I price quotes should suffice. If you intend to trade more actively, you might consider paying for additional market data, including Level II quotes. Most direct-access brokers offer real-time data, though some traders use more robust stand-alone market data services, such as eSignal (www.esignal.com), which charges monthly fees from $85–185. You can also get real-time quotes and other market data from Yahoo! Finance for a significantly lower monthly fee.
Open a Trading Account
A brokerage account—also called a trading account—is an account through which you can buy and sell stocks and other investments. The process of setting up an account is simple: you complete a few forms and make an initial deposit of $1,000–5,000 to establish the account. Some brokers may have substantially higher initial deposit amounts for trading accounts, though these minimums are often negotiable.
Once your account is established, you can typically begin trading right away. Any commissions you incur as you trade will be deducted automatically from your account balance. If you need to replenish or add to your balance, you can do so by mailing in a check to your broker or by transferring money electronically into your account.
Margin Accounts
A margin account is a type of account that allows you to trade with borrowed money. Most brokers allow traders to borrow up to 50% of their brokerage account balance for trading on margin (with borrowed money in a margin account). Traders are often tempted to use margin because doing so opens them up to the prospect of making more money—if they had double the balance, they think, they might make double the profit. Despite this temptation, there are three reasons why you should never trade on margin:
- Interest charges: Your broker will charge you interest per day on any margin balance you maintain overnight. If you’re a day trader, interest charges likely won’t affect you, but if you’re a swing trader or a position trader, they add up quickly and cut into your returns.
- Debt from losses: Margin funds are loaned money that you’re responsible for paying back, even if you lose all or part of your margin balance as a result of trading. If you can’t pay back your broker, your trading privileges will likely be suspended, and more serious financial consequences—such as a lower credit rating—will soon follow.
- Margin calls: Strict rules govern the amount of money that you can use to trade on margin. In short, the stock positions you own not on margin must equal a certain proportion of your overall account balance. If it falls below that proportion, you’ll get a margin call, which forces you to come up with the cash to bring the balance back in line. If you don’t have the cash, your broker will sell stock from your account to make upthe difference.
Set Up a Trading Station
Traders use the term trading station to refer to the home-based computer setup they use to trade stocks. The components you’ll need for your trading station vary depending on whether you’ll be trading with a direct-access broker or a discount broker:
- Direct-access broker: A direct-access broker provides you with software that you run on your computer. Your computer will have to meet their software platform’s system requirements (the minimum system requirements that a computer needs in order to run the software effectively).
- Discount broker: If you trade with a discount broker, you’ll place your trades on the broker’s website using a standard internet browser, so no special hardware or software is required.
Components of a Typical Trading Station
There are four basic components of a typical trading station: a computer, a monitor, internet access, and a power supply. The following list provides specs for each of these components based on the standard system requirements for the trading platforms of the leading direct-access brokers.
Computer
Most DATs run on Windows PCs. If you’re using Windows, you’ll want to run Windows XP or Vista on a Pentium 4 computer with a 1GHz processor or faster. You’ll need 100MB of free hard-drive space and at least 512MB of RAM (though 1GB or more is preferable). You can buy a PC with these specs for under $500 (not including a monitor or other peripherals).
If You Have a Mac
If you’re using a traditional Mac, you can either buy a PC that runs Windows, or you can use special software, such as Microsoft Virtual PC®, that allows you to run Windows programs on your Mac. If you’re using an Intel-based Mac, you can run most Windows software right out of the box.
Monitor
Most experienced traders use several monitors arranged side-by-side, which allows them to keep an eye on market data and price charts on one or more monitors while making trades using another monitor. You don’t need a multiple-monitor setup to get started trading, but at the least you’ll want to use a flat-panel 20" LCD monitor with a resolution of 1280×1024 or higher. Monitors with these specs cost in the range of $250–400.
You’ll also need a video card (an internal device that affects the speed and quality with which your computer renders graphics) with at least 128MB of RAM that produces a resolution of 1280×1024 or higher. Such cards typically cost in the neighborhood of $50–75. (Your computer might come with an adequate video card preinstalled, so check before buying an additional card.)
Internet Access
You’ll need a reliable, “always-on” broadband internet connection, ideally from a reputable network provider. Broadband internet access typically costs about $50 per month.
Power Supply
To protect your trading station from power surges—and, equally importantly, to keep your computer and your trading software running in the event of a power failure—get an uninterruptible power supply (UPS). These both protect from power surges and provide an interim source of power, should your electricity go out. They’re sold at electronics stores, office supply stores, and online retailers for about $75–100.
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