How to Bet on the Stock Market
Trading stock can be risky, but you can minimize that risk by learning as much as possible about trading and market analysis and by using conservative strategies.
Nevertheless, the North American Securities Administrators Association (NASAA) determined in a study that only 11.5 percent of day traders make reasonable and reliable profits.
How to Bet on the Stock Market
Learn about market behavior, financial and fundamental analysis, and technical analysis of trading charts. The more you know, the better your decisions will be, particularly in a fast-moving market. The North American Securities Administrators Association (NASAA) has a good online course in investing basics, and Investopedia has an introduction to technical analysis.
Practice your trading strategies using an online fantasy stock market. Read Investors Business Daily every day, and decide whether you want to buy, sell or wait for a better investing opportunity. Choose an ETF (exchange-traded fund) that interests you and fantasy trade that until you’re ready to branch out into other stocks. Continue fantasy trading for at least three to six months. You are training yourself to react wisely to unexpected developments in the market and learning how the market moves in relation to economic indicators and company earnings reports.
Allocate only a small portion of your total trading account to your first few trades. Always keep a reserve in case you make a bad trading decision and take a substantial loss. As you make profits, take out and set aside your original investment amount in your trading reserve.
Control your risk by investing in mutual funds and ETFs, which give you maximum diversification for minimum investment. Diversification tends to protect against the risk of a single credit, or sector.
Use dollar cost averaging to avoid the risk of investing all your money at a market high. Invest a fixed amount at regular intervals in the same stock each time until you have established a full position. For most people, this means buying one or two different stocks, an ETF or a mutual fund. One of the best places to do this inexpensively is Sharebuilder.com. Investing a fixed amount at regular intervals in a variety of things does not achieve dollar cost averaging.
Tips & Warnings
- Do not try to trade against an established market trend. Successful market timing historically has been shown to be almost impossible, even by the most expert professionals, so waiting for a trend to establish and riding that trend is advisable.
- Guard against getting greedy. When you make money, close out your position. Do not hang on hoping to make more money. Many a winning position has turned into an almost total loss overnight because of unforeseen events.
- Never trade with money you cannot afford to lose. When you make the transition from fantasy trading to real-world trading, be conservative at first. You may find that trading with real money is much harder to control because of the psychological factor.