How to Start Trading Stock in 2019

From one finance amateur to another: it’s actually easy

We sat around the yule log this holiday with my extended family, discussing the latest crash in the market. I quickly realized that not many people understand how the stock market works. Or, if they do, they have pretty typical fears that are validated the moment they trade their first stock. This naïveté makes me sad because a) trading stock is not very difficult at all, and b) big investors make their money on the backs of total amateurs who trade poorly. Trust me, I have been that moron suckered in by an attractive price, only to be stuck with that stock for the next two years.

A couple of things first: I’m not an expert, a lawyer, nor a finance professional. However, I have made decent returns trading stocks on Robinhood since starting in 2015. All tips below are built off my personal experiences trading stock and constructing trading algorithms using Robinhood’s quantopian API. I won’t get into the latter here — it’s just helpful to know that I’ve automated and studied tens of thousands of micro-transactions, driving my accountant insane.

Lastly, this is not an introduction to how the stock market works. You can find that here and many other places. This is purely a 1–4 year horizon strategy — how you should go about trading as a wealthy newbie and when you should really not.

1. Trade on Robinhood first

I know I’m a walking advertisement for Robinhood, but…

There is really no good reason for a first-timer to try anything else. It is totally free. It’s not going to have the bells and whistles an E-Trade or Ameritrade offers for the expert trader. But that’s not you anyway. Honestly, your first trades are going to totally suck — so there’s no reason to have each trade also cost you $7 each time. Robinhood has no costs, has a beautiful mobile application, and now also has a browser dashboard.

My advice: sign up and ignore all their up-sells (Robinhood Instant, Gold, Cash etc). Just dive right into the interface, start studying, and build up enough confidence to buy your first share of Netflix.

2. Don’t be stupid. Fully fund your safety net, IRA’s, 401k’s and any other retirement funds

OK. Now you have Robinhood and they are asking you to deposit some cash. How much do you commit? First ask yourself, “do I have the money for this? Is my retirement fully funded and am I just swimming in excess cash?” If the answer is yes and yes, great — jump to the next section.

The rule of thumb is to save 6 months of salary in case of an emergency. That means if you take home (after taxes) and comfortably spend $72,000 a year, $36,000 stays in your little piggy bank that do you not touch. This, of course, completely excludes retirement.

Retirement means a lot of different things to different people and you can spend weeks reading about it. Essentially, you need to save up somewhere in the ballpark of $1 million, depending on how comfortably you live, by retirement age. You can only contribute up to $5,500 each to Traditional and Roth IRA’s a year. Read more about that here. So, to hit that million-dollar goal, you should be contributing to a mixture of IRA’s, 401k’s, stocks and any other means offered to you. The point is, if you are not maxing out legal contribution limits to some kind of retirement fund, YOU SHOULD NOT BE PERSONALLY TRADING STOCKS.

[So many people do not understand that retirement funds are a tax designation. They save you a crap ton of money on taxes. If you want to trade personal stocks, great!! Setup an IRA fund, and then start trading ETF stock using a company like Betterment, for example.]

I am sorry I have to say this as a final footnote: with very few exceptions, funding your retirement solely using stocks is EXTREMELY FOOLISH. Even the most stable stocks are often volatile year over year and you do not want to tie your retirement and legacy to a few companies that may suffer a downturn or have to declare bankruptcy. Please do not do this and please use something safer like a mutual fund or ETF.

3. The Quarter Principle

Wow, only 2% of you made it through the safety net and retirement sections. That’s fine. It is still good to know how to play stocks once you have the excess liquidity (a fancy term for money).

This is by no means a unique principle, so don’t yell at me if you read it somewhere else. It is meant to help new and amateur traders get some skin in the game without too much risk. It works like this: if you have $10,000 to play with, your first trades should be in the ballpark of $2,500. This means you should have $2,500 in the market (25% and between 1–3 stocks) and $7,500 just sitting in your stock account, ready to spend. After you’re comfortable with the first few trades and find some better priced stocks, spend another $1,875 (25% of $7,500). You get the picture.

Now, timing is everything, and as a serious investor I would never say, “just throw $2,500 in the market.” Yet, the barrier to entry for most people is simply making that first risky purchase. You won’t really understand the market unless you start trading and you won’t start trading unless you feel it’s a safe bet: chicken and egg problem.

I will explain further down when you should buy, but the quarter principle exists to help you take soft risks. I still use it today because it sobers my excitement when I think I see a really good price.

4. Just don’t day-trade

Unless you’re a pro, please steer clear.

I made the mistake early on of day-trading high volatility oil stocks (these stocks can jump or fall 10-20% in a single day). And while it was exhilarating and fun, I also got burned — a lot. Way too much. Price fluctuations really make no sense sometimes and unless you have A+ insider information on these companies, you won’t have a reference for how to react. You’ll never know if a hedge fund is placing a $2 million buy on American petrol or if OPEC is just angry today. I personally built a lot of algorithms that attempted to ride minute-by-minute price movements, but even those were powerless against x-factor variables outside my view.

Those first few months trading stocks, I was day-trading every day and it sucked up so much of my time (at a full-time job). Worst of all, depending on the platform you are using, you’re going to have to go through a lot of hoops to become a verified day-trader. I squeezed through with a Robinhood loop-hole, but usually you cannot make rapid trades without being banned from trading. So there’s that.

All the money I’ve made has been by going long on trades (and those trades actually paid back losses from my day-trading days). Do yourself a favor and make longer-term investments.

5. When losing, BUY more. When winning, SELL some

This is one of the simplest rules I’ve followed and I haven’t been let down

Buying: recall the Quarter Principle (part 3), which is essentially a buy strategy. I initially said throw in 25% of your play money into anything, just to get in the game. However, the wiser choice is to always wait for a very bad day. Better if it’s a terrifyingly bad day.

Here’s my personal example: there are about 5–10 scary stock market days every year. About 1–2 really scary ones. It’s generally hard to know exactly when those will happen and how bad they’ll be (relatively) but I do a gut check. I pick one of those days every year and that’s the day I make lump sum contributions to a few of my retirement funds. Now, keep in mind I am putting in small amounts all the time. Sometimes the market is great! Sometimes it’s bad; everything evens out safely if you contribute that way. But on those very terrible down days, I also take a chunk of money and toss it in because I know the price is too good to pass up. When the market is screaming, it’s time to buy. The only exception is if the market is heading for a recession or depression. But honestly, if that happens — you have much bigger problems.

Selling: this is much harder to achieve because we are all greedy. Or maybe you don’t realize that you’re greedy until you’re holding onto a 300% return on a stock you accidentally bought on a whim and then lose it all in a week (been there too). I would say I have some genuine wisdom here, or an application of the quarter rule, but I really don’t. Selling some is about the best I’ve got. Selling is extremely difficult because a) if you’re losing, you’re always buying more stock at cheaper prices and b) if you’re winning, there’s no intuitive incentive to exit. Especially if you have more than a financial stake in the company. What does that mean?

A lot of people spend weeks, maybe years studying and reading about publicly traded companies. Many folks even sit on those dreaded quarterly earnings conference calls, vote by proxy for the board, and pore over analytics reports to map out the company’s future. If you do that, you really become more than just a stockholder. Which begs the question — if you love Apple, for example, and you have purchased stock and would absolutely buy more later (because you love them), selling your current shares makes little sense because you’ll probably only buy them back later at a higher price. Selling only really makes sense if you have some kind of insider information (shh, see below) that tells you your current investment is about to go south. Which sometimes it does…

6. Insider information: you have it or you don’t

Yikes, this one is hard. Let me repeat: I am not a lawyer and none of this is legal advice in any way, shape, or form. It may not even be legal to write this.

I really really don’t understand how insider trading works, at all. So when I tell you that if I could hire 5,000 frisky finance interns to infiltrate the hallways of Fortune 50 companies and just LISTEN to other people talking inside, I would absolutely have no shame in doing it. Why?

I monitor anywhere from 25–40 publicly traded stocks on a regular basis. And I can tell you that minutes, hours, and sometimes even freaking days before an earnings report, a gas price drop, or a technical malfunction that causes cars to explode, people know. People always know. And it’s not just a handful of snub-nosed rich white guys. It’s enough to create major price movements, which can be in the 100’s if not 1,000’s of traders (depending, of course, on the size of the trades).

All of this to say, insider information is key. It’s honestly how a whole lot of people make their money and it’s a federal felony punishable by…20 years of prison (says the SEC). Yet, insider trading is so loosely defined that we all commit it in some small way. Imagine you have a friend at a major Pharmaceutical company (call it ZBP) who, after an exasperatingly long day, shares over dinner that he just had a major breakthrough at work. His company is publicly traded. So you go home, buy a few hundred shares of ZBP and next week they announce their success. Your investment just increased by 30%. Who would know? or care?

Tip #6 is not that anyone should break the law. My point here is that forms of insider trading are too widespread to ignore. Be aware of it so you don’t get screwed by it. If you don’t realize it’s happening, you are one of thousands of suckers buying or selling in the wrong direction when a bunch of chosen few know what’s about to happen. Be smart.

7. Some final tips

Old chart but it does the job.

Here’s a few last tips I lump together — there’s nothing particularly astounding.

  1. DON’T BUY TECH IPOS!!! — Oh my gosh, Twitter, Snapchat, Blue Apron. Just don’t do it. Taking private options at a startup is fine, but tech IPO’s are usually always a very bad idea.
  2. Don’t let your reserve coffers dry up — trading stocks is about taking advantage of opportunities. Sometimes you miss them because you’re having a baby (personal experience). Other times you miss them because you don’t have any money to spend… Don’t let that happen. It’s important to cut off bad investments (take them as tax deductions) and always have money reserved to attack a bad day or good price.
  3. Stack up on dividend stocks — this seems like a no-brainer, but I’ve at times committed myself to companies I didn’t care for, lost money, and they didn’t even pay dividends. Dividends are awesome and the better publicly traded companies know it.
  4. Generally stay away from ETFs (combinations of stocks)— I used to trade ETFs outside of my retirement fund (which is all ETFs) and I quickly learned that, because they trace neat little parallel lines to the S&P, there’s nothing to gain there. If you’re going to track the S&P, just throw more money in longer-term retirement ETFs. Trading stocks should be about trying to beat the S&P, not stay with it. That’s for 30-year horizon trades, which is a bit outside of stock trading.
  5. What am I missing? — throw me some responses below and I’ll add any best practices I’ve missed (which I’m sure is a ton). This is not the thing I usually write about, so please be kind!

God bless, Happy New Year, and have fun trading!