Complete trading guidance in 1 article! Everything you need to know to become a better trader
A step-by-step guide to stock trading. First, let’s start with basics and answer the question: why should you trade stocks?
You trade stocks to earn more money and to satisfy your unlimited needs. You are receiving a salary for your job. But often, your expenses are a couple of times higher than your salary. You trade stocks to bridge that gap and earn more while also retaining your stable job.
What is the first step that I should make?
Accumulate funds to trade stocks. Don’t use money that you will need to cover daily needs. Open a bank account and try to accumulate money there. Also, if you receive bonuses at your job, you can form your funds out of bonuses that you get.
What’s next?
Retail traders cannot buy stocks directly without an intermediary. You need to open a brokerage account to buy stocks. Your broker provides you with a trade terminal and access to the stock exchange, and then you can trade through the broker, by using the electronic trade terminal or leaving your trade orders directly with traders who work in the brokerage company. This is how to choose the right brokerage company. You can also use my referral link and open an account with interactive brokers. If you use my referral link you will get Interactive Brokers stocks on up to $1000 depending on your deposited amount. After completing the broker check, move to the next step.
The next step is to deposit funds!
Move funds from your deposit or from the bank current account to the brokerage account to buy stocks. When you buy stocks, your funds will be reduced, and you will get stocks; when you sell stocks, you will get money from the stock sale, usually within 1–3 days as soon as the deal will settle. In simple words, without diving into details, the counterpart receives money and sends you stocks.
The next step is to analyze companies.
Before buying stocks you need to understand what you are buying. You need not only to analyze companies which stocks you will be buying buy you also need to understand your risk appetite and choose stocks depending yon your risk appetite. After understanding what stock types to buy, you may proceed to company analysis and undertake fundamental analysis. Even if you trade stocks on a shorter term time interval you still need to buy great stocks, strong fundamentally, companies that have strong product or service and wide economic moat. We call such stock value stocks. While this is important for longer term investors, it is also very important for shorter term traders. You may ask, why it is important, for you if you are driven only by buying cheap and selling at a higher price. Great question. If you are not buying value stock, it may fall rapidly and never rebound or will rebound slowly and you will sit in your position for a very long time. Lets say that you did not[ put stop loss and simply missed the opportunity to sell stock when it only started to fall. It can fall 20%-30% or even more and never rebound if it does not have strong fundamental support to go higher. That is why before buying a stock you need to make sure you are golding try value stock. Read this article to understand how to analyze company and choose great stocks, pick the best company among its closest peers. You also need to calculate stock fair value or target price to have an idea how strong the company stock price is and weather the stock is undervalued or overvalued. The process i described is called fundamental analysis. look at the infographics below to understand what are the elements of fundamental analysis and how to analyze the company.
When it comes to stock target price calculation (stock fair value) you can use three different valuation models, discounted cash flow (best used with larger companies that have stable cash flow), dividend discount model (best used with companies that regularly pay dividends), price income model (compares company financial ratios to the closest peers and to industry average in order to find the best stock among closest peers.) Look at the infographics below to see the difference between different valuation models.
If you have large company that regularly pays dividends, you can try using three models at the same time, then calculate average between three target prices that you calculated using those models and the average that you extracted will be your stock target price. By doing this you will get better stock price approximation. This is very difficult part imm the equity selection process and one of the most time consuming parts in trading, but if you want to learn everything fast, get those models in Excel with detailed guidance on how to use them, you can take 11-hours stock market crash course on Udemy and learn everything listed here including fundamental analysis, risk management and portfolio management.
Build an efficient portfolio.
After you finished previous step, understood what stock types to buy and found great value stock, company with strong fundamentals, good stock growth potential, its time to build your efficient portfolio. but first you need to decide how many stocks will be in your portfolio. I would recommend choosing minimum 6 stocks, less would be considered as bad diversification, and up to 10 stocks. If you choose more that 10 stocks this could be time consuming to undertake fundamental analysis for each stock quarterly, but you need to do it to make sure you are still holding value stocks, because company financials may change quarterly and so do company management style. thats why you need to analyze stocks quarterly. Thats why 10 stocks in the portfolio is optimal, not few and not a lot and you still have time for company analysis. Now repeat previous step for all other stocks in your portfolio. This would be time consuming but it is the most important part. After you found 10 great value stocks, its time to build an efficient portfolio. In simple words you should distribute stock weights in your portfolio in such a way as to minimize portfolio loss given your required return, or visa versa maximize your portfolio expected return given your expected loss level. You can use the Markowitz model and do manual calculation, i made youtube video that shows how to build an efficient portfolio. If you have no time for manual portfolio building you can use Diversset web based application that will help you with efficient portfolio construction. but apart from building an efficient portfolio, Diversset also helps you find great stocks and ETFs tailored to your risk appetite and builds an efficient investment portfolio from sorted list. Moreover Diversset also tries to maximize your investment portfolio expected return together with minimizing portfolio loss.
Know your risks.
Now, when you have list of stocks that you want to buy and know stock optimal weights to get the best investment portfolio, its time for risk management. You should calculate your maximum possible loss for your investment portfolio. You can use Value-at-risk method for determining that. You need that to understand what can be your maximum loss in worst case scenario and decide if you are willing to bear that loss and hold your stocks. Suppose you are a long term investor and buying for 10+ years, you need to know what level of risk you will be able to tolerate. For a shorter term investors this is also important because if the risk is higher than your psychological limit, you will not be holding those stocks and will consider finding other stocks. you should also assign level of losses and their probabilities. For example you should know what is the probability of your losses exceeding 10%, or what are the probabilities of your losses exceeding 5%. Yes you built your efficient portfolio and minimized your risk, but you should know that stock market risk is sometimes called uncontrollable risk, because there are a lot of factors that affect stock price and we cannot control them all. We can only smooth the risk and minimize it, but we still have probabilities that this risk will be higher if some unexpected things will happen. Traders can use Monte Carlo Simulation model to examine stocks and modulate outcomes, to assign probabilities. With this probabilities you can build stock limits and decide when you are going to sell the stock. For example if you are not tolerating loss higher than 2% and the probability of the stock loss exceeding 2% in the future is high, you can decide to choose another stock or decide to sell stock slightly earlier. Monte Carlo Simulation model can also be used for modulating your expected return and assigning the probability for your return.
Buy stocks.
After you build your efficient portfolio (allocated asset weights to minimize your loss given your required return), calculated risk range and know how much you can get from your stock portfolio with probabilities assigned, its time to buy stocks and ETFs that you selected. You already opened a brokerage account and deposited funds, now open your trade terminal, find stocks that you selected, use the trade ticker to find stocks. You can buy stocks at the market price, in this case you will buy at the best offer price, or you can use trade orders if you don’t want to buy at a current market price. If you are expecting stock price would go lower, and then bounce back from the support level and start raising again, you can buy the stock at a lower level. In this case you may use limit order, and set the purchase price lower than the current market price. If you want to buy stock higher, you can use stop order and put higher price, and you will purchase the stock as soon as your price will be triggered, or you can use stop limit order. But why you want to buy stock higher? Well maybe you made a technical analysis and you expect stock to gain stronger upside trend when it will cross certain level (resistance) and you would want to buy the stock then, and will wait patiently while the stock is trading below that level. In this case you may use stop orders. Apart from using orders you can also use trade algos to lower your trading costs and get the best execution. Trade orders and algos are very important, master them and understand well. It will take time but mastering them, together with proper stock selection, risk management and portfolio management will make you a better traders.
When should you sell stocks?
By now you know a lot of things, now its time to think when you should sell your stocks. If you sell them you have to substitute your stocks with other stocks, then you can repeat everything listed above. But sometimes you don’t have to sell stocks but only rebalance your portfolio. This may happen when your portfolio is not efficient anymore and when there are better alternatives on the market, in this case you may change asset weights or completely substitute assets in your portfolio with other assets.
Should you buy stocks now?
Sometimes market conditions are not good for buying stocks, the market can be more volatile and investor confidence may be low, this directly affects the strength of the trend and can lead to unexpected losses. If it is not the best time to buy stocks you should consider cashing out (holding cash position on your brokerage account) or invest in other instruments, such as money market instruments (repo operations or deposits or currency swaps), or buy fixed income instruments (bonds).
I hope my guidance was helpful. Please learn everything listed in this guidance and don’t buy stocks until you learn everything listed here as you need to understand clearly what you do in order not to be blind on the stock market. Remember trading stocks is also a profession and like any other profession you need to learn things before jumping into it. Only then you will secure yourself from unnecessary losses and will know where to move your capital when things are not good on the stock market. If you need detailed step by step video tutorial on everything that i wrote here, you can take my 11-hours Udemy stock market crash course, and you will get all the valuable financial models that professional traders use regularly, plus you will be able to apply for a trader job. Also you can read free stock market investing blog and learn vital things that will help you greatly on your investment/trading journey. If you are a developer building stock market app you can use great endpoints for your project, contact me at skobzhan@diversset.com if you need further guidance on stock market-related app development. Thank you for reading the article.
