Learn to trade in stocks step by step

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Think Complete

10 min readJun 14, 2021

Do you feel left out of the stock market boom just because you don’t understand it? Do you think it is not easy and you don’t have time to learn? This article will guide you through basic concepts using simple examples. After reading it you will understand trading concepts good enough to manage a small account. If you have a basic knowledge of Grade 7 math, you can easily follow it and get into trading as a beginner.

Do not jump into trading with little knowledge or after watching a couple of YouTube videos. Asking friends about tips and making quick money is not the way to start trading. You must understand the basics otherwise you will be speculating with high risk of loosing — this is not gambling.

I will take an analogy of buying a house and will walk you through step by step process to understand important principles of investing.

Step 1: Understand the Basics using an analogy of buying a house

Buying a house: My wife and I decide to buy a house which costs $500,000. Each one of us plan to contribute 50% of the amount. She had to pay $250,000 and I will have to pay the same. So there are two shareholders of a property worth $500,000. If we do not have enough money and ask our relatives to contribute and include three of them then we are now paying $100,000 with five shareholders of the house. Taking it at larger scale, if I include my friends on Facebook and relatives, I may have 1000 people as shareholder. In this case everyone contributes $500 to make it $500,000.

Total value of business(e.g. house): $500,000
Number of shareholders: 1000
Price per share: $500

1000 friends own one share each ($500 value) in the house worth $500,000.

In simple terms, it is like millions of people buying shares of a publicly traded company like Apple(e.g. at $130)

2. Renting the house: Now we rented the house at $3000 per month earning $36,000 per year. We paid $6000 in taxes and other expenses so I am left with $30,000 earnings. Remember we have 1000 shares, so the earning per share will be 30,000/1000 = $30 per year. Every share is worth $500 which means it has a yield or profit of 6% ($30 earning with investment of $500).

Annual earning(revenue) from business: $36,000
Annual expenses(e.g. tax, insurance etc.): $6000
Net annual profit after tax and expenses : $30,000
Profit per share per year: $30 (30,000/1000). We call it as Earning per share(EPS).
Yield (profit percent): 6% (30/500 x100)
Assets value of business besides earning: $500,000
Price to Earning(P/E ) ratio: Price of stock / Earning Per Share = 500/30 = 16.66

3. Appreciation of the house: In 3 years the house price increases to $700,000. Now this means the share which was $500 will now be worth $700 in value. Some other friends who do not have share may feel like buying it at premium at $750 thinking the price of the house will go up in a year. If I originally bought it at $500, I may like to sell it at $750 to take profit.

Number of shares: 1000
Price per share in market(by Asset value): $700
Price per share in market(people ready to pay $50 premium): $750
Market Capitalization(Total value): $750,000 (No of shares x price per share)

What we learned so far :
a) Companies have a business model, assets, earnings and expenses.
b) People who buy shares of the company have a small percentage of share in the company.
c) When people see(or speculate) growth in the company they are ready to pay premium to buy a share in the company
d) Share value increases as more people buy at premium and volume of buyers and sellers increase

4. From house to stock market: Considering high growth in the value of business I setup my company(corporation or LLC). Now I take help of financial institutions(e.g. banks/investment banks) to invest in my business and buy multiple properties. With expansion of business I need large volume of people around the country or cross-borders to hold stake in my company(by becoming shareholders). I take help of the specialist financial companies and get my business listed in a stock exchange (e.g New York Stock Exchange) where people can trade shares. Basically, I scale up the business and include millions of shareholders for the business. This does not come easy as my business has to follow all compliance norms and share the financials to the government as well as public(something which you see in yahoo finance, CNBC or any financial website).

Step 2: Opening a trading account and first steps to trade

Now that we understand the basics of a business and how it grows with the help of shareholders, we will learn about buying and selling these shares or holding them for long term. Just like buying a house, we need a brokerage firm or a platform. These brokerage firms can be banks offering their platforms like TD Ameritrade, Scotia iTRADE, CIBC Investor’s edge, ICICI Direct or online trading platforms like InteractiveBrokers, Robinhood, Wealthsimple, Questrate, TradeStation, Charles Schwab and many others.

These days opening a trading account online takes not more than 15 minutes if you have all the information handy.

Before venturing into opening the real trading account you must ask your bank or go online and open a ‘Demo account’ and practice trading for few weeks.

Understand the regulations of your country and tax implications. Normally you will have an option of a margin account a.k.a. brokerage accounts(just like your chequing or current account) where you need to pay capital gains tax on your earning. There are options for tax saving (TFSA) or retirement accounts(IRA, 401k or RRSP) depending upon the country you are residing. If there are child benefits or children education related accounts, do not miss the opportunity. Prefer investing small amounts in your tax saving or retirement accounts and trading in your brokerage accounts if you have spare money.

Talk to your banker about various accounts and benefits but do not get sold to their bank’s mutual funds. Remember if you want to trade by yourself you are looking for a self-directed account and not the one managed by your broker or bank. They will show you colorful graphs but take the information and make your own decision.

Most of the banks charge high transaction fee for buying or selling stocks as compared to online brokers. Make a wise decision of choosing the right broker platform by considering the following:

Transaction fee charged by the broker platform for buying and selling stocks.
Minimum amount required to open an account and how much you can afford to invest in the account.
How user friendly is the platform (try using demo account) and do you easily understand it.
Does the platform offer mobile app as it is easy to trade from anywhere when the device is handy.
How easy and quick is the transfer of money as sometimes you may see a big dip in a stock you want to buy and you need funds to transfer from your bank into the trading platform. You don’t want to wait for 3 days for funds to be transferred and by that time the stock price goes up.
How good is the customer service as there will be cases where you made a mistake or have questions and want to talk or chat with customer service.

A simple search in Google like “Compare trading platforms in US” or whichever country you are residing will show you comparisons. Do not look for comparisons given by the specific platform and check for the link which is neutral and not an advertisement.

Step 3: Investment and Trading

You invest money where you expect it to grow over time, same as buying a house. So for investing, use your retirement or tax saving accounts so that you can grow money over a period of time. For such scenarios you have to choose fundamentally strong stocks. Stay away from those which you haven’t heard about and come to you through tips from various channels.

Trading is when you see the trends and buy a stock when there is some news and sell it when it reaches a target profit price. You do not keep such stocks for long. You may be buying and selling like a day trader who makes multiple trades daily at short interval of time or swing trader who holds stocks for a few days. It is like some people were stocking tissues and sanitizers during pandemic and selling when there was shortage. Trading is normally done in margin account. You pay for capital gains in margin account and your losses are carried forward in future years.

Step 4: Looking for the right stocks

It is important you understand and know the company you are investing in. Do some research to understand their business and make sure their revenue and profits are growing every year and debts are decreasing. Just look up in yahoo finance or any financial website and you will find the information. Invest regularly and if you are employed in a publicly traded company, do not miss the employee stock options.

I would invest in companies like Apple, Microsoft, Walmart, Costco, Amazon, Google, Proctor and Gamble, Johnson and Johnson, Visa, Mastercard, Bank of America, Nike and companies I know have strong hold in the market. These are the companies I feel cannot go bankrupt with some incidents like pandemic. Look for fundamentally strong companies for investment and buy their stocks regularly especially when they go down so that you can grow the portfolio. Look if the stock has fallen 5% or it is trading below the 50 day moving average (To make it simple, it is the average price of the stock in last 50 days). You can easily find it as an indicator in your trading platform or just google and check it. Refer the Investopedia link for better understanding.

Do not buy when the stock is at peek or all time high, wait for it to come down. Entry point is very important for the right purchase. It is same way like you buy electronics during Black Friday or Boxing day or festival deals and special sale events.

Simple rules for a beginner for investing in stocks, look for:

Large companies are more stable as compared to small and new companies. New and growing companies are good if you are ready to accept high risk, high gains, but I personally won’t choose them as a beginner. Market capitalization is one of the aspects to determine the size of the company
Continuous growth in revenue since last 5 or more years.
Positive Earning Per Share(EPS). Refer our example of EPS in Step 1
Price to Earning ratio (P/E) should not be high. Ideally it should be less than 25. Remember our house analogy in step 1 where the P/E ratio was 16
Strong Current ratio. Current ratio is represented as Current Assets / Current Liabilities. If the company sells all assets and pays off all liabilities the ratio is 1. If I have a debt of $100,000 on my house and I sell it for $100,000 so I pay off all debts and as per formula the Current ratio is 1. Lower the liabilities, the better it is, as it will increase the Current ratio.
Better Dividend growth: A positive dividend is better although some companies use their earnings to clear debts and may give smaller dividends.

Step 5: Do not put all eggs in same basket

This old saying is very important for our financials. We need to diversify. I have friends who have invested all the money in properties or only in stocks. Remember, nothing stays up forever — it comes down and goes up again. There have been stock market crashes, housing market crashes, pandemic crisis where airlines and travels were hit. Look for various sectors to invest. Pick stocks from various industries technology, banks, retail, heavy industry, real estate, precious metals and bonds. People have to rotate their money, if one sector goes down they will start taking money out add adding to another sector. People sold stocks of airlines and oil and various industries during pandemic and invested in technology. Imagine you had all the investments in airlines sector and retired with huge portfolio of stocks fallen to all time low.

Make a log(Journal) of your financials(notebook or spreadsheets whatever works for you) — how much you have invested in stocks and how much you have diversified within the stocks into different sectors.

Let us summarize:

Trading or investing in stocks is like buying a small portion of a large company. As it grows, the value of your stock grows. When you invest you look long term, when you trade you typically hold it for short term.
Start with a demo account and practice for few weeks. Use the tutorials or videos of the platform you plan to use and learn the interface of the platform.
After you practice with demo account, open a margin account for trade and retirement account where you invest and buy stocks of fundamentally strong companies
Start with investing and keep growing your portfolio of stocks during the period when stock dips.
Diversify your portfolio and maintain a record or sheet of which sectors you are investing and how much have you invested.

Note: I am not a qualified financial advisor or planner. I am sharing my knowledge what I have learned over the years from various mentors. Investment and trading is your personal choice and depends upon your financial situation. There is always a risk involved which you need to assess as per your personal financial situation.