Lured by investor success stories, blockbuster IPOs, and other get rich quick examples, many people take a direct plunge into the labyrinth of stock trading. What is not apparent to most, is that trading in stocks before being completely prepared can create financial ruin and psychological scars that can last a long time.
Many people tend to be risk-averse, too scared of getting their fingers burnt in the stock market. News about stock-market crashes, volatility, or worrying about their luck keeps them away from investing in stocks. If they are prepared to work hard on understanding trading fundamentals, increase their market knowledge, and be prepared for minor losses, then the stock market beckons. In this article, you will learn some of the ways to trade without using real money.
There is a plethora of both free and paid information on investments and stock trading available online. For a newbie investor, it is essential to understand the basics of stock trading before stepping foot into the real world. Trading in stocks lasts a lifetime, so spending some time on research will go a long way in honing your skills and strategies.
Attending seminars, webinars or online courses can be useful to understand specific aspects of trading. They could be geared towards an industry, a particular technique or generic trading principles. Successful investors did not succeed by relying on speculation, ‘tips’ or ‘timing the market’. They first educated themselves, learned the tricks of the trade and only then started actively trading. Making a mistake in trading is not a crime, it is to be expected. But repeating the same mistakes due to fear or greed is.
Work with a Mentor
Reaching out to a friend or mentor, who has prior experience in trading and has good fundamentals of the stock market is an excellent approach for any new investor. A mentor could be a family elder, a friend, or a past co-worker.
Their shared experiences (both good and bad), tips, stories about how they started, and the pitfalls they avoided, will be greatly beneficial to a new investor. A good mentor should encourage being asked questions, no matter how irrelevant they seem at the time. A mentor guides you like a hands-on coach, as well as a critique, and gives you sound advice. At the same time, it is important to remember, that the mentor might not always be right and some of their recommendations need to be taken with a pinch of salt.
Study Successful Investors
Some of the famous investment authors to follow include Benjamin Graham (The Intelligent Investor), William O’Neil (How to Make Money in Stocks), Jeremy Siegel (Stocks for the Long Run), and of course Warren Buffet (The Essays of Warren Buffett). By reading these classical investment books early on, new investors can understand the principles behind investments and acquire the essential skills to develop their own profitable strategies.
By studying successful investment strategies, one can move from understanding the basics to more advanced trading strategies. You will be able to learn all about advanced techniques like short selling, wash sales, day trading, swing trading, scalping or loss harvesting. These techniques will be very useful for investors who want to make trading their full-time occupation.
Start Following the Stock Market
Research never stops. Start casually following the stock market, by choosing a few companies that interest you. You could start by identifying 5 different types of industries to build a balanced portfolio and track their historical prices. By following the market, you will learn to analyze trends, understand the technical analysis of charts, key financial information, and divergences from fundamentals. By viewing 60-minute, daily and weekly trends of stock prices, you will be able to get an edge in your stock outlook and price predictions.
Try Your Hand at Paper Trading
Once the basics are in place, it is time to move on to paper trading. In the earlier days, new investors used to simulate their trades by writing on paper, and hence the name paper trading. By starting with a lump sum seed amount (virtual money), you can start mimicking investing strategies based on real-time stock market prices.
Also known as stock simulators or virtual trading platforms, they are software applications that allow an investor to work in a virtual trading world. By letting you get a feel of actual market conditions. Paper trading apps like Alpaca help you to familiarize yourself with real-world trading mechanisms and functions.
Paper trading allows newbie investors to fine-tune their stock investing strategies and understand the nuances of real-life trading, before committing their money to a live brokerage account. The biggest drawback of using these virtual apps is that without your hard-earned money on the line, you can get a feeling of false security, and make incorrect decisions. Treat it seriously, and not as if you were just playing another game with nothing to lose.
The best way to build wealth is by saving early and often. Trading in stock markets is not the only way to build wealth, but just one of the pathways. It is always prudent to invest money in a diversified portfolio that takes into consideration, the appropriate amount of risk for your age. If you are looking for long-term returns, or are risk-averse, it might be better to invest in mutual funds, or exchange-traded funds, or use a passive Robo advisor to manage your investments.
But if you are keen to trade actively yourself, enter the markets slowly with a sound knowledge base and the awareness of potential risks. Take as much time as you need to prepare yourself. Try your best to keep emotions and feelings out of your trading strategy. Millions of people try their hand at active trading, but the majority who failed are the ones who did not do their due diligence, lacked the discipline, and failed to understand the fundamentals of stock trading.