With the inception of the Internet, many people experienced and inexperienced in stock trading have begun signing up with online trading companies and buying and trading their own stocks. Investing online in this manner is growing in popularity, especially with the sometimes-apocryphal stories of people who’ve made tons of money doing it.
But how do you know what stocks are right for you? How do you start? How do you keep from losing your shirt investing online?
First, start small. View your first few months as a learning experience, and only invest online with money you can afford to lose. Smaller sums are easier to handle and track, and manipulating smaller amounts will get you used to how the online exchanges work. Only when you’re very confident with the money you’re investing should you add more money to your account.
Diversification is as important to investing online as it is to investing in regular stocks. Make sure you purchase stocks with a wide variety of risk, in a wide variety of industries. The more you spread your money around the more you reduce your risk. You should learn as much as you can about where you’re putting your stocks, and keep up with what’s going on with those companies. Many online trading companies offer some great news resources, so you can keep up with the latest developments in your companies and your industries; but you can also use Yahoo news and other online news services to search for information on your stock holdings.
Hold onto mutual funds, even when you’re investing online in great stocks. Mutual funds are a great form of stock market insurance. They’re invested by professionals who have time to keep up with all the industry trends. View your online investing as a way to make extra money with money you can afford to lose.
Although the costs listed on online brokerages may seem low, the associated fees, especially with multiple trades, can be significant. Know what your chosen online services will really cost you before investing online. You should also know the rules concerning capital gains tax and other federal and state rules that may affect your profits.
When you start investing online, learn how the tools can work for you, particularly the order options. For instance, market orders let you automatically buy or sell stock at the current market price. Stop-loss orders sell stock when it drops below a preset price, allowing you to minimize losses when you can’t watch your stocks.
You should educate yourself about all aspects of investing as well as the businesses in which you’re invested. Investing online does not excuse you from understanding the market. If you’re dabbling in the market, you should remember that there are tens of thousands of people who are seriously investing, learning all the tricks, and reading every word of the Wall Street Journal. By choosing to not educate yourself, you’re changing what could be educated online trading into a gamble, and a gamble that leaves you at a disadvantage. It’s like playing poker, betting every time, and just hoping your cards come up.
Investing online is not a surefire way to get rich. Most day traders lose money. You should remember that your stocks may not sell anywhere near the time you put it up for sale; it could not sell for hours, during which the price may drop or rise. You can use limit orders to minimize some of this uncertainty. And even though you can access your online account anytime you want, your trades will not execute until the market is open.
You should also avoid rapid buys and sells, following the short-term vagaries of your stocks. You’ve noticed how the other lane in traffic is always moving a little faster – no matter what lane you’re in? Scientists studying this phenomenon – seriously – have determined that this is a matter of perception. The stock market does the same thing to you. When you sell and buy whenever you see a stock rising and falling, you’re putting yourself in the slow lane almost every time. It’s better to look at the long-term trends of a stock when investing online – or offline.