For a beginner, trading stocks and options can be like solving a jigsaw puzzle. Trading these financial instruments can make you rich with the right skills and also plunge you into debt as well if done wrong. This guide will help you get started with stock and options trading in simple, easy-to-follow steps.
What is Stock and Options Trading?
Shares (also called stock or equity) are ownership in a firm. To buy stocks is to buy into that corporation and in turn a share of its profits. The exchange that does all of this is the stock market and the two major exchanges are the New York Stock Exchange (NYSE) and the NASDAQ. Stock prices change depending on company performance, market forces and investor sentiment and therefore have upside potential.
Options trading, on the other hand, is a contract that permits but not requires the purchaser to purchase or sell an underwritten asset at a predetermined price, in a certain timeframe. Two of these options are calls and puts. Call option lets the investor purchase stock, put option lets you sell stocks. Options trading is more complex but it can bring high returns if you do it right.
Stocks trading can be divided into two categories:
Long-Term Investing
Long term investing involves purchasing the stocks and holding them for several months or even years. The idea is to hold these stocks while they appreciate in value. For example, a dollar of Company A stocks could be worth ten dollars in five years, multiplying the investment value by five times.
Day Trading
Day trading involves trading the price fluctuations of stocks within a short period of time within a day for the sole purpose of making a profit. This approach is about achieving short-term profit by frequently buying and selling stocks in the same market day
Key Differences Between Stocks and Options
For the purpose of trading, it is important to identify the differences between stocks and options with certain terminologies:
Ownership
When you invest in stocks, it gives you a stake in a given corporation. Options do not provide ownership.
Risk Level
It is less risky to invest in stocks than to engage in options. You buy a piece of the business when you buy stocks, and so are involved in the company’s gains and losses. Price in stocks changes but the total risk will usually be no more than the amount you are putting into it. Options, however, are more risky as they are derivatives. They’re derived from an asset, resulting in high levels of leverage and market risk.
Complexity
In terms of complexity, stocks are easy to trade for beginners. However, options are a little more complex and it takes advanced knowledge and skills to be profitable.
Cost
While options trading is less expensive it is done with high risk of leverage which means that both the gains and losses are multiplied. It is recommended that beginners try out stock investment and subsequently try out options trading after gaining needed experience.
Steps to Start Trading Options and Stocks
Understand the Basics
Before engaging in trading, it is important to gain knowledge on how the stock market works. Know some of the commonly used terminologies such as “dividends,” “bull markets,” and “bear markets.” In the same manner, you should be well acquainted with the options jargon such as “strike price,” “expiration date” and “premium.”
Choose a Reliable Platform
The availability of a good trading platform makes it easier for the newcomers in the market. Some of the factors to consider include spreads and fees, easy user interface, and exceptional customer support. New traders can use the following link to compare different exchange platforms.
Set Realistic Investment Goals
It helps to set investment goals as a trader as this gives you a focus. Choose what you want to do with your trading, so you’ll know what you want to achieve. Is it your goal to increase your savings over time or do you want to get quick returns? These goals will define whether you’ll be more likely to trade stocks, options or both.
Start Small
It is advisable that when you are new in the market, one should start with a small capital. This approach helps you to understand the dynamics of the market and at the same time prevents you from losing a lot of money due to beginner mistakes. It is recommended to start with one or two products and then increase the amount of investment as you gain confidence.
Create a Diversified Portfolio
It’s a good strategy to Invest in several stocks and options of different categories of industries. These could be tech, healthcare or utility stock. Diversification helps in minimizing risk of the total portfolio that you hold. For instance, it is recommended to balance tech stock with stable stocks such as healthcare.
Strategies for Trading Stocks
Dividend Investing
Concentrate on the stocks which provide dividend payments on a regular basis. This strategy gives you a constant source of income while your portfolio appreciates overtime.
Value Investing
Look for undervalued stocks that have the possibility of having a higher value in the future. A Companies’ financial statements and market trends can be analyzed to get insights into the potentials of undervalued companies.
Managing Risks as a Beginner
It is very important to learn about risk management especially in stock and options trading. Here are some tips:
Set Stop-Loss Orders
Stop loss orders act as a risk mitigation strategy. In trading, stop loss means that if the price of a certain asset falls to a certain level, your investments will be sold. Stop losses help to protect your investment capital from underperforming assets that can wipe you out.
Diversify Investments
Do not invest all your money in one stock or even one type of options. It’s always a good idea to spread your risk across different stocks.
Limit Leverage
When it comes to options trading, leverage should be used carefully as it can lead to large losses.
Stay Informed
It is important to monitor the market information and trends in order to make smart choices.
Common Mistakes to Avoid As a Beginner
Investing Without Research: Never invest in a stock or option without doing proper research. Proper research can be the difference between investing and blind gambling.
Overtrading: Do not overtrade, that is, opening a lot of positions within a short time, this exposes one to many risks.
Ignoring Risk Management: It’s important to know how to avoid losses and how to limit them with proper risk management.
Emotional Trading: Trading decisions should not be based on fear or greed. Decisions should be objective and follow a defined strategy.
