Diversifying your income streams is an important action to take for your financial future. This is one of the reasons why online trading has become a popular side hustle. You do not need a large amount of initial investment and the potential rewards are high. However, if you are thinking of getting into online trading, there are a few things you need to know first. If you are a completely new to online trading, these steps will help get you started.
1. Choose an Online Broker
You will need to register a brokerage account with an online broker before you can make any trades. A qualified and regulated broker will provide you with access to the best stock market research and data. There are many online trading platforms to choose from. Some are more suited to beginners while others are designed for more experienced traders.
A good online trading platform for new traders should offer free (or very low) trading commission fees and simple account opening procedures. The app should be easy and intuitive to use. Some platforms only offer one market while others will provide access to multiple markets across the globe. There should also be tools and features to help you manage your portfolio and make informed decisions.
2. Choose a Market to Trade
Once you have created your brokerage account, have a look at the available trading options and choose a market to trade in. This is where you may have to spend some time doing research and learning more about the various markets available.
Different markets have different trading patterns and require different skill sets. For instance, cryptocurrency trading is well suited to people who are knowledgeable about technology and emerging industries while ETFs can be beneficial for traders who want to invest in a more diversified stock market.
Depending on your risk tolerance, short and long-term financial goals, and availability of time, you may choose to trade in just one or a number of different markets.
3. Understand Key Financial Metrics
Learning how to read and understand key financial ratios is an important skill to have if you plan to invest in stocks. Your online broker may be able to furnish you with the numbers, but it will still be up to you to use the information to your advantage. Without that knowledge, you could make mistakes like investing in a company with too much debt or buying a stock with poor earning potential.
The most popular metric for beginner traders is the price-to-earnings (P/E) ratio which indicates the price of the stock divided by the earnings per share of the company. This tells you if a stock is overpriced or undervalued compared to similar stocks in the same sector. There are many other metrics too, so make sure that you study these to make an informed decision before buying into any company.
4. Learn About Stock Orders
Investing in stocks can involve making several different transactions—it is a little more complicated than simply buying and selling. Depending on the stock you plan to trade, there are certain types of orders that you can use to maximize your profit while minimizing your risk.
The most basic types of stock orders are market orders and limit orders. Market orders are immediate orders which indicate that you would like to buy or sell the stock at the current best price. Meanwhile, limit orders may not be executed immediately and instead allow you to specify the price at which you would like to buy or sell the stock.
There are several other more sophisticated stock orders. You should make sure that you are clear on all the available stock order options and use them in the correct situations.
5. Make a Trading Plan
Once you have developed an understanding of the market and the basic trading principles, it is time to make a trading plan. Your plan should include guidelines such as the maximum sum you will allocate to trading, the criteria for choosing stocks, the percentage of your investments you will risk per trade, and the criteria for exiting trades. Make sure that your trading plan is realistic and sustainable in the long run.
Having a trading plan will allow you to remain consistent with your investment strategy and prevent emotions from interfering with your decision-making. You can find many free trading plans online to get started. If you have a trusted friend who is a more experienced trader than you, consider them to review your trading plan.
6. Make Your First Trade
Finally, you are ready to make your first trade. If you are still unsure about trading with real money, many online brokers offer demo accounts where you can practice trading with virtual funds and grow your confidence. Once you have familiarized yourself with how the trading platform and markets work, you can move to trading with real money.
Add funds to your brokerage account from your bank account or credit card. Some platforms will ask you to verify your identity. Once your account is funded, you can start placing trades. All you need to do is go to the market you have chosen and place a trade based on the plan you developed.
Then, just watch, wait, and act appropriately. If you are diligent and disciplined with your trades, you should see a significant profit within a few months!