One constant principle of investing is that markets fluctuate. Stock prices will rise and fall for a number of reasons: the economy, investor sentiment, political uncertainty at home or abroad, energy or weather problems, or even corporate scandals. This means market performance isn’t always predictable. That is why diversification, or spreading the investments in your portfolio among different asset classes and across different sectors within each class, is such an important strategy. Diversification is a time-tested way to manage risk.
Every investor should try to establish what their goals and objectives are prior to investing. There isn’t necessarily a wrong objective, but it’s more important to understand your goals because that will help drive your decisions. For instance, if you plan to regularly trade in and out of stocks, you might be better off opening an IRA account so you don’t have to pay taxes on your trades. If you plan to be a long-term investor, taxes won’t be as important of a factor and you could hold your account in a taxable or tax-free account.
Individual Accounts – With this account, your broker will manage your capital individually and make investment decisions tailored to your needs. The main benefit is having an experienced professional on your side. However, you will pay for that privilege with account maintenance fees and commissions. In addition, some brokers will impose high minimum investments of at least $10,000.
One of the first decisions you’ll have to make is deciding what you want to trade. Every market is different, bringing with them their own benefits and drawbacks. You need at least $25,000 to start investing in the stock market for example, whereas the forex market requires the least amount of capital. You could start day trading with just $500 in your account.
Traditional full-service stockbrokers do more than assist with the buying and selling of stocks or bonds. They often offer a wide array of services and products, including financial and retirement planning, investing and tax advice and regular portfolio updates. But they can charge substantial fees and transaction costs that can erode long-term investment gains.
Pooled Funds – With this type of account your capital goes into a mutual fund along with other traders’ capital. The returns will then be distributed between the investors. Normally, brokers divide these accounts according to risk appetite. For example, those looking for large returns may put their funds into a pooled account with a high risk/reward ratio. Those looking for more consistent profits would probably opt for a safer fund. Minimum investments for pooled accounts are around $2000.
Most of these services offer some form of free portfolio tracking - this enables you to create a portfolio and track it properly to see how you do with no money on the line. This used to be known as paper trading in the 'good old days' before 2001. This kind of exercise can be a good way to learn and play around with things without being either serious or costly.
When you are choosing an online stock broker you have to think about your immediate needs as an investor. Are you a beginner? Maybe you need a broker that has great educational material about the stock market. Do you only have a small amount of money you can put aside to invest? Some online brokers allow for small minimum deposits which can be a great option for those with limited funds. Are you always on the go and in need of a robust mobile platform? Some online brokers have incredible mobile apps delivering nearly all the features that their desktop counterparts do.
It also takes the reader through a path that should help anyone make better decisions based on their own personal circumstances so that they can plan their own path. In other words, there are no short-term investment tips here, only sound fundamental guidance for the long-term. This book redefines investment related advice and is highly recommended for investors at all levels.
A stop-loss order is designed to limit losses on a position in a security. For long positions, a stop loss can be placed below a recent low, or for short positions, above a recent high. It can also be based on volatility. For example, if a stock price is moving about $0.05 a minute, then you may place a stop loss $0.15 away from your entry to give the price some space to fluctuate before it moves in your anticipated direction.
At the same time, there are literally hundreds of thousands of individuals who buy and sell corporate securities on one of the regulated stock exchanges or the NASDAQ regularly and are successful. A profitable outcome is not the result of luck, but the application of a few simple principles derived from the experiences of millions of investors over countless stock market cycles.
3. Harness technology – With thousands of other traders out there, you need to utilise all the resources around you to stay ahead. With that being said, charting platforms offer a huge number of ways to analyse the markets. You can also backtest your strategy against historical data to fill in any cracks. Mobile apps will also ensure you have instant access to the market, almost anywhere. Combine that with a lightning fast internet connection and you can make fast, informed and accurate decisions.
Interactive Brokers (IBKR) earns this award due to its wealth of tools for sophisticated investors and its wide pool of assets and markets. The firm makes a point of connecting to as many electronic exchanges as possible. You can trade equities, options, and futures around the world and around the clock. Interactive Brokers’ order execution engine stays on top of changes in market conditions to re-route all or parts of your order to achieve optimal execution, attain price improvement, and maximize any possible rebate. The order routing algorithms seek out a speedy execution and can access hidden institutional order flows (dark pools) to execute large block orders. The wide array of order types include a variety of algorithms as well as conditional orders such as one-cancels-another and one-triggers-another. You can also set up conditional orders based on price, volume, daily P&L, margin cushion, number of shortable shares available, rebate available from the trading venue, and other factors.
The least demanding way to invest in the stock market is to invest through a fund. There are two types of funds. First is the actively managed mutual funds which have higher fees—92% of these funds fail to beat the underlying index over any three-year period. The second type is the index tracking fund, which typically has lower costs and is more effective in matching the growth of the stock market. This means they are growing in popularity because of the higher return on investment you receive. You should also use the most tax efficient way to invest: using your Investment Retirement Account (IRA) first. It’s best to invest in a low-cost, index-tracking fund through your tax-free IRA.
Accept losses – When you’re making so many trades every day, you’re bound to lose sometimes. It’s how you respond to those loses that defines your trading career. The loss trigger can quickly result in revenge trading, micro-managing and just flat out poor decisions. Instead, embrace small losses and remember you’re doing the correct thing, which is sticking to risk management.
Trading successfully is a lot easier when investors have great tools at their disposal. A top stock broker should offer access to a wide variety of trade tools to help make the most of each and every trade. From real-time streaming quotes to last sale tickers, quality stock scanners, mobile trading apps, and level II quotes to name a few. Strong tools are essential for active investors.
The Intelligent Investor by Ben Graham ought to be required reading for every private investor. While the innovations he brought to stock analysis have long been outdated and the red flags he used to watch out for in a company's accounts are now regulated against by the SEC, many of his insights about thinking about investment still stand. For example, his description of Mr Market is still an excellent way of understanding how a crowd moves with the daily news.
Finally, trading platforms may have specific requirements to qualify for their use. For example, day trading platforms may require that traders have at least $25,000 in equity in their accounts and be approved for margin trading, while options platforms may require approval to trade various types of options before being able to use the trading platform.