Dow Jones Fell 800 points.
When media posts an article leading with the "Dow Jones Fell 800 points". All of the lurkers of the markets come and start asking the traders questions and commenting about investing.
"Dow fell 800 points, did you surive?"
"Ouch, your profile must have taken a hit today"
For someone that trades the market daily, as I do, these are some of my best days. The trend is strong and moves are big.
So I want to create a series where I can teach someone how to start investing from the basics to advance, in baby steps. I am no expert in the markets. I don't have millions but I have been trading enough to make a living from it. Yes, it is possible. It took me 7 years of trial and error.
Let's jump right in.
To start of investing you will need to figure these three things
- What type of market do you want to invest in?
- What type of trader do you want to be/ can be?
- What broker to choose from.
What type of market to invest in?
The first step in how to invest is to find out what market. The most popular market to invest in is in equities (Stocks). In the equities market, you can invest in stocks, ETF, and Mutual Funds. The most common investment are stocks. Stocks are a great way for one to get their feet wet. So what are stocks? Stocks are owning shares of a company. If the company does perform well and grows in net worth, you start earning money from stock growth. If a company does really well like Apple, Ford Caterprille, or AT&T they will start to pay dividends. Dividends are usually paid out quarterly, some are yearly. Dividend varies by the company and by quarter they can be reinvested or paid out. See the table below.
Buying a stock- If you wanted to buy 100 shares of F (Ford) at the current price of $8.86. It would cost you $886.
100 (Shares) x 8.86 (Current price) = $886 If the stock goes up one dollar to $9.96 your profit is $100. If the stock goes down to $7.96 your loss is $100. If you own 1,000 shares then your result will be $1,000 instead of $100. [ (Current Shares) x (Price Change) = Net Gain/Loss ] . Don't forget the 1000 shares would have cost $8,860. If you owned F (Ford) four months and meaning dividends are coming up. This time around they end up increase dividends, thanks to a good quarter sales, instead of $0.15 you get $0.17 per share. If you had 100 shares you would get $17.00 total. [ (Number of shares) x (Dividend amount ) = Total payout ]. You can reinvest back into the stock to buy shares or get a payout. Doesn't sound like much but if the stock went up in price then you have the gains from that and dividends. Keep in mind more shares more money.
ETF and Mutual Funds
What are ETF and Mutual funds? It is a pool of money funded by investors that is handled by a manager to invest in stocks. Both do have fees that one has to pay. The fees vary depending on the equity. Usually, ETF have fewer fees than Mutual Funds. Investing in either one or is the same as buying stocks. There is a price that the ETF or Mutual Fund is valued at and one buys shares of the underlying equity. Mutual Funds are usually for longer-term as they require one to hold the equity for longer than 90 days. ETF can be bought and sold the same day or within a week. There is no penalty for not holding longer than 90 days like in Mutual Funds. This is a great place to start investing or looking for safe options. There are a lot of safe small risk/ small return Mutual Funds and ETF on the markets.
Derivatives - Leverage Markets
If you are starting off with a small account or looking to get your eggs in every basket look into derivatives. Derivatives consist of options, futures, forex and money market accounts. Derivatives offer leverage depending on the market. Unlike with stocks of buying shares of a company; derivatives can be buying a product or currency. Stock Options are part of the derivative market, one contract is equal to 100 shares. That one option will cost less than buying 100 shares, this is where leverage comes in play. Options can be as easy as picking a time and price and hope that the stock hits that price within the timeframe you choose. It can also be very difficult if you are trading options with multiple legs ( this is more advanced I will be going over in a different article). Futures and Forex market is where all the leverage is at. You can buy crude oil, currently at $56, for $3,000 per contact. One contract is a $10.00 move per tick (cent). If you bought one contract of crude oil and it goes up 10 cents that is $100 profit. Crude will move about $1.00 a day, meaning you can trade crude all day and have a chance to make money. If $3,000 is too much to start off with than move over to Forex or Mirco Futures. Some of the Mirco Futures/Forex brokers require a $200 account size. This is perfect if you are starting off in the markets or looking to add more positions without adding more money.
Type of Trader
What type of trader are you? Do you want to sit in front of the charts all day? Do you want to go to the beach during the day while you the markets move? To find out what type of trader you want to, find out what you want your life to be. If you want to be involved in the markets all day then maybe short-term trading is you. What if you have a job and want to start investing to get more passive income or grow retirement account. Then maybe swing trading or long term trading is for you. You can be any type of trader with any amount. If you want to become a trader that depends on the market as an main income then you will need a hefty account.
What is the best type or trader? That is up to you. There are traders that make a living from just long term dividend payout. That requires a large account of $500,000 plus. You can start day trading stocks with $25,000 and make a living. Will it be easy? No. You don't hear a lot of day traders making millions since then don't need to. They make what they need to live and enjoy freedom. You can start off trading Futures or Forex and make an extra $500 a week with just a $5,000 account size. Once again it will not be easy but with pratice it can be done. Now if you have a larger account size the low-risk low-return on some ETF or dividend payout is an option. Don't have to worry about what the market does daily just buckle your seat belt and enjoy the ride.
Before putting any money on the line the best way to start is opening a SIM account and see what you like.
Type of Broker
What is the best broker? It depends on what you are looking for low commissions, low margin, best charting, best customer service, etc. Below are some of the most popular brokers. Robinhood is known for no commission trading. Charles Schwab is great for AI trading and client relationship. TD Ameritrade has the best charting tools. Ninja trader is great for coders and auto trading strategy programs. Tradestation low commission and easy coding language. Oanda low-cost Forex trading. I use three of these brokers today. Not one broker has everything I like. I use Tradestation as main charting and programming. TD Ameritrade for my options. Oanda for forex trading. Can TD Ameritrade do all this? Yes, but the commission is high for forex and there is no auto program strategy in TD Ameritrade- Think or Swim platform. There is no one best broker. Each broker falls in its own category depending on your needs. If you are a day trader and want the best customer service than maybe TD Ameritrade is for you. Find out what trader you are/ want to be and choose the broker that you like.
Here are some links that you might find helpful in your research on where to start:
- 8 Best Online Stock Brokers for Beginners of September 2019 https://www.nerdwallet.com/best/investing/online-brokers-for-beginners
- What Kind of Trader Are You? Quiz https://www.dummies.com/personal-finance/investing/currency-day-trading/what-kind-of-trader-are-you/
- What Are Stocks and How Do They Work? https://www.nerdwallet.com/blog/investing/what-are-stocks-how-they-work/
- How to outperform the market. https://www.stockbuddies.net/2019/09/18/how-to-outperform-the-market/