Saturday, February 20

Stocks and Shares for Beginners

Buy Stocks Online - Stocks and Shares for Beginners - the Basics

The basic low-down on how to buy stocks online. Trying to find information on the Internet about stocks and shares for beginners can be a frustrating experience. I know, I've just tried it ! You often click on a site that looks promising only to discover that there is nothing there of any use to beginners looking to buy stocks. This post, however, will provide you with basic information on trading stocks and shares if you are a beginner.
First things first, you will need a broker. Unless you are pretty wealthy to start with, go for a discount broker - they are cheap and cheerful but won't give you any advice, they just take your money, buy your stocks and shares and put them in your account, and do what you ask them to do (hopefully) usually automatically online but sometimes over the phone if you prefer. For discount brokers I always recommend steering clear of TDWaterhouse but apart from that take a look at this article - online brokers - which describes the various discount brokers around, what they offer and how much they charge to buy and sell your stocks ( a few dollars per trade usually).

Secondly, as a beginner you may be confused by the number of stocks available and wonder which stocks you should buy ? Well, you need to decide if you are a long-term investor or a short/medium-term trader. If you think you want to be a long-term investor then check out Warren Buffett and learn how he became a billionaire by buying stocks at good prices and holding them for a very long time. But be prepared to wait a few years - as Warren Buffett says "the stock market is a means for transferring money from the impatient to the patient".

If you are going to be a short or medium-term stock trader (a few days to a few months) then you really need to learn about stock charts and technical analysis. You can't just stick a pin in the Internet and hope to get lucky. Stock charts and technical analysis of charts are important for beginners starting to trade in stocks and shares as they can be used to show when is the right time to buy and when is the right time to sell. You don't need to know anything about the company whose shares you are trading, all you need to know is how to read stock charts and understand what the various indicators are telling you.

As a beginner it is important to learn about charts before trying your hand at share trading, because the professional traders use them and you need to be flowing with the professional stock traders not fighting against them.

Here are some absolute basics about stock market charts.

When online stock trading don't buy a stock whose price is below its 200-day moving average. It is generally a bad sign when a stock falls below its 200-day moving average and a sign that it is likely to fall even further, wait for it to get back above the 200-day moving average. What is a 200-day moving average ? Take a look at this chart of BP - the red line is the 200-day moving average and the blue line is the BP stock price. If you are thinking about buy BP stock then bear in mind it is generally not a good idea to buy a stock whose price is below its 200-day moving average.

BP 2 Year Chart with the 200 day movng average [UPDATE - the BP stock chart is now back avove its 200 day moving average so not so much of a risk as an investment as it was up until this point]

There are stock charts available fre for stock market beginners and experts on places like Yahoo finance. Just click on 'indicators' or 'moving averages' then type in 200. You should then see a stock chart or an index chart with the 200-day moving average plotted. One stock you can look at is MSFT - each stock has its own code.

Moving averages are just one of the techniques that analysts use to decide when is the optimum moent to buy or sell stocks (5-day, 10-day, 20-day, 30-day, 50-day, 100-day) are the most popular periods of time.

You also need to understand about support and resistance. If a stock price is falling, at some point it will fall back to a level where it meets with support and stabilize, by looking at the charts you can see when this support will be found and you can then start buying. Similarly when a stock price is rising, at some point it will meet with resistance and stop rising. This is the time to sell if you are a trader.

Short-term traders or swing traders are generally hoping to get a 10% profit from their stock trades so once they have made their 10% profit (or thereabouts) they close the trade and look for something else.

Stop losses. Stop losses, in the context of the stock market, are designed to prevent you losing vast quantities of money in one go. Basically, if you buy a stock and instead of going up it starts going down then at some point you are going to have to sell at a loss. An automatic stop loss, which you should select at the time you buy the stock, will automatically close the trade once the stock reaches a pre-determined price. Usually after losing around 4- 5% you should close the trade and take it on the chin. It is far better to lose 5% than to hang on to your shares in the hope of getting your money back and thereby end up losing 50%.

Stock trading online is all about balancing risks and rewards. You cannot win every time, but you can try and make sure that your winners make you more money than your losers lose. This is why swing traders are looking for a 10% profit but are only willing to bear a 5% loss.

There are other rules that swing traders often follow, such as not buying when the 5-day moving average is pointing down. (check the charts and see where the 5-day moving average is and which way it is pointing).

This introduction to how to buy stocks online for beginners was designed to give a very basic idea of some of the concepts that are used by stock traders. Professional stock traders do use charts and because they use them they often turn out to be self-fulfilling prophecies so it is important to understand what the charts mean, even if afterwards you choose to ignore them.

The subject of technical analysis is vast. One of the most widely used methods is that of Japanese candlesticks on which volumes have been written. There are also other things to consider like MACD, RSI (relative strength index) and many more so you really should get a basic knowledge of what they mean before risking your money.

But the absolute most simple basic idea when buying and selling stocks and shares is that of support and resistance and some people say they use nothing else. They find a stock that is following a trend and then buy it when it falls back to its support level and sell it when it reaches its resistance level. Then wait for it to fall back and do it all over again !

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Related posts : stocks and shares for beginners
Stock charts for beginners and the Hindenburg Omen.
For a video on where stock markets may be headed in 2011 - see stocks and shares