Tuesday, June 22
Making money online stock trading is a nice way to make a living, provided it works. But if you are a beginner to the stock market then you may be wondering just where to start. The principle of making money on the stock market is very simple, you buy stocks in a company via one of the many online stock brokers, at $X then some time later you sell the same stocks for $X + $Y. You have to pay commission and fees and possibly tax too if you make enough, but whatever is left over is profit for you. and you made it all from the comfort of your own home ! The ultimate make money on the Internet job.
If you don't like the idea of paying tax on your stock market profits then you can use one of the many financial spreadbetting firms instead of a stock broker. Your 'investment' is then classed as a 'bet' and for some reason you don't need to pay tax on it.
That is the basic principle of making money stock trading, but of course putting this basic principle into practice is rather more tricky. You need to know which stocks are likely to go up in price and this is where the complications arise (you can also make money from falling prices, this is known as 'shorting' but this is not a strategy that is recommended for beginners).
First of all, unfortunately, you need to bear in mind that you cannot really trust anyone. Stock market tipsters frequently get it wrong. So-called experts and analysts often make their money by selling their 'expertise' rather than actually by trading stocks. Company directors are often economical with the truth. Even your online stock broker will probably turn out to be incompetent at some point and will cost you money. In my personal experience TDWaterhouse is a prime example of this, but there are plenty of other stock brokers around - see here for a list of online stock brokers. Technical analysts, who base their trading decisions on what the stock charts are telling them, often disagree with each other, and lets face it they can't all be right.
However, you've got to start somewhere. There are two basic methods for picking stocks - fundamental analysis and technical analysis. Fundamental analysis involves analysing what a company does, reading its accounts, deciding if its stock price is cheap or expensive and then buying the stocks or not. This is what Warren Buffett does and he has become a billionaire by doing it. If you have the time you can in fact just follow what Warren Buffett does and buy the same stocks that he does - you can see which stocks he is invested in here - Warren Buffett stock holdings.
Technical analysis is used more by short and medium-term stock traders - using a timeframe of anything from a few days to a few months. It involves interpreting stock charts and buying stocks when certain levels are reached and then selling them when you have made the profit you were intending to make (or selling them qucikly if they start going down instead of up).
Why do people use stock charts in stock trading ? Basically because stock charts are a reflection of human behaviour. For example, in a football match some people start heading for the exits 5 minutes before the game is finished, if you knew nothing about football then this movement of people might tell you something about what is about to happen next. The same often happens with stocks. People who know what is about to happen start heading for the exits (or the entrances) and this behaviour shows up in the charts. This is why it is often said that the news shows up in the charts first. A stock price will rise for no obvious reason then a few days later some announcement is made. The conclusion is that some people knew what was going to happen before it happened and acted on that news.
Stock charts also cause people to act even when there is no news. When a stock reaches a certain level people will sell for the simple reason that a certain level has been reached thus creating more selling and a self-fulfilling prophecy. If you are a beginner to stock trading and have no desire to really understand the fundamentals of every company you may invest in, then you really owe it to yourself to understand the basics of stock charts. Professionals use them all the time so you are at a disdvantage if you don't know how the professionals are likely to react to certain situations.
As a stock market beginner the first thing to understand to make money on the stock market are the concepts of support and resistance and moving averages. Moving averages show the average price of a stock over a given time period. The 200-day moving average is particularly important. If a stock falls below its 200 day moving average then this is interpreted by many people as a clear sell signal, which of course drives the price down. - see stock charts for beginners
Barclays stock price fell through the 200 day moving average back in early 2007
Support and resistance levels are the levels at which stocks fall or rise to before turning round. This is known as trending and many traders make a living by buying at the bottom of a trend and selling at the top. They then wait for the stock price to fall back to the bottom and start all over again.
Some traders say that this is all they use.
For such traders, known as swing traders, another basic rule they often apply is to never buy a share if the 5-day moving average is heading down.
These are the most basic concepts of technical analysis but if you are a beginner to stock trading it is important to get to grips with such concepts, even if you choose to ignore them, as they are used by many thousands of traders and their behaviour will influence the price of the stock you are considering trading.