Beginners'guide: What are the first steps to trading?
Warren Buffett. A name. A legendary name! The name of a billionaire. So, what does he do? He invests in stock. The stock exchange is a huge topic, and a very exciting one. You can make your fortune or go to rack and ruin. Whichever way it goes for you, there’s no denying that investing is one way to improve your finances. So how do you start? How do you make money from it? Is it as simple as it looks? Or is it a minefield? How does a layperson take their first steps on the stock exchange without falling flat on their face? There is a mine of information out there but how do you separate the lies from the truth? You hear about stocks and shares but are they the only way to go? And how does trading fit into it all, what’s the link with the stock exchange? Warren Buffett isn’t a trader as such, more an investor. So what’s the difference?
Let’s take a look at the points any aspiring trader needs to look carefully into both before and during their stock exchange journey.
BEFORE: Need-to-knows before you set off on your stock exchange journey.
You don’t become the new Buffett overnight. It’s more likely to be the work of a lifetime!
So best not to have too many illusions on the subject. It would be however, very risky to start trading without at least some prior knowledge of the stock exchange. And that’s very easy to do – get yourself a book on the subject and read it cover to cover. Try not to pull info from various sources: it’s not the most effective way to learn. Yet nothing is stopping you looking further into a particular topic by researching it. In addition to books on the subject there are countless stock exchange training courses online, some free, some that come with a fee. The ultimate way to learn, however, is by having a mentor, someone who has experience and good results in the field. A mentor will give you more than just information, also providing tried and tested ways to invest in the stock exchange.
The aim of this article is not to give a lecture on the stock exchange, although some points do need to be addressed. Among them is the fact that shares are not the only product that is traded on the stock exchange. There are also, in particular, funds, groups of stocks which enable you to take your first steps in share dealing with less risk. This category includes UCITS, index funds, trackers and ETFs. Another important point to understand is the distinction between trading and investment. Finally, it is possible to hold actual shares or to, for example, trade CFDs. In the former you are a company “shareholder”. In the latter you take advantage of variations in the price of shares without actually owning the shares.
Tools and ways to access the stock exchange
Theoretical knowledge and learning represent an indispensable prerequisite. The logical next step is practical implementation.
You get access to the market via a broker. There are dozens of brokers out there, each with his or her particularity, plus points and negatives. It is important to analyse each so as to select the broker that suits your goals best.
In the UK, there are several tax envelopes or investment vehicles that can help you take your first steps on the stock market: equities saving plans, securities accounts, life insurance. Again, you should compare the specifics of each of them to work out which will best suit your situation and strategy. With, for example, life insurance, you are not able to invest in individual shares. Instead your money has to be invested in a fund. For each different product on the market taxation will be equally specific.
A new class of investment services and financial management has made its entrance in the last few years, called robot-advisors.
If you are short on time and lack the ability to manage your savings effectively, these new options can be very helpful.
As far as your initial analysis and the accessible platforms are concerned, there are various tools available, some reserved for brokers to use and others for the wider public (free or fee-paying). Some give assistance with technical analysis of the markets, others with financial and fundamental analysis.
Setting your goals
Your first and most important task is to set your stock exchange aims and objectives. Trading is all about short-term buying and selling shares, the timeframes extending from a day to several months. Warren Buffett-style investment is, however, a long-term undertaking, ranging from a few months to several years. And there are various strategies you can choose, such as investing to ensure good annual dividends, for example. This is just one of many different strategies, hence the need to analyse them all carefully.
One thing equity trading and stock market investment have in common is that they can be classed as "active management". What this means is that traders personally select the stock they want to trade. This is called stock-picking and it requires you to have a very precise strategy that will enable you to decide which stock to choose and exactly when to sell it on. On the other side of the fence is what we call “passive” management, which deals with index funds and other ETFs. This is generally what robot-advisors use.
Advice and a word of warning
Trading and investing inevitably generate transaction costs, with the broker taking a fee on each and every stock sale or purchase. As such, although equity trading and investment can be a potentially lucrative activity, it can also be an expensive one.
Moreover, you need nerves of steel to trade effectively. It can be difficult to keep your emotions out of your decision-making, which is why it is essential to have a clear, set strategy so you know precisely what to do and when. Equally important is having the means to analyse your results and see how your portfolio is doing in order to improve and optimise its performance.
Brokers also offer complex leveraged products such as turbos, options, warrants... As a beginner with no experience, these should be avoided at all costs! The same goes for trading CFDs, as these are also leveraged products, generally with a margin account attached. You would be ill-advised to venture there until you know the ins and outs of this type of investment.
A final word to you
As you have seen, there are many parameters that need to be considered with the stock market… It isn’t an easy ride and you can spend a lifetime learning and perfecting strategies and using new tools and services. Risk will always be a passenger on that ride with you; you simply need to be aware of it and learn to manage it effectively. There are many different strategies to manage risk but there is one you should never forget when you’re dealing with trading, the stock exchange, equity, risk: invest your capital in small portions and diversify your portfolio!
Last Update on 16/09/19