How to trade stocks: A 101 guide
Editorial staff, J.P. Morgan Wealth Management
- Investing in stocks means buying and selling – or trading – them with the help of a broker.
- In the past, trading stocks was more difficult. Now you may be able to more easily own stocks at a low cost with a small contribution and trade via a brokerage account that is accessible entirely online.
- People who trade stocks employ different trading styles, but many financial experts recommend a “buy and hold” trading strategy for most investors.
For generations, the stock market has allowed people to invest their money in companies that are publicly listed on stock exchanges. While this has always come with risk, it has also been a key way for companies to raise capital and for investors to potentially see returns on their money from this opportunity.
In this primer, we’ll talk about the basics of investing in stocks if this is an investment strategy you’re interested in pursuing.
First things first: What does it mean to buy stock?
Today, when a person buys stock in a company, they're buying shares of that company. Shares are priced based on supply and demand in the stock market, and that price is readily available on financial websites and via stock trading platforms.
To put this concept into context, if Company A’s shares are priced at $171 each at a given point in time, if you own 100 shares of Company A’s stock it will be worth $17,100.
It’s important to note that stock prices change constantly, and so while Company A’s stock might be priced at $171 one minute, its price could change in the next minute.
Are stocks and shares the same thing?
When friends or relatives talk about owning stocks or shares in a company, you may ask, “Are stocks and shares the same thing?” The short answer is yes, but there are a couple of nuances to these terms.
A stock represents ownership in a company, typically referring to the overall equity or total ownership stake, whereas shares are specific units of that stock. Think of stocks as the broader concept of company ownership, and shares as the individual, countable pieces that represent a proportional claim on the company’s assets and earnings.
For example, you might say “I own stock in Company A,” but you would specify “I own 100 shares of company A stock” when discussing the precise quantity of your investment.
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Types of stock trading
To determine the best approach for trading stocks, it’s helpful to understand the different stock trading styles. As you familiarize yourself with the different trading styles, keep in mind that while all trading comes with risk, some trading styles – like day trading – are riskier than others and may be best left to highly experienced investors. You can also get exposure to stocks by investing in mutual funds or ETFs. These are professionally managed portfolios of stocks (or other assets).
Buy and hold or passive investing
Generally speaking, the safest way to invest may be to think long term. With a buy and hold investing strategy, which translates into how often an investor buys and sells stocks, investors purchase stocks, funds or other securities and hold them for long periods (often years or decades) regardless of short-term market fluctuations. This trading style is based on the belief that long-term market appreciation will outweigh short-term volatility.
Active trading
Active trading refers to the frequent buying and selling of stocks to take advantage of market movements over days, weeks or months.
Active traders hold positions for periods of time depending on the perceived opportunity. Technical indicators and patterns may play a role in their strategy, but some active traders also incorporate analyzing the fundamentals of companies or the economy at large – such as earnings reports or economic trends – into their strategy.
Day trading
Day trading is a form of active trading that involves buying and selling stocks within the same trading day to capitalize on short-term price fluctuations. Since the goal is to profit from short-term volatility, day traders may rely heavily on real-time data, news updates and high-speed trading platforms. This trading style is not encouraged for novice investors due to the high risk involved and potential to lose significant capital.
Algorithmic or automated trading
This form of stock trading uses computer programs to track the market and make investment decisions based on a pre-determined set of parameters. This may allow investors to set specific goals and investment strategies without having to monitor progress and make adjustments on a continuous basis.
Position trading
Position trading is a longer-term approach to investing that is based on larger price movements over an extended period of time. This may involve tracking a specific company or market sector. This may be an effective approach to trading, but it requires a thorough understanding of the underlying assets and their growth potential.
Swing trading
Swing trading is a strategy where investors aim to capture short- to medium-term price movements (or “swings”) in stocks, typically holding positions for a few days to several weeks to try to profit from the natural rhythm of price movements. This style requires less constant monitoring than day trading but more active management than long-term investing.
Value investing
Value investing is a distinct trading style that focuses on identifying and buying undervalued stocks – essentially finding “diamonds in the rough” that the market has overlooked or unfairly discounted. Unlike growth investors who chase high-potential companies with rapid expansion, value investors may dig deep into financial statements, analyzing metrics like price-to-earnings, ratios, book value, debt levels and cash flows to find opportunities. Value investors may hold stocks for several years to decades, though there’s no fixed period.
How to trade stocks: A step-by-step guide
Here’s how to go about starting to trade stocks, along with some considerations you might want to make as you begin.
1. Open a brokerage account
At brokerage firms, you may be able to open a general investment account or a tax-advantaged retirement account to buy and sell stocks.
To decide which account is better for your needs, you may want to ask yourself the following question: Is my goal saving for the future (like retirement) or making extra money now?
If you’re looking to make money to use in the immediate future, then a general investment account may be the best fit for your needs.
On the other hand, if you’re looking to save for retirement, you may want to explore investment accounts designed for retirement like Roth and traditional IRAs. Although they come with certain tax advantages, there are early withdrawal penalties to consider too if you think you may need access to the money before age 59½.
2. Set a budget to start with
Determine how much money you can afford to invest and start there as you begin. Remember, you can always add to your investment portfolio over time. First creating an emergency fund and then directing what you can to your investment portfolio is a practice some people employ as they start to build their portfolio over time.
3. Understand the different types of stock market orders
To buy stocks, you have to submit an order to your broker – whether that’s a human being or an online investing platform. When you begin to do this, it’s important to familiarize yourself with the different stock orders you can make and their different implications.
- Market order: A market order tells the broker to buy or sell the stock for you at the current “market” price.
- Limit order: A limit order tells your broker to buy or sell a stock when it reaches a certain price. You typically use this kind of order when you think a stock is too expensive, but you would buy it if the price dropped. You can also use limit orders to sell a stock you own if the price drops below a specified amount.
- Stop-loss order: A stop-loss order is similar to a limit order because you specify a price at which you want to buy or sell a stock. However, a regular limit order identifies the maximum or minimum price you’re willing to accept for a purchase or sale, whereas a stop-loss order turns into a market order when the given price is registered. The difference is subtle, but it can make a difference if a stock price is bouncing around your given price.
- Stop-limit order: A stop-limit order tells the broker to convert the order into a buy-or-sell order at a certain price (i.e., the “stop price”). However, the order won't execute until the “limit price” – which is different from the stop price – has been reached. Once the order converts into a market order, you don’t have to worry about the price changing before your trade can execute.
- Day-only order: You may want to place a stop order today, but tomorrow is a different day. A day-only order is only good for the trading day on which you place the order.
- “Good-‘til-cancelled” (GTC) order: Unlike a day-only order, a GTC order is, as the name implies, good until you cancel it. If you think the price of a market index is going to go down, until it hits a certain price – whether that’s this week, next month or in the coming year – you can set a GTC order and wait for as long as you like to see if it fills.
4. Build your investment portfolio
After you’ve opened an investment account, set a budget to start with and familiarized yourself with the different types of trading orders, you can start to build an investment portfolio.
When building your investment portfolio, it’s important to define your goals and time horizon – whether you’re saving for retirement, a house or other objectives. Consider your risk tolerance as some industries are more volatile than others and diversifying your portfolio across different asset classes like stocks and bonds so you aren’t putting all of your eggs in one basket.
5. Measure results, monitor progress and tweak as needed
Evaluate your trading outcomes regularly. If specific strategies don’t work, you should adapt your plan for future success. Learning how to trade stocks is like trying to hit a moving target: you should make regular adjustments to keep up with changing economic tides. It’s also important to continually evaluate your portfolio to make adjustments as your goals and risk tolerance change over time.
How do beginners learn to trade?
Learning to trade stocks requires time and effort, but there are plenty of resources available to help you succeed, including:
- Online educational resources: Use resources, like J.P. Morgan Wealth Management’s educational hub The Know, to access educational content about investing along with timely content about the economy and the markets.
- Books and courses: Read investing books or take online courses on stock trading fundamentals.
- Brokerage account tools: Many brokerage accounts offer demo accounts or educational tools to practice and learn without taking on the risk of investing with actual money.
- Mentorship: Consider joining trading forums or investing groups to learn from experienced traders.
Practice patience, start small, absorb as much knowledge as possible and approach trading with discipline. It may take some time to become skilled at stock trading.
Stock trading terms to know
There is a lot of vocabulary to potentially learn as you begin to trade stocks. The following is a short list of terms you’ll likely run into when you start investing. This list is by no means exhaustive – there are many, many more terms to learn as you go.
- Stock/share: As discussed above, though there are nuances, these terms are often used interchangeably to refer to the units of a company people buy and sell on the stock market.
- Dividend: A dividend is a payment in cash or more company stock that a company may pay to its shareholders.
- Fund: A fund, including mutual funds and exchange-traded funds (ETFs), is a pool of money from many investors to purchase a diversified collection of stocks, bonds or other securities allowing individual investors to own small pieces of many different investments through a single purchase.
- Mutual fund: Mutual funds come in different varieties, including actively managed funds and index funds. The former may try to outperform market returns (and are usually more expensive to maintain), while the latter may try to match market returns and are typically passively managed.
- ETF: An ETF is an investment fund that trades on stock exchanges like a regular stock, sometimes tracking a specific index, sector or asset class. These funds can be bought or sold throughout the trading day, which makes them different from mutual funds.
- Stock split: Sometimes, a company may choose to “split” its stock. So if you initially own one share, after the split, you’d own two or more shares. It’s important to note that you’re not any richer after the split.
- Value stock: Value stocks are shares that appear to be underpriced relative to the company’s fundamentals like earnings, dividends or book value.
- Growth stock: A growth stock is a share of a company that’s expected to grow its earnings and revenue faster than the market average.
How much money do you need for trading stocks?
Thanks to fractional shares and modern brokerages, you can start investing in stocks with very little money – often as little as $1 to $5, depending on the trading platform. This means you can buy portions of stocks rather than needing to purchase the stock for the full share price.
Beyond the ability to purchase fractional shares, as you consider how much money you’ll need to trade stocks, you’ll want to take into consideration the commission structure and minimum account balances for the trading platform you want to use to determine how much money you’ll need to start with.
Beyond determining the minimum you’ll need to start trading, you’ll also want to determine the amount you personally want to budget for. Set a realistic budget that aligns with your financial situation and risk tolerance, ensuring you only invest what you can afford without compromising your financial stability.
How to start trading with $100
Starting with $100 might seem small, but it’s enough to begin in most cases depending on your brokerage account. Some tips?
- Consider investing in fractional shares, which will allow you to build a diversified portfolio with $100.
- Consider low-cost ETFs that offer exposure to multiple stocks so you can stick to your budget.
- Consider the total performance of your trading style e.g. profits, losses, commissions, fees and taxes. You may need to change your approach.
The bottom line
As you go on your investing journey, review your portfolio regularly to help ensure your investments remain in line with your financial goals.
If you’re not willing or able to spend a lot of time keeping an eye on the price movements of your stocks – and you just want to grow your capital – you might want to consider working with an advisor who can help you determine suitable options for your needs.
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Editorial staff, J.P. Morgan Wealth Management
