The S&P 500’s solid 22% return in 2017 is likely to entice millennials and other new investors to try their hand at building wealth in the stock market . If so, they’ll be choosing a path that is in many ways superior to bonds and other investments.[ibd-display-video id=3037819 width=50 float=left autostart=true] You can often start with as little as $50, and you can do it in your spare time, on a laptop at your favorite waffle shop, or even over your phone.
While internet trading permits you to be as casual as you like, those who succeed in the stock market tend to be the ones who get the most serious about the challenge of trading stocks. New investors will want to learn some important steps in order to avoid costly mistakes.
Set Up An Account
To be sure, with the age of the internet, getting to your first trade has become a deceptively simple process. You can set up a trading account this afternoon and transfer money from your bank account. When the funds arrive, generally within one to three days, you are set to jump in.
As a first step, determining which broker with which to set up a trading account deserves at least modest basic research. Most of the established online broker ages offer trustworthy banking services and competitive trading tools. Check some of the comparison reviews online to find the best fit for you, or look at IBD’s Annual Broker’s Survey – which provides a detailed rundown of brokers ranked highest by consumers. Brokers recently ranked among the top are Fidelity, Charles Schwab ( SCHW ) and TD Ameritrade ( AMTD ).
Once you have the account and are ready to go, how much do you invest, in which stocks and for how long?
Being brave and bold can be effective traits for some investors. For others, being wary and meticulous works best. In either case, such intrinsic traits become much more effective once investors develop some serious market knowledge and skills.
Investors who take the process seriously generally aim to save time and to reduce the risk that comes from experimentation by adopting a trading system.
Rule No. 1: When To Sell
A broad array of educational programs are available to investors, from groups like the American Association of Individual Investors to brand names like The Motley Fool. The best way to find a good fit is to be clear on what it is you want to accomplish.
Investor Business Daily’s CAN SLIM trading methodology , developed by company founder and legendary investor William O’Neil, is a perfect fit for investors interested in minimizing risk and protecting capital, while pursuing high-quality growth stocks.
One of the best ways to begin to wrap your head around the CAN SLIM system is to learn first the most fundamental rule: cut your losses at a maximum of 7% to 8%, with no exceptions.
“Even being right three or four times out of 10 should yield a person a fortune if he has the sense to cut his losses quickly on the ventures where he has been wrong,” said financier and philanthropist Bernard Baruch, quoted in William O’Neil’s How To Make Money In Stocks.
Rule No. 2: Market Direction
The absolute sell rule provides the most critical survival tool for an investors’ capital, especially early in the learning process. Next on the list of priorities, you must make sure the market is moving in the direction you want to go.
“To be highly accurate in any pursuit, you must carefully observe and analyze the object itself. If you want to know about tigers, watch tigers – not the weather, not the vegetation, not the other animals on the mountain,” O’Neil wrote in The Successful Investor.
One clear way to do this with the stock market is to read IBD’s daily Big Picture market roundup , which breaks down the day’s market action . It also keeps a clear bead on market direction through the Market Pulse, which gauges whether the market is in a confirmed uptrend, uptrend under pressure or market in correction.
The first two indicate green and yellow lights for investors to make purchases. Market in correction means it’s a risky time to place capital in the market.
Charting Out The Basics: Earnings, Bases & Breakouts
Knowing those two overriding rules frees you to begin the basics of locating and timing your first stock purchase. You can do this by searching for and reading IBD Investor’s Corner articles on these basic steps toward your first trade.
- Learn the basics for gauging earnings and revenue growth .
- Learn chart base patterns , how to find buy points and how to identify breakouts .
- Learn when to take profits , and how to add to positions through follow-on purchases .
- Learn the more subtle sell rules , and how to identify stock rallies nearing their peak , when it’s often time to take profits.
As you run through these basics, you can also familiarize yourself with the broader CAN SLIM trading stratagem by reading O’Neil’s How To Make Money In Stocks. And remember, don’t expect it to be quick or easy. You are not likely to get rich in your first 10 or 20 trades. But after 20 trades you should be on your way to building the confidence, knowledge and skills that are the basic building blocks to becoming a highly profitable investor.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.