Trading with stocks

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Stock Trading: How to Begin, How to Survive

Not everyone who buys and sells stocks is a stock trader, at least in the nuanced language of investing terms. Most investors fall into one of two camps. Depending on the frequency in which they transact and the strategy driving their actions, they’re either “traders” (think Gordon Gekko in the movie “Wall Street”) or “investors” (as in Warren Buffett).

What is stock trading?

The term stock trader typically refers to someone who frequently buys and sells stocks to capitalize on daily price fluctuations. These short-term traders are betting that they can make a few bucks in the next minute, hour, days or month, rather than buying stock in a blue-chip company to pass along to their grandkids someday.

Stock trading can be further refined based on certain criteria:

Active trading is what an investor who places 10 or more trades per month does. Typically, they use a strategy that relies heavily on timing the market, trying to take advantage of short-term events (at the company level or based on market fluctuations) to turn a profit in the coming weeks or months.

Day trading is the strategy employed by investors who play hot potato with stocks — buying, selling and closing their positions of the same stock in a single trading day, caring little about the inner workings of the underlying businesses. (Position refers to the amount of a particular stock or fund you own.) The aim of the day trader is to make a few bucks in the next few minutes, hours or days based on daily price fluctuations.

» Read more: How to day trade

How to trade stocks

If you’re trying your hand at stock trading for the first time, know that most investors are best served by keeping things simple and investing in a diversified mix of low-cost index funds to achieve — and this is key — long-term outperformance.

That said, the logistics of trading stocks comes down to six steps:

1. Open a brokerage account

Stock trading requires funding a brokerage account, a specific type of account designed to hold investments. If you don’t already have an account, you can open one with an online broker in a few minutes.

To see suggestions on stock brokers, plug your preferences into the selection tool below. (Article continues below tool.)

Get the best broker recommendation for you by selecting your preferences

What do you want to invest in?
What do you want to invest in?

Investors who trade individual stocks and advanced securities like options are looking for exposure to specific companies or trading strategies.

Mutual funds and ETFs are typically best suited to investing for long-term goals that are at least 5 years away, like retirement, a far-off home purchase or college.

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Beginners and long term investors often look to get exposure to whole markets and don’t have a preference on which type of securities to trade.

How much will you deposit to open the account?
How much will you deposit to open the account?

Some brokers have minimum deposit requirements, while others may require a minimum balance to access certain advanced features or trading platforms.

If a broker is offering a new account promotion, there may be a minimum initial deposit requirement to qualify.

How often will you trade?
How often will you trade?

If you’re trading frequently — more than weekly — you’ll want an advanced broker that has powerful platforms, innovative tools, high-quality research and low commissions.

Those who trade monthly or yearly will want a well-rounded broker with a user-friendly interface, helpful customer support and competitive pricing.

Who will manage your investments?
Who will manage your investments?

Robo-advisor services use algorithms to build and manage investor portfolios. For a very low fee, they’ll create a portfolio of ETFs based on your investing goals and risk tolerance, then rebalance it as needed. Many also offer tax-loss harvesting for taxable accounts.

If that sounds too hands-off for you and you want to manage your own investments , choose a self-directed account at an online broker.

What is most important to you?
What is most important to you?

Low Cost: Mutual fund/ETF investors want access to funds without commissions or fees; stock or options traders want low commissions and no added fees for inactivity, tools or research.

Platform: If you plan to trade frequently, you likely know what kind of tools you’ll use most and what you want out of a platform.

User interface: Tools should be intuitive and easy to navigate.

Premium research: Investing, particularly frequent trading, requires analysis. The broker should provide extensive information to help you select the investments for your portfolio.

Large selection; low fees

cash credit with a qualifying deposit or transfer

on E*TRADE’s secure website

Offers access to human advisors for additional fee.

of free management with a qualifying deposit

on Betterment’s secure website

Professional-level trading platform and tool.

0.25% reduction on margin loans. Tiers apply

on Interactive Brokers’s secure website

» Need help making a selection? Learn how to choose a brokerage account

2. Set a stock trading budget

We have some advice: Even if you find a talent for trading stocks, allocating more than 10% of your portfolio to individual stocks can expose your savings to too much volatility. Other ground rules to manage risk: Invest only the amount of money you can afford to lose, don’t use money that’s earmarked for near-term, must-pay expenses (like a down payment on a house or car, or tuition money) and ratchet down that 10% if you don’t yet have a healthy emergency fund and at least 10% of your income funneled into a retirement savings account.

3. Learn to use market orders and limit orders

Once you have your brokerage account and budget in place, you can use your online broker’s website or trading platform to place your stock trades. You’ll be presented with several options for order types, which dictate how your trade goes through. We go through these in detail in our guide for how to buy stocks, but these are the two most common types:

  • Market order: Buys or sells the stock ASAP at the best available price.
  • Limit order: Buys or sells the stock only at or better than a specific price you set. For a buy order, the limit price will be the most you’re willing to pay and the order will go through only if the stock’s price falls to or below that amount.

4. Set up a practice stock-trading account

There’s nothing better than hands-on, low-pressure experience, which investors can get via the virtual trading tools offered by many online stock brokers. Paper trading lets customers test their trading acumen and build up a track record before putting real dollars on the line. (Several of the brokers we review offer virtual trading, including TD Ameritrade and Interactive Brokers.)

5. Measure your returns against an appropriate benchmark

This is essential advice for all types of investors — not just active ones. The bottom-line goal for picking stocks is to be ahead of a benchmark index. That could be the Standard & Poor’s 500 index (often used as a proxy for “the market”), the Nasdaq composite index (for those investing primarily in technology stocks) or other smaller indexes that are composed of companies based on size, industry and geography.

Measuring results is key, and if a serious investor is unable to outperform the benchmark (something even pro investors struggle to do), then it makes financial sense to invest in a low-cost index mutual fund or ETF — essentially a basket of stocks whose performance closely aligns with that of one of the benchmark indexes.

6. Keep your perspective

Being a successful investor doesn’t require finding the next great breakout stock before everyone else. By the time you hear that XYZ stock is poised for a pop, so have thousands of professional traders and the potential likely has already been priced into the stock. It may be too late to make a quick turnaround profit, but that doesn’t mean you’re too late to the party. Truly great investments continue to deliver shareholder value for years, which is a good argument for treating active investing as a hobby and not a Hail Mary for quick riches.

How to survive stock trading

Wherever you fall on the investor-trader spectrum, these tips for how to trade stocks can help ensure safe trading:

Lower risk by building positions gradually. There’s no need to cannonball into the deep end with any position. Taking your time to buy (via dollar-cost averaging or buying in thirds) helps reduce investor exposure to price volatility.

Ignore “hot tips.” WallStreetHotShot4721 on the EZMillion$Trade forum and the folks who pay for sponsored ads touting sure-thing stocks are not your friends, mentors or bona fide Wall Street gurus. In many cases, they are part of a pump-and-dump racket where shady folks purchase buckets of shares in a little-known, thinly traded company (often a penny stock) and hit the internet to hype it up. As unwitting investors load up on shares and drive the price up, the crooks take their profits, dump their shares and send the stock careening back to earth. Don’t help them line their pockets. If you’re looking for a guru, bookmark Warren Buffett’s annual letters to shareholders for commonsense advice and observations on sane, long-term investing.

Keep good records for the IRS. If you’re not using an account that enjoys tax-favored status — such as a 401(k) or other workplace accounts, or a Roth or traditional IRA — taxes on investment gains and losses can get complicated. The IRS applies different rules and tax rates, and requires the filing of different forms for different types of traders. (Here’s an overview of the IRS rules for stock traders.) Another benefit of keeping good records is that loser investments can be used to offset the taxes paid on income through a neat strategy called tax-loss harvesting.

Choose your trading partner wisely. To trade stocks you need a broker, but don’t just fall for any broker. Pick one with the terms and tools that best align with your investing style and experience. A higher priority for active traders will be low commissions and fast order execution for time-sensitive trades (like our picks for best online platforms for active traders/day traders). Investors who are new to trading should look for a broker that can teach them the tools of the trade via educational articles, online tutorials and in-person seminars (see NerdWallet’s round-ups for the best brokers for beginners). Other features to consider are the quality and availability of screening and stock analysis tools, on-the-go alerts, easy order entry and customer service.

No matter what, the time spent in learning the fundamentals of how to research stocks and experiencing the ups and downs of stock trading — even if there are more of the latter — is time well spent, as long as you’re enjoying the ride and not putting any money you can’t afford to lose on the line.

How to Trade Stocks

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wikiHow marks an article as reader-approved once it receives enough positive feedback. This article has over 531,591 views, and 89% of readers who voted found it helpful. It also received 23 testimonials from readers, earning it our reader-approved status. Learn more.

Penny Stocks for Beginners (Trading With Just $100)

Wondering how to trade penny stocks? Penny stocks are a great option for traders who want to start investing with just $100. The popularity of penny stock trading has skyrocketed because penny stocks are “designed” for investors who have little start-up capital. In this step-by-step guide, you’ll learn how to trade penny stocks for beginners.

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Jordan Belfort, also known as the “Wolf of Wall Street,” is a stockbroker who made his name dealing in penny stock trading, which made him millions in profit. Now, his name has a negative connotation because back in 1999, he was convicted of manipulating the stock market and running a penny stock boiler room.

We’re not here to promote penny stock scams, we just want to show you what can be accomplished if you follow our penny stocks for beginner’s guide.

Before you risk any of your hard-earned money, let’s learn what penny stocks are and how you can buy them. By the end of this guide, you’ll know the exact trading tips, methods, and strategies to successfully trade penny stocks.

What Are Penny Stocks?

What are penny stocks? According to the US Securities and Exchange Commission (SEC), penny stocks are shares in companies that trade below $5 five dollars. In the past, only stocks under $1 were considered penny stocks. Penny stocks are also referred to as “pink sheet stocks.”

Usually, penny stock companies operate outside the major exchanges like the NYSE or NASDAQ. They are traded over the counter. However, if a penny stock’s price is consistently between $1 and $5 dollars a share, it can be listed on NYSE.

Penny stock examples:

If you want to learn more about the OTC market, please visit Over-the-Counter Trading – How the Whales Trade.

The second characteristic of penny stocks is that they have a small market cap. These cheap penny stocks generally have a market cap of less than $300 million or $50 million.

Risks and Benefits of Trading Penny Stocks

There are multiple benefits of trading penny stocks. Because these stocks are priced under $5, there is a limited risk. The most you can lose is $5. By choosing the right stocks, however, you have access to an unlimited upside. Though they are rare, instances of stocks rising from $1 to $100 within a month are not unheard of.

Penny stock price movements are also usually more volatile than normal stocks. For day traders, this means there will be multiple opportunities for profit within a given trading period. Even if a stock only moves from $0.20 to $0.30, this is still a 50% increase in value.

Another benefit of trading penny stocks is that, unlike stocks listed on the S&P 500, penny stocks are loosely correlated with the market as a whole. Even if the entire economy is undergoing a recession, there will still be multiple penny stocks increasing in value.

There are drawbacks to trading penny stocks. Many of these companies have very little (or even negative) value, which is why they are priced so low to begin with. The majority of penny stocks will remain penny stocks for life. Furthermore, because they are often traded over the counter and with little oversight, these stocks are a prime target for pump and dump or insider trading schemes. Still, when managed correctly, trading penny stocks can still be quite profitable.

Let’s dive into how to find penny stocks using this smart, simple strategy.

How Do I Find Penny Stocks?

In order to find penny stocks, you need to use a penny stock scanner. A scanner will help you find hot penny stocks that are hidden from the general public attention.

Finviz.com stock screener is our favorite free penny stock screener. This is by far the easiest way to find penny stocks.

A good penny stock screener will let you scan for stocks under $5 or for stocks under $1 using customized parameters. You can find the best penny stocks to buy for 2020 that meet your specific parameters and filters. If you’re just getting started learning how to trade penny stocks, don’t be afraid to play with the online stock screen tool testing different filters. This can lead to a powerful penny stock list to buy.

If you lack ingenuity, try scanning for the most active penny stocks in the premarket. This will give you a list for day trading penny stocks.

Remember – A lack of research can lead you to invest in some of the worst pump-and-dump scams. Learning how to make money from trading penny stocks comes down to putting in the time and effort. There is no secret formula to find stocks before a pre-spike. But, learning how to find the right penny stocks can definitely improve your chances of success.

Now that you’ve learned how to find the hottest penny stocks the next big question is where to buy penny stocks?

Where to Buy Penny Stocks?

Most penny stocks are listed on the OTCBB (over-the-counter bulletin board), however, some of them can also be found on the regular stock exchanges. Professional traders on Wall Street refer to penny stocks as over-the-counter stocks.

There are more than 10,000 securities listed on the OTCBB. Investors can trade and access these pink sheet stocks via an online stockbroker.

Since OTC stocks are very volatile and illiquid, we recommend only to invest in penny stocks listed on NYSE and NASDAQ.

So, how do you buy penny stocks?

How to Buy Penny Stocks?

The best way to buy penny stocks is to go through a regulated stockbroker. A Broker will get you access to the market with leverage, so you can begin trading quickly. Besides a using broker, learning how to buy penny stocks requires two more things:

  • Money to purchase the penny stocks.
  • A penny stock trading strategy to help you pick the best penny stocks.

Try to avoid buying penny stocks directly from dealers who call you to pitch you investment opportunities. Try researching low commission stock brokers that offer OTC stocks and penny stocks listed on the NYSE or NASDAQ. You’ll want to have a wide variety of options, so you can find the best-performing stocks.

Here are the top brokers we recommend:

  • Fidelity Investments – $4.95 per trade
  • Charles Schwab – $4.95 per trade
  • eOption – $3.00 per trade
  • TD Ameritrade – $6.95 per trade
  • Interactive Brokers – $.005 per trade
  • TradeStation – $5 per trade

What’s the Difference Between OTC and NYSE/NASDAQ Penny Stocks?

Penny stocks come in two different forms, pink sheet stocks and exchange penny stocks. “Pink Sheet” penny stocks are traded over the counter. “Exchange” penny stocks are still priced under $5 but are featured on a major exchange such as the NYSE or NASDAQ. Blockbuster is a prime example of an exchange stock that eventually achieved “penny stock” status.

Usually, when people refer to penny stocks, they probably referring to stocks being traded over the counter. These stocks usually have very small market caps and the market itself is very lightly regulated. While the right pink sheet stocks can yield profitable returns, they are usually considered riskier than those listed on the major exchanges.

Now that you know about the two different types of penny stocks, the next step is learning how to trade.

How to Trade Penny Stocks?

Ever wonder how to trade penny stocks?

Anyone can learn the ropes of how to trade penny stocks for free. There are no hidden secrets because the game on Wall Street never changes. Penny stocks are characterized by big volatility. They can go from a few cents per share up to a couple of dollars very fast.

You can make a lot of money from volatility, but you can also lose lots of money.

Most people trading penny stocks tend to lose money because they trade incorrectly or use a penny stock trading strategy that is not suitable for their type of trading environment. That’s what makes penny stocks a high-risk, high-return investment.

At the end of the day, you have to keep in mind that 85% of active traders lose money trading the stock market.

However, if you learn how to trade penny stocks the right way, you can skew the odds in your favor and be part of the 15% of active traders that are profitable day trading penny stocks.

All you have to do is to learn how to buy penny stocks and find potential winners before they spike.

There are only a handful of hot penny stocks that make big moves on a day to day basis. Not all the stocks under $5 are hot penny stocks. The trick is to learn what penny stocks to buy pre-spike. We have developed a penny stock trading strategy that uses some trading rules that we found 20 years ago.

If you want to become a better penny stock trader, try learning how to trade penny stocks using our methodology.

The Best Penny Stock Trading Strategy

The best penny stock trading strategy is broken into three steps, scanning, searching and striking. The goal is to identify when a penny stock is spiking. This is very important for penny stock traders. Not even the best trading rules in the world can tell you what every penny stock will do in every situation.

However, if you use our “secret sauce” you can predict with a high degree of accuracy when a penny stock is about to get pumped.

If you want to learn how to trade penny stocks, simply follow our three S’s rule:

  • Scan for the best penny stocks using our 6 filters.
  • Search for a technical pattern.
  • Strike using a market order.

Step #1: Scanning

Use a penny stock screener to find hot penny stocks. We prefer using the free stock scanner offered by Finviz. Customize the penny stock screener to match our parameters and filters. This will give you an edge in the market.

Penny stocks parameters to find the best penny stocks:

  • Market Cap: between $50 million and $300 million
  • Target Price: 5% Above price
  • Current Volume: Over 1M
  • Country: USA
  • Price: Under $5
  • Technical: Price Above the 200-day Simple Moving Average

List of penny stocks to buy:

If you use our penny stocks filters, you have the potential to find penny stocks that are going to make a big run. As you can see, the penny stock screener only displays a handful of penny stock examples.

Once you have your penny stock watch list, it’s time to search for a technical pattern.

Step #2: Searching

If the penny stock screener only displays a handful of stocks we like to look through all of them and see which of them presents the clearest technical pattern. If you’re an experienced technical trader you can use your skills to pick the best pattern.

After looking through our watch list, the penny stock UUUU (Energy Fuels INC) presents the clearest price pattern.

We manage to find a neat rectangle pattern developing on this hot penny stock’s chart. You can’t go wrong trading when you have such a clear pattern.

After we picked up the penny stock that shows the clearest price action, it’s time to pull the trigger.

Step #3: Striking

For an entry, we wait for our rectangle pattern to get confirmed. Once we break above the rectangle resistance line, we pull the trigger and buy the UUUU penny stock.

The rectangle pattern is a super easy chart pattern to trade because it gives you a very precise entry point and risk point as well.

The key to trading any breakout of a chart pattern is to also see the volume picking up as smart money pumps the penny stock.

Best Penny Stocks to Invest for 2020

The list of the best penny stocks to invest in is constantly changing. Most penny stock trading trends unfold quickly. However, here is a list of the best penny stocks with the greatest daily increases for July 2020:

  • SG Blocks (57.77% increase)
  • FTE Networks Inc. (22.44% increase)
  • Synthesis Energy Systems (19.48% increase)
  • Innodata (17.39% increase)
  • Taronis Technologies (16.28% increase)
  • Iconix Brand Group (14.71% increase)
  • Remark Holdings (12.20% increase)
  • Sierra Oncology (11.04% increase)

Pro Tip – To reduce the risk attached to any given stock, you may want to consider diversifying your holdings and purchasing multiple stocks at once.

Final Thoughts – How to Trade Penny Stocks

Penny stocks present opportunities that are independent of how the overall market is performing. Penny stock trading can be an important part of a diversified stock portfolio. But, before you put your hard-earned money at work, you need to find penny stocks that are more tradable and liquid than average.

Penny stocks are very speculative in nature, but this market can provide you with a probability to make money if you learn how to trade correctly. Proper preparation, research, and scrutiny are needed to be successful. Always due your due diligence, and make sure to try our suggested penny stock scanner settings for best results. We hope you enjoyed this penny stocks beginners guide.

Thank you for reading!

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