When starting to invest in online trading there are many different aspects you must look into. I am here to explain different aspects along with a few tips I have learned over the years.
Investing: An investment is defined as an item of value purchased for income or capital appreciation. In reference to stocks, traders who label themselves "investors" usually play stocks from the Big Boards (which we will discuss later) and choose their investments based upon cold hard facts, fundamentals, and the overall quality of the company behind the stock.
Daytrading or Swingtrading: Especially online, people will throw around the terms daytrading, swingtrading, and flipping a stock. In essence, they are all similar and overlapping styles of trading. Daytrading is when you buy an sell a stock within the same day once, twice, or many times (intra-day trading). Swingtrading is usually looking for a movement within the month of purchase. Flipping a stock is a style of trading built by targets set by looking at past performance. Flipping a stock is done by buying any given stock at its bottom support levels and selling at its resistance. All of these methods are short-term trading styles. They are influenced by what is going on right now; not what/where this company is going in the future. These indicators of market movement ATM (at the moment) include Technical Analysis, Press Releases, Stock Momentum (public sentiment) and general trends in different sectors.
Trading on Margin: Many investors are timid when opening a margin account. However, opening a margin account is the only way to avoid the "3-day" rule. When you open a margin account, you no longer have to wait 3 days for you funds to settle after a stock purchase/sale. Most online brokers require a $2,000 balance to open a margin account. If you are able to open one then you have the ability to purchase more stock than a normal cash account would actually allow. With $2000 in cash, you would have the ability to purchase $4,000 in stock. However, use caution, because if your purchase goes into the red, you loss also doubles
Shorting a Stock: Shorting a stock is another perk of opening a margin account. When you short a stock, you are actually selling something that you do not have. Usually this is done with the intention that a stock will decrease in price (for a various number of reasons). When it decreases in price enough to make you a profit, then you purchase that stock back (called covering your short position). Basically it is trading, only backwards. This ability gives you a method of making money by catching stocks in a downward (bearish) movement as opposed to looking for stocks on the rise (bullish stocks).
FYI...You cannot short OTCBB, Pinksheet, or any other stocks under $5.00.
Risk Tolerance: If you were to hire a "big-shot" broker or financial analyst than they would discuss your risk tolerance, and probably do it very extensively. I will address it shortly however, becasue I believe it is an essential question you must answer before you begin trading, however the answer is very simple.
First, figure out how much you can start to trade with. $500 will open you an account to help you learn, but will not offer much return. Others may recommend different amounts, but I believe that $1500 - $2500 is a decent amount to begin with if possible. This way, you can play approximately 3 stocks at once and erase a red play with two green ones.
Second, never invest (especially in pennies) what you cant afford to lose. When you begin, it is a learning experience. Don't think of getting rich quick. The more you know, the safer your money will be. Protecting you initial capital comes first. It is better to not take a loss than to not take a gain. Pennies are not your kid's college fund. Trusts and Mutual Funds handle that type of low risk, slow growth.
Finally, when it comes to risk (sorry for the cliche) Knowledge is Power. The more you know, the safer your money is. Play safe, play smart. Make the smart trade.
$$$ Practice, Predict, Profit $$$
Opening an Account: The next step is opening an account. By addressing all of the above issues, it will make your decision about a broker much easier. Knowing how often you plan to trade, what your average trade size will be, and various other aspects of your trading style/interests will determine the broker which best suits you. The next post will layout the key points/attributes, pros/cons, and customer service experiences with the most popular, affordable, and reliable online brokers.
Rob Rens is the owner of Penny Stocks, Stock Picks - Stockhideout.com