I found this question regarding the trading process, and I want to write on it today because I think it is an excellent concept for people to understand. This post is also dedicated to Problogger.com’s Group Writing Project. Here is the question:
“I’ve been reading countless articles, tutorials, definitions, books and so forth. One thing, however, which has alluded me is the actual process of making a trade. I know that im not ready to start making real trades, but I was wondering if someone could provide a basic start to finish of how they make a trade. So what would be your first course of action if you were looking to invest? What websites do you start out and finish with?”
To answer this “how to” question, the stock trading process is really broken down into the following steps:
- Finding Stocks to Potentially Trade
- Choosing one to buy (research)
- Setting Objectives for the trade (strategizing)
- Buying the stock
- Selling the stock according your plan
- Following up and recording what you did right and wrong
First thing is first, you have to somehow find stocks that you can potentially buy. How the heck do you find companies that you may be interested in buying? The most common way is just through everyday living. You may see 10 people wearing the same pair of shoes and go, “a ha, I need to find out more about this shoe company”. Restaurants, traveling, clothing, food, etc. are all very basic areas that may give you a fresh lead off. So, the first thing you need to do is find a few companies you think would potentially make good investments; that is step 1.
The second part is narrowing down your finds based on research. Let’s make this an example and say that we went to mall, found Master’s Bar and Grill to be pretty popular, Skipper Shoewear to be great, and Remedy water bottles in everyone’s hands. We now have to narrow down our finds to pick one to buy. We can go online to the company’s website and first see if they are publicly traded, that’s a start. Lucky us all three are (in this hypothetical example). Next we probably want to know how the company has been doing in the past. There are tons of ways to get information on how a company has been performing recently. Yahoo Finance, MSN Money, Reuters.com, Investors.com, aol.com, heck google could link you up to company information and news. So, after spending 10 to 15 minutes on each company we decide that Skipper Shoewear is our best buy because sales are expected to increase with summer beginning in the next two months. Now what though?
Now that we have found the company we believe that will perform the best, we need to strategize. Some questions you may ask yourself could be, “How long do I want to hold it for? Is today a good day to buy or should I wait till spring is almost over? If the stock goes up, is there a point where I should just sell and take my gains? If the stock goes down, should I sell at a point and cut my losses?” Just throwing these questions out in the open will give you a big advantage because you can then go in with a battle plan and stick to it. Since it is almost April we decide to buy the stock now, and hold it until either A. The summer ends B. We make 20% in profits, or C. We loose 7% (When it comes to these numbers, ignore the exact % and take into account the basic concepts behind it).
Step Four is actually making the purchase. So, we find out the ticker for our stock (this can be found anywhere on the web, typing in “Google Ticker” will pull up the stock symbol/ticker for you), and we buy x shares of stock at x price. Now, your purchase may have been by calling up your broker, or buy buying through an discount broker such as Ameritrade, Scottrade, Etrade, etc. Either way, you know what you want, and now you buy it.
As time goes on you stick to your strategy and rules set forth before buying the stock and watch it fairly closely. This could mean simply pulling up a stock quote once a day, or looking at its chart once a week, how ever you decide to monitor it is up to you. The closer you watch over it though, the better understanding you will have for where the company is and actually the further you will extend your knowledge base for trading in general. Making the final sell is the deemed by some people the hardest part of the trade, and it can be extremely tough if you do not have a pre-set plan. If you stick to your plan though you setup, you can sell for a profit, loss, or just based on time without too much mind interference.
After all is said and done, and you have sold your stock for whatever result, one of the key things forgotten is follow up research. “What did I do right?”, “What did I do wrong?”, “Should I have sold earlier?”, etc. are all extremely important for the future. Just because you made 50% profits doesn’t mean you are a perfect trader. How you play both sides of the table are extremely important. Taking even 10 minutes to overlook the trade as a whole will provide a wealth of knowledge. Write down a recap of the trade and everything that comes to mind lesson wise. Then, file it away with other past lessons and use them as a reference for the future. Some lessons hit harder than others, but be confident that with time you will only get better. It only takes one time of getting your hand slammed in a door to figure out to be more careful, but may take two or three times to learn to turn on the lights before walking around your house at night.