Online trading has been a boon for individual investors who prefer doing their own research and trading stock on their own. Before online trading was invented in the 1990s, investors paid hundreds of dollars in transaction commissions to registered stock brokers.
Online trading is available to anyone with the cash to open an account, usually a minimum of $2,000. A single trade costs between $4 to $7.95, each time a buy order or sell order is placed. The trick is to pick stocks with great care (do your research), avoid risky situations, and make a profit. Surely, this is possible, but not magic by any means.
While day trading can be risky, frequent trading in and out of a few good stocks can be more manageable. Some investors supplement their incomes by trading stocks, but there is always risk. Don’t kid yourself into thinking you can’t lose.
Investors think, “I just have to buy a stock and wait until it goes up and then sell it. When it goes down, I can buy it back”
There are several things that can go wrong with that scenario:
The stock might be affected by an overall decline in the market or in a sector and slide down. For example, Cisco Systems (CSCO) was trading at $65 a share about 10 years ago towards the end of the technology boom. An investor that bought 100 shares at $65 soon watched the stock go down and it never hit $65 again. Today, CSCO never went back up and has been selling in the $19-high $20 dollar range. So although a stock like CSCO seemed like a sure thing, it was not.
The company can be impacted by bad news, such as the recent financial crisis, the oil spill, or a natural disaster, and its stock price could go down drastically.
The company could turn out to be a house of cards – like Enron.
An industry sector, such as shipping or copper, could be flying high and then lose momentum for no apparent reason. If you are not watching the movement, you might fail to get out in time.
A new invention or development might impact a company’s product. This has happened frequently in the technology sector.
Smart traders look for the most liquid and most volatile stocks. They also look for stocks that trade in a narrow range and consistently trade within that range (known as range trading) for an extended period of time.
For example, Citicorp has been trading between approximately $3.50 and $5.00. The trader tries to buy at the lowest point by tracking the stock and using limit orders. If he owns 1000 shares at an average price of $3.75, he waits until the stock goes to $4.35, and sells. The transaction gain on 1000 shares is $600.
The next step would be to wait until the stock goes down again because of a weakness in the overall market.
According to experts, financials are the most watched and most heavily traded sector of the market. They are consistently daily volume leaders on the New York Stock Exchange (NYSE). Traders favor bank stocks and other financial stocks because they are highly volatile and extremely liquid. That means lots of people are buying and selling them and there is a huge market for these stocks.
Financial gurus also say that large cap financials are bellwethers of the market. They tend to lead market rallies and crashes. Some examples are Goldman Sachs (GS), Bank of America (BAC), Citicorp (C), and JP Morgan (JPM).
Large cap high growth tech stocks are traded widely and are volatile. Examples are Apple (AAPL), Amazon (AMZN), and Google (GOOG).
Index ETFs are heavily traded, including SPY, QQQQ, XLF, and EEM. Others traded are commodity ETFs, such as GLD and USO.
Some quick tips for day trading or frequent trading:
Make a short list of stocks to follow and write down the range each day for at least 10 days. Follow these stocks on paper and get acquainted with how they move. Decide how you would react to prices and set goals.
Get a feel for a few stocks you like that are in your price range. Pick stocks that are reasonably priced for today’s market and that offer value.
Select quality, earnings driven companies. If the company does not produce earnings and is new to an industry sector, stay away.
Stay away from penny stocks and IPOs. They are often hyped by people paid to hype them in the press and on the Internet.
Listen to the news for events that might affect the stock. For example, if it is a mining stock and there is a coal mine explosion, the entire sector will be negatively impacted for some time.
The best advice to novices is to buy long, meaning you own the stock. Don’t try and short the market or buy options unless you really know what you are doing.