Online Stock Trading, The Essentials

Posted by Nick Niesen on November 8th, 2010

The internet opened up online stock trading in the mid '90s with E-Trade and Ameritrade, and most of the small investor friendly brokerage houses eventually followed suit with a similar service. This allowed a lot of smaller investors to get into active stock trading ? low cost accounts let investors with only a few hundred dollars get into the market.

However, there's still a learning curve, and as it's investing with your money, making that learning curve easier to deal with is important. Getting up to speed quickly helps improve your return on time invested in investing.

First, decide what time horizon you're investing for. A long time horizon is "buy and hold" ? you're expecting the value of the stock to increase over time, or you're expecting dividends to earn out in your favor. A short time horizon means you're looking for sharp, immediate gains. Different people have different levels of acceptable risk and temperaments; for some, the adrenaline rush of a buy-and-sell strategy is a drug. For others, the security of buying stocks for the long term allows them to plan.

In the long run, the safest payout is the long time horizon; on average, the stock market returns an inflation adjusted rate of return of about 8-9%, compared to bonds which return at 2-4% after inflation adjustment. Most stocks are held in portfolio accounts for 401(k) plans, which allow investment brokers to leverage large amounts of money to make big purchases?and these tend to be conservative, and fairly safe.

If you need to immediately convert a small amount of cash into a larger amount of cash, you have to take a riskier day trading approach. Day trading approaches take considerably greater due diligence and research to pull off. Become a sponge for information that relates to the companies you hold, so that you know when to sit out a round of buying.

Under no circumstances should you berate yourself for not selling at the maximum price ? very few people can do this reliably. Nor should you berate yourself for buying a stock that drops in value ? a lot of companies are hyping stock prices more than they are their own products, and that's one of the risks you take as an invester.

Always diversify your holdings, and whenever you make a gain, put at least half of it into a long time horizon investment package, to hold on to it. Think of it as pocketing your winnings at the table rather than doubling down every time. Never rely too much on one sector, but do hold on to stocks that match the pace of the index funds.

Check your ego and your emotions at the door. This is a business, these are your savings, and as John Wayne said, "Life ain't for sissies" You're going to lose some. Learn from them. Take time to have a life ? it doesn't matter how your stocks are doing if you're just plotting charts and reading investment business daily every day.