There is a lot to know about trading stocks. The stock market can be really exciting and, if you are like me, you probably want to jump in as quickly as possible. But there are likely a few things you should know before you start investing your money.
Opening up a stock trading account can be a little daunting for beginners. Everything from knowing how much to invest, to understanding the lingo can be hard to wrap your head around. As someone who has traded stocks for 6+ years and been in this industry for over 13 years, it’s my hope that I can guide you through the process of opening a stock trading account the right way.
10 Things You Should Know Before Opening A Stock Trading Account
But first here are some of the things you need to know before opening a stock trading account.
1. Stocks are tied to a company’s performance.
When you invest in stocks, you’re buying a share of ownership in a company. As the company performs well, so do your stocks. If the company starts performing poorly, your stocks will also be worth less.
It’s important to remember that while stocks are tied to a company’s performance, they’re not guaranteed to go up or down over time. They’re risky investments because they can lose value quickly and dramatically if the market moves against them.
This means that when you buy stocks, you’re tying your money to the performance of an individual company. If they do well, then you’ll likely see positive returns on your investment. But if they don’t do well…well…not so much!
The performance of an individual company is determined by its earnings per share (EPS), which is calculated by dividing net income by the number of outstanding shares. In general, companies with high EPS tend to have strong financials and therefore have higher values than companies with low EPS.
If you’re looking to make money quickly and easily, stocks might not be right for you. Consider starting with low-risk investments like bonds and mutual funds instead.
2. Know the difference between types of accounts
Before you open a stock trading account, it’s important to understand the difference between the two types of accounts that are available.
A cash account allows you to buy and sell stocks without maintaining a minimum balance in the account. A margin account requires a minimum deposit, which allows you to borrow money from your brokerage firm if you need it to purchase more shares or sell short.
If you have enough money in your cash account, you can avoid having to borrow money by using margin. However, using margin is riskier because it involves borrowing money from your brokerage firm—and if things go wrong with your trade, they can come after your personal assets in order to get their money back.
A third type of account is known as a day trading account. Day trading accounts allow investors to buy and sell stocks in one day, but they typically have higher fees and lower interest rates than other types of accounts.
3. A company’s stock price can change
The value of a company’s stock is always changing. It goes up and down based on how investors feel about the company, how well it’s doing in the market, and so on. If you buy shares of a company and then sell them for more than you paid, that’s called a profit. If you lose money on your investment, that’s called a loss.
So if you want to invest in stocks or trade them, there are two things you need to know: how much each share costs (the current price), and what kind of return people have gotten from buying the stock at different times in its history (the historical price).
The price of a stock is determined by supply, demand, and the company’s performance. If there are more people who want to buy a stock than there are people who want to sell it, then the price will go up because there is more demand than supply. If there are more people who want to sell a stock than there are people who want to buy it, then the price will go down because there is more supply than demand.
But the price of a stock doesn’t just depend on what investors think about the company—it also depends on how well that company performs in its market. When a company does well (like selling lots of products), its stock price usually goes up because investors believe that they can make money off investing in that company. On the other hand, if a company doesn’t do well (like selling few products), its stock price usually goes down because investors don’t think they can make any money off investing in that company.
4. There are different ways to make money off stocks.
There are many different ways to make money off stocks, and you should be aware of them before you open a trading account.
When you buy stock, your goal is to make money. The more you invest, the higher your potential gain. But if you lose money on a trade, it can be devastating to your finances.
The first way to make money off stocks is by buying them at a low price and selling them when they are worth more money (or “cashing in” on the price increase). This is called short-term trading. You could also buy a stock when it’s worth less than its value and sell it when it’s worth more than its value—this is called long-term trading.
When trading long-term or short-term, there are two main types of accounts: margin accounts and cash accounts. A margin account allows for high risk/high reward trades because investors are borrowing money from their broker in order to buy stocks with greater potential returns than if they had only used their own funds (essentially leveraging their investment). A cash account restricts how much you can borrow from your broker and therefore limits how much risk you can take on (and therefore how much return).
In summary Here are a few ways to make money off stocks:
1. Buy low, sell high
2. Short selling (selling a stock before buying it)
3. Insider trading (buying or selling based on information not available to the public)
4. Options trading (buying or selling options)
5. Know how to handle fees on your account
Opening a new account at a brokerage firm is usually free, but you’ll have to pay a yearly fee for keeping it open. The amount of that fee can vary widely between firms. Some brokers charge as little as Kshs1000 per month and others charge up to Kshs3000 per month for basic accounts. You may also have to pay additional fees if you want access to certain types of investments or if you want to trade more often than once per quarter (typically at least Kshs1000).
Understand what kind of investor you’re going to be so you know if these fees are worth it or not. If they’re not, look around for another broker who offers better deals and pay attention when comparing their trading commissions because they’ll be the biggest cost over time once your portfolio grows large enough that commissions matter more than other costs like annual fees.
Watch out for hidden fees: Some brokers offer free trades on certain stocks (including those listed on major exchanges) but charge extra for others (such as those listed on foreign exchanges). Also be aware that some brokers.
6. Mutual funds are an alternative to investing in stocks.
Investing in stocks can be confusing, especially if you’re new to the world of investing. But there are ways to invest in stocks that are less risky than buying individual stocks. Mutual funds, for instance, offer a way to invest in dozens or even hundreds of stocks at once.
A mutual fund is a collection of investments that’s sold as one unit. For example, if you buy Kshs100,000 worth of shares in a mutual fund that invests in small-cap companies, you’re essentially buying shares in 100 different companies.
The advantage of owning shares in a mutual fund is that it allows you to diversify your portfolio without having to pick individual stocks yourself. And because many mutual funds track an index like the Nairobi Securities Exchange (NSE) — which tracks over 60 companies large companies — mutual funds allow you to invest broadly based on market trends rather than trying to predict which company will perform well next quarter or year.
Mutual funds offer several types of investments:
Stock index funds track an index like NSE and rebalance their holdings periodically based on that index’s performance over time. These are often referred to as passive investments because they don’t require active management by fund managers.
7. ETFs combine features of both individual stocks and mutual funds.
ETFs are similar to mutual funds in that they allow you to buy shares in a basket of assets, such as stocks or bonds. But unlike mutual funds, ETFs trade like stocks. This means you can buy and sell them throughout the day just like any other stock.
Many people prefer ETFs because they’re more tax efficient than mutual funds. Mutual fund dividends are taxed as ordinary income, but ETF dividends are taxed at long-term capital gains rates (if you hold the fund for more than one year).
How to choose an ETF:
There are dozens of different types of ETFs with different focuses. You should pick an ETF based on your investment goals and risk tolerance. For example, if you want to invest in gold because you think inflation is coming, then a gold-focused ETF would be appropriate for your portfolio.
8. Your broker can help you find investments that meet your goals, but it doesn’t come for free.
Whether you’re just starting out or looking to expand your portfolio, understanding the basics of stock trading is important. It’s also a good idea to know what’s involved in opening a brokerage account so you can decide whether it’s right for you.
“The main purpose of a brokerage account is to trade stocks,” says Steve Weisbart, chief economist of the Insurance Information Institute. “The broker is providing you with an electronic platform and some research tools that help you make decisions on which stocks to buy and sell.”
Your broker can help you find investments that meet your goals, but it doesn’t come for free.
Costs to Consider
The fees you pay for trading and investment advice can vary widely depending on the type of account you have and the services offered. Here are some common fees:
Commission. This is the fee a broker charges for executing a trade for you. It is usually a percentage of the total value of the trade, so it can be very high on large transactions. In most cases, it’s worth paying attention to this cost because high commissions can eat into your profits over time.
Trading costs. This includes the bid/ask spread (the difference between what buyers and sellers pay to get in or out of a stock) as well as market impact (how much prices change when you place an order). These costs are harder to quantify than commissions, but they’re still important because they can eat into your returns if they’re too high in relation to the size of your trades.
9. There are a lot of financial products out there to help you meet your financial goals.
There are a lot of financial products out there to help you meet your financial goals. With the right tools and strategies, you can start building wealth right away.
But not all financial products are created equal. When it comes to investing, stocks are quite different from mutual funds, bonds and other investment vehicles. For this reason, it’s important to understand how stocks work before you open a trading account.
You should also know what type of investor you are before making the leap into stock trading. This will help you choose the right investment vehicle for your needs and goals.
10. Stocks, mutual funds, real estate and other investments have their ups and downs too.
Stocks, mutual funds, real estate and other investments have their ups and downs too. If you’re not ready to lose money, you should probably steer clear of stocks.
Here are some tips to help you avoid losing your shirt in the stock market:
Know your risk tolerance before investing. If you can’t afford to lose any of your investment money, then don’t invest in stocks. That’s not a bad thing — there are plenty of other options for making money.
Know how much time you’ll need to invest in learning about investing. Stock investing isn’t easy, but it’s not rocket science either. Take the time to learn about it so that you can make informed decisions about which stocks to buy and sell.
Pick a broker who will work with your schedule and needs as well as offer good customer service and low fees or commissions (if applicable).
In Summary here are some of the tips to use when starting with stocks
Do Your Homework
Create Your List of Assets
Use Free Tools to Research Assets
Understand the Different Types of Orders
Use a Demo Trading Account Before Using Real Money
Take Calculated Risks
Don’t Get Emotionally Attached
Have the Right Mindset and Expectation
Closely Manage Your Portfolio
Make Sure Your Broker Is Legitimate and Transparent
Takeaway: Investing in the stock market is easier than ever before with online trading accounts and companies that allow you to purchase fractional shares of their stock