The stock market is intimidating; maybe a little less so these days – but we have technology and the internet to thank for that. However, despite a wealth of knowledge that many people have access to, stock market trading remains a risky endeavor and one in which only a few really make it. This is not to imply that the risks aren’t worth it. Some might be quick to pipe up and say that trading stocks or speculating on currencies and futures is akin to gambling. That would be the wrong assumption. Investors who have been in the game for a long time do meticulous research on the companies they plan to invest in. The same applies to those speculating on currencies; quite often online traders have automated software that monitors trends to help the trader make the best possible call. These are all calculated risks with high-end potential. Needless to say, if you’re going to start stock trading, there are some things you’ll need to consider.
It’s important to differentiate the type of trading you’re going to do. For instance, if you’re going to day trade, the SEC (Securities and Exchange Commission) will require that you have at least $25 000 in your account. Brokers who provide the services of day trading might ask that you have a bit more or a bit less. On the other hand, if you’re going to trade something like Forex, which essentially involves speculation, spread-betting and currencies, then the entry point will be much lower. It’s advisable to keep updated on shares with CityIndex and other online applicable online resources for the purposes of research. Some brokers might ask that you only have $500 in your account. Lastly, if you’re going to trade stock, then there is no set amount of money you need to have. However, stock is usually purchased in lots or orders of at least 100. So, if the stock price is $10, you’ll need a thousand dollars in your account.
Buying stock: your time horizon
It’s important to be aware of the concept of a time horizon and how it factors into making an investment. There are three time horizons to be aware of.
A short-term time horizon is any stock purchase or investment that you don’t see yourself owning for more than a year. You can go this route, but then you need to be aware of a few things. For one, if the stock goes south, there’s not much time for it to recover. Thus, if you’re going to hold on to your investment for just shy of a year, then it’s best to invest in something stable, like blue-chip stocks. These stocks pay dividends and are typically represented by well-established corporations, thus you’ll face minimal risk in terms of losses. However, growth on stocks like these is typically slow.
A medium term horizon is any stock purchase or investment that you plan to keep for anywhere between one year and a day and 10 years. As this type of investment has a much longer timeline, should you incur a loss, there’s ample time for recovery. It’s not advisable to invest in penny stocks (remember the Wolf of Wall Street?), instead rather build your portfolio with quality emerging stocks and ones who only come with a moderate risk profile.
A long-term horizon is applicable to any stock purchase or investment that you plan to keep for more than 10 years. In other words, you’re in it for the long haul. Long-terms investments have the longest period of recovery should things take a dip. For this reason, you can dabble in something viewed as ‘risky’ in the hope of seeing a major return.