Understanding Trading in 5 Simple Steps

Five Simple Steps to Learn How to Trade

Growing a nest egg for retirement is a significant goal for most people. Whether you want to relax in the same house where you grew up in your 60s and 70s, or you are hoping to buy a retirement home in a picturesque city, you need funds to live a comfortable lifestyle in those years.

One of the best ways to grow your nest egg is by investing your money in financial markets. Whether you invest in stocks, bonds, or mutual funds, or engage in FX trading, you can make a lot of money through these methods.

The most advantageous aspect of trading is that you earn a passive income, without needing to put in more than a couple of hours of work each week. You can start investing in your 30s and 40s to truly boost the money you save from your job each month.

Below are five simple steps to help you learn how to trade.

1. Understand Your Circumstances

Before you learn the mechanics of trading stocks, buying bonds, or investing in mutual funds, you have to understand your circumstances. Are you in your late 50s with an eye toward retirement? Do you hope to grow your nest egg to pay for your child’s college education? Are you single and in your 30s, aiming to slowly grow your savings to enjoy a comfortable retirement?

Your circumstances play a significant role in how you will trade. Those who are younger and have more years between them and retirement can take more risks. If they have the time to learn the stock market, they can buy and sell stocks with an eye to gaining a significant profit.

Those who are younger, but do not want to spend much time investing, can put their money in riskier mutual funds. These funds make more aggressive investments. In contrast, older individuals may choose safer options, such as buying bonds or investing in mutual funds that track the entire market.

2. Leverage Online Resources

If you are committed to active trading, whether it be stocks or foreign exchange, you must learn more about the market. There are countless online resources you can use that would allow you to gain a deeper understanding of investment principles.

Putting money in the stock market is not as simple as buying companies with the biggest brand names. Those businesses already have very expensive share prices and may remain at a relatively stable price for several years. Up-and-coming businesses often present more opportunities for share price growth, but you can only know where to invest if you understand the market.

3. Find an Online Broker

If you are planning to trade currencies, you must find a forex platform that you can use throughout the week. The best platforms offer you the chance to create a free account, make it easy to add and withdraw money and let you trade on margin.

Those who have more interest in stocks can find a website or mobile app that allows them to quickly buy and sell stocks. If the platform allows you to buy a percentage of shares, you can easily diversify your portfolio by making modest investments in established businesses across various sectors.

4. Research Companies

If you have gained a general understanding of the market, you are now in a position to think about the sectors where you want to invest. Selecting companies from across the spectrum are important, as putting all your money in one or two sectors may leave you vulnerable if those areas of the economy experience problems.

Before buying shares in a business, spend one or two weeks learning more about the company. Assess its share price, see if there are any news stories pertaining to the business, and look at its financial statements.

With a deeper understanding of the businesses that made your trading shortlist, you can narrow down your options to ten or fewer companies whose shares you will purchase.

5. Active or Passive

The final, and possibly most important decision, you must make is whether to remain an active investor or to slowly transition to passive investment. A lot of people start with active investing, as they find the stock market or forex market exciting.

As you get older, and your nest egg grows, you may be in a position where passive investing is enough to grow your savings by several percent each year. Excellent options for passive investing include mutual funds or ETFs that track a particular market, such as the S&P 500.

Studies show that even though stock prices fluctuate over a few months or years, the market as a whole always grows every 10 to 20 years. So long as you make smart investments in your 30s and 40s, and then switch to passive investing in your 50s, 60s, and 70s, you can triple or quadruple your savings over your lifetime.

This article does not necessarily reflect the opinions of the editors or management of EconoTimes.