I'm not into active trading. In fact, I'm all about indexing. I'm the world's most boring investor. However, I've had some questions about trading recently. So I've put together this little guide to trading.
Current market volatility has many would-be investors skeptical about investing.
Yet, the swings are simply part of the markets — ultimately stocks have grown in value overall since their introduction. If you can weather the emotional spikes, then you'll likely see solid earnings one day.
I like indexing because it allows me to just ride the wave. Yes, I'll see setbacks during a market downturn, but just as my portfolio more than recovered following the crash of 2008-2009 (and the issues in 2010), I expect to continue to recover from whenever the next crash happens. They're only truly losses when you sell at the bottom of the market.
So, at your request, let's look at a couple of ways to get into the markets and make your first trades — and learn about a few basic investments worth exploring for long-term holdings.
As always, the following information is for informational purposes only. The information in this article is not intended for investment advice. Do your due diligence before committing to any investment strategies.
First: Find a Focus and Start Paper Trading
You've probably heard someone talk about trading futures. Or, caught some line in a movie about shorting the markets. Maybe it was penny stocks. No matter what you want to invest in, start with what you know.
- What brands do you love?
- What products do you buy?
- What services do you subscribe to?
A good understanding of the company and what they offer is better than betting on those you know nothing about. At least with what you know, you've got an idea of the business. So, consider the brands you use and love daily as a starting point.
- Open a paper trading account or make a spreadsheet for this purpose.
- Practice trades without committing actual money.
- Track your progress and learn what you did right.
This should prepare you for future trades. Of course, it's impossible to predict the market but at least you'll better understand the underlying factors.
Build a Diversified Portfolio
Next, this guide to trading looks at building your portfolio. Using a mix of what you know and consistent performers, start building a diversified portfolio. You can use trading platforms like Merrill Edge, Schwab, Vanguard, or Robinhood for this purpose. Or, if you want to put it in someone else's hands, look at Betterment.
What could you consider?
- Index funds like VFINX, SWPPX, or FUSEX.
- ETFs like ITOT, VOO, and SPYV.
- Currencies like the Vietnamese Dong, Euro, or South African Rand (there are also currency ETFs).
Of course, you could invest in “slow” money with bonds or dump your finances into a high-yield savings account. But, there's good value in learning the markets through stock trades. It's learning by doing which may encourage you to learn more about investments.
In the end, you want to be careful, though. Most portfolios are fine with a mix of stocks and bonds, with a little cash or real estate tossed in. My own portfolios are composed of bond and stock index funds and ETFs, along with REITs.
You could also consider basic short-term investments, even if they are a bit on the “safer” side and you might not see huge returns.
Consider setting aside a bit of “play money.” When I want to try something out or see if I can find a new avenue, I choose play money.
This is money you're 100% okay with losing.
Why take the risk? Because it could turn into incredible returns.
The play money would go toward those speculative plays like these:
- Emerging markets like tech in third world countries.
- Cutting-edge industries like biotech or fintech.
- Physical investments like flipping houses or short-term loans.
- Engaging in options trading, swing trading, or day trading.
- Investing in foreign currencies.
This exercise further refines your understanding of investments. And, “hardens” your stoicism when the market swings. Sure, you may lose the investment. But, you could land incredible returns if you've done due diligence and truly understood what you were doing.
You need to be very careful here. I can't stress that enough in this guide to trading. You are likely to lose money and you need to be ready for it. The reason I like indexing is that it relies on the wider market. So, even if something is down one day — or even for a year or two — there's a good chance a market recovery will result in adequate long-term gains.
Once you get involved with this experimental trading, you lock in your losses when you trade, and there might not be any recovery. So don't put any money you need later at risk with these riskier assets.
Follow the Community
Education is your best investment. There's a lot of downtime between trades if you're taking a long-term approach. Use that time wisely by following financial and market news to get a better understanding of long plays.
- Watching CNBC or Bloomberg.
- Following financial news blogs or platforms.
- Subscribing to market alerts.
- Reading one of the many investment books.
This could also include:
- Lurking and participating in investment forums.
- Getting active with finance social groups.
It's easy to obsess with investments because it's such a lofty goal. Can you get too involved?
Maybe, especially if you allow emotions to dictate trades. But, it's always good understanding how you're using money especially when it's with investing.
Of course, if you stick with a boring strategy, like what I do with indexing, it's easier to ignore the noise that makes up a lot of the “news” in the financial media.
Plant Those Money Seeds
A common misconception about investing is the need for big capital when starting out. In fact, you can get started investing with as little as $25 — or even less.
Today's markets offer a lot of opportunities to invest. There are many platforms allowing microtrades. A platform, like Acorns, can let you invest a few dollars at a time, which is just enough to get a “feel” for the markets and how they work.
All in all, investing can have great payoffs. Understand not only what you're investing in but why.
Start small and scale up (learn the basics included in this guide to trading) and develop a strong stomach to help you weather the market storms.