File stock trading with mountain climbing and skydiving: These are all activities you should avoid if you don’t know what you’re doing.
But with practice and a good handle on the ground rules, these pastimes become a lot less risky.
The good news: Stock trading isn’t typically a life-or-death situation — but it’s still best to make money, not lose it. Following these five rules will help you minimize losses and maximize gains.
1. Pay attention to costs
Stock-trading commissions vary, from less than $5 per trade to more than $10 per trade. For active traders, even a few bucks per trade can quickly add up to hundreds of dollars per month and thousands per year. And even if you don’t trade often, every dollar you pay in commissions and account fees is a dollar you can subtract from your returns.
Keeping costs down can be tricky, particularly for beginning traders: Often, the online brokers with the most comprehensive customer service and richest educational content charge higher commissions. But once you’ve gained some experience trading, survey the marketplace again to see if you might benefit from switching to a lower-cost broker.
You can often avoid account fees completely by choosing a broker without trade minimums and by paying attention to any account balance requirements.
Find the best brokers
- Understand your investing style
- Narrow down the features you need
- Open and fund your account
2. Make a plan — and stick to it
Go into the market with a plan, whether you’re saving for retirement or picking stocks. This will protect you when things don’t go as planned, because you’ll have set rules for yourself and won’t be tempted to make a quick decision.
Before you buy a stock, you should know the maximum price you’re willing to pay, the maximum amount you’re willing to lose — in other words, how much the stock’s price will drop before you’ll sell — and the amount of money you can dedicate to stock trading. For most retail investors, that should be a fraction of an overall portfolio that is otherwise dedicated to a diversified mix of mutual funds — specifically, low-cost index funds and exchange-traded funds.
3. Be prepared to lose
You can’t trade stocks without losing money. The goal, of course, is for your gains to outpace your losses, but even when they do, the losses can hit you hard. Losing anything — especially money — doesn’t feel good.
But it feels even worse when you’ve lost money that you were counting on for retirement or other long-term goals, such as your kid’s college education. That’s why it’s important to trade stocks only with money you’re willing to lose — money that was specifically allocated to stock trading.
4. Don’t go in blind
Trading stocks shouldn’t be impulsive. You should only make a trade once you’ve done a significant amount of research, reviewing earnings reports, financial filings, analyst research reports, recent company news and SEC reports. This is called fundamental analysis.
Good online brokers provide much of this research, but it’s up to you to interpret it and evaluate trade opportunities, through things like charting and technical analysis, which involves examining both recent and historical trends in an attempt to predict future performance.
5. Make the most of technology
Today’s trading platforms are advanced, which means that you have lots of tools at your disposal. Good traders take advantage of them.
First, and perhaps most important, enter orders with stop-loss limits, which will trigger a sale if a stock price drops below a certain amount, limiting your losses.
You can also test strategies without risk by using virtual paper trading, if your broker offers it. Become active in trader chat rooms — hosted by some online brokers and also available elsewhere on the Web — so you can bounce ideas off other investors and follow their trade strategies. And use mobile apps to track the markets, make trades on the go and receive customized alerts about your holdings.
More from NerdWallet:
- 5 Steps to Start Trading Stocks Online
- The Best Online Brokerages for Stock Trading
- Trading Stocks in an IRA Can Minimize Taxes
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