Beginner’s Quick Reference Guide To Understanding Stock Market Trading

If you’re new to stock investing and trading, understanding the difference between short, medium, and long-term investments is the first step toward getting started.

This article helps you discover what type of stock activity may be best-suited to your goals.

Whether you’re looking to actively trade in the hopes of cashing out on a “big win” or looking to build wealth through long-term investing, we’ll help point you in the direction that aligns with your objectives.

There are three ways to invest in the stock market: short term, medium term, or long term. 

Short-to-medium Term Stock Market Investing

Active stock traders are people who attempt to profit by trading and selling stocks. Active stock trading is not a passive investment, as it requires time to make trades.

There are two types of active stock trading representing two distinct trading strategies: day trading and swing trading.

Day Trading

Day trading is a short-term investment strategy that involves buying and selling several securities within the same day. 

Day traders do not hold stocks overnight.

Day trading usually revolves around technical analysis and charting systems.

Day trading typically involves more profit than swing trading, but its time and financial requirements are more demanding.

Most day traders invest 15 – 40 hours per week into stock activity, even when using automated systems, because researching, buying, and selling stocks is time-consuming. 

This makes it challenging, if not impossible, to hold down a job or run a business while day trading.

Additionally, U.S. law requires day traders to maintain a $25,000 account balance at all times.

Swing Trading

Swing trading is a medium-term investment strategy that involves buying and selling securities over weeks or months.

Swing trading includes buying and selling around short-term swings in the market.

For the most part, this approach doesn’t experience dramatic losses or gains as quickly as day trading, but investors can still experience massive wins and losses.

Swing trading is challenging but isn’t as demanding of your time as day trading, so it allows you to participate without giving up your day job.

While there is no legal minimum account balance required for swing trading, investors need to deposit funds in advance of purchase and should generally plan to keep at least $5,000 – $10,000 in their trading account.

Short-to-medium Term, Active Investing For People Who Love Trading

Day trading and swing trading require more time and investment than long-term stock market investing. The short and medium-term investment strategies require understanding and skill to earn profits.

Active trading is not a long-term wealth strategy since it doesn’t provide a passive income.

So why do people do it?

Active trading can be a fun and competitive challenge, especially for people who enjoy learning about the stock market and don’t mind taking risks.

While the idea of high payoffs can be tempting, potential day or swing traders should be aware that it takes time and learning to break even as a day or swing trader. Many people practice for years (“paper trading”) before spending actual money on stock trading.

Interested in swing trading? 

M1 Finance is an excellent place for beginners who want to buy, sell, and hold stocks for the medium- or long-term. You can buy and hold for days and weeks, as swing traders do, or create a long-term investment portfolio that builds wealth over time.

Join M1 Finance today to get started trading or investing in stocks!

Long-Term Stock Market Investing

Stock market investing is a long-term strategy whose end goal is to build wealth, often for retirement. 

Long-term investors typically purchase index funds and hold on to them for decades, although some take a different approach, selling when there are dramatic changes in the market.

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Long-term investors often use a non-emotional “buy and hold” strategy, holding on to their investments and often reinvesting their dividends for decades before withdrawing any profits.

This lowers the risk and increases the chances that their assets will earn profits over time.

While this investment strategy isn’t as exciting as active trading, it is an excellent choice for people who want to build wealth over time.

Investing in safer, more diversified stock choices can provide a passive income that grows significantly throughout the years.

Long term investing requires no time investment after you set up your account and develop your portfolio. This time savings is a significant advantage for anyone who runs a business, holds a job, or simply doesn’t want to spend their time actively trading stocks.

Anyone can get started with long-term stock market investing, and the younger you are when you get started, the more wealth you’re likely to build over time.

For example, a 20-year old who invests about $360 per month and receives an average return rate can retire a millionaire. Waiting until your forties to begin investing means you’d need to invest about $2,000 per month to achieve the same results.

Source: Business Insider

Getting started with long-term stock market investing is simple and doesn’t require much money. 

For example, you can open an account with M1 Finance for only $100 and never have to pay any fees. 

M1 Finance is an excellent place for beginners to get started with stock investing. 

Its visual approach to stock investing includes allowing you to build your own “pie” of investments or choosing a professionally-built pie based on your investing goals.

Open a commission-free account at M1 Finance today.

Aligning Stock Market Trading And Investing With Your Financial Goals

There are several ways to invest in the stock market, and you should choose the strategy that aligns with your financial goals.

Any type of investment is a risk, whether it’s real estate, business, or stocks, but certain types of stock purchases carry more risk than others.

Short- and medium-term trading require more time, investment, and risk than long-term investing, but may be a good match for people who love the stock market and enjoy a challenge.

Long-term investing provides a lower-risk alternative for people who want to build wealth over time. 

It doesn’t require a great deal of time or effort to get started with stock market investing and is an excellent way to work toward developing a passive income stream for your future.

M1 Finance makes it easy for beginners to start investing. Open a commission-free brokerage account today

Understanding the Stock Market: The Benefits of Consistency

Above all else, the number one thing that you can do to understand the stock market and to make the most of your investments is to invest consistently. That means putting all the money you can afford into good investments and letting them ride. When you have more funds, dump them in and keep on doing so over the long haul. Rather than trying to determine when to engage in quick stock trading or other medium-term investment strategies, it's often best to ride the waves and only sell when you've made a significant return — or you need the money.

What you shouldn't do

Simply put, long-term stock trading strategies stipulates that you should buy in when you have the funds and sell when you need them. Try your best to avoid timing the market or to get ahead of certain dates with your investments — you're more likely to jeopardize your investment money than to hit on a winner with that kind of approach, and it'll also shield you against making decisions based on emotions rather than sound financial advice.

Even the experts can fall victim to trading too much, as well as the decrease in the performance of a portfolio, if they lean too heavily on timing and trying to beat the market. After all, stocks mostly go up given a long enough time frame, which is why you hear of those “if you only bought stock X decades ago you'd have a fortune today” stories that are common in investor circles.

Understanding the Stock Market With Consistent Investing

For the most part, consistent investing is one of the best ways that you can increase your understanding of the stock market. Forget about what the market is doing on a daily or weekly basis — you can actually make money by investing in good companies and letting your investments ride. And with the proliferation of convenient mutual funds and ETFs, you don't even have to narrow down your investments to specific companies at all.

In fact, several funds and ETFs mirror the larger U.S. stock market, or you can also double-down in a certain sector via convenient funds that take a lot of the guesswork out of it. Instead of worrying about whether a company will still exist over the long haul, you can invest in an overall industry that you think will overperform, allowing you to reduce your risk while also increasing what you can potentially make on your investments.

Make a Plan and Stick To It

If you're looking for a guide to stock trading for beginners, one of the most beneficial pieces of advice is to create a plan and to stick to it. Since the plan is made before you have any money in the market, you'll be able to better ride out those fluctuations that could force you to sell low and buy high, which is the exact opposite of what you should be doing with your investments.

While you may not ever learn how to understand stocks and why certain stocks go up while others trade sideways or even go down, you can always refer back to your plan and increase your understanding of the stock market by taking the emotions out of your trading decisions. Then the only thing you have to do periodically is to rebalance your portfolio based on your desired risk allocation — indeed, you may want to sell investments that have outperformed so that you can lock in those gains and minimize your exposure to a future dip or sideways trading.

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