Advice to beginners on trading shares

Stocks and Shares for Beginners If you try to find information on the Internet about Stocks and Shares for Beginners it can be a tedious chore. Often you end up clicking on a link that looks promising only to find when you get there that it is a total waste of your time. This article however provide the basic information on what you need to bear in mind when trading stocks and shares if you are a beginner.

First of all, you will need a broker. To be more precise you need a discount broker - they are cheap but won't give you any advice, they take your money and do what you ask them to do, usually online but sometimes over the phone. For a list of cheap discount brokers take a look at this article - online brokers - which describes some of the discount brokers around.

Secondly, which stocks are you going to buy ? Well, you need to decide if you are long-term investor or a short/medium-term trader. If you are long-term investor then check out Warren Buffett's stocks and learn how he became a billionaire by buying stocks at good prices and holding them for a very long time. But be prepared to wait a few years - as Warren Buffett says "the stock market is a means for transferring money from the impatient to the patient".

If you are going to be a short or medium-term trader (a few days to a few months) then you really need to learn about stock charts and technical analysis. You can't just stick a pin in the Internet and hope to get lucky. Stock charts and technical analysis of charts are important for beginners starting to trade in stocks and shares as they can be used to show when is the right time to buy and when is the right time to sell. You don't need to know anything about the company whose shares you are trading all you need to know is how to read stock charts and understand what the various indicators are telling you.

As a beginner it is important to learn about charts because the professional traders use them and you need to be flowing with the professional traders not fighting against them.

Here are some absolute basics about stock market charts.

Don't buy a stock whose price is below its 200-day moving average. It is generally a bad sign when a stock falls below its 200-day moving average and sign that it is likely to fall even further, wait for it to get back above the 20-day moving average. If you don't know what a 200-day moving average is then take a look at the charts available on places like Yahoo and click on 'indicators' or 'moving averages' then type in 200. You should then see a stock chart or an index chart with the 200-day moving average plotted. One stock you can look at is MSFT - each stock has its own code.

Moving average are just one of the techniques that analysts use (5-day, 10-day, 20-day, 30-day, 50-day, 100-day) are the most popular periods of time.

You also need to understand about support and resistance. If a stock price is falling, at some point it will meet with support and stabilize, by looking at the charts you can see when this support will be found and you can then start buying. Similarly when a stock price is rising, at some point it will meet with resistance and stop rising. This is the time to sell if you are a trader.

Short-term traders or swing traders are generally hoping to get a 10% profit from a trade so once they have made their 10% profit (or thereabouts) they close the trade and look for something else.

Stop losses. Stop losses are designed to prevent you losing vast quantities of money in one go. Basically, if you buy a stock and instead of going up it starts going down then at some point you are going to have to sell at a loss. An automatic stop loss, which you should select at the time you buy the stock, will automatically close the trade once the stock reaches a pre-determined price. Usually after losing around 4- 5% you should close the trade and take it on the chin. It is far better to lose 5% than to hang on in the hope of getting your money back and end up losing 50%.

Stock trading online is all about balancing risks and rewards. You cannot win every time, but you can try and make sure that your winners make you more money than your losers lose. This is why swing traders are looking for a 10% profit and are only willing to bear a 5% loss.

There are other rules that swing traders often follow, such as not buying when the 5-day moving average is pointing down. (check the charts and see where the 5-day moving average is and which way it is pointing).

This introduction to stocks and shares for beginners was designed to give a very basic idea of some of the concepts that are used by stock traders. Professional traders do use charts and because they use them they often turn out to be self-fulfilling prophecies so it is important to understand what they mean, even if afterwards you choose to ignore them.

The subject of technical analysis is vast. One of the most widely used methods is that of Japanese candlesticks on which volumes have been written. There also things like MACD, RSI (relative strength index) and many more so you really should get a basic knowledge of what they mean before risking your money.

But the absolute most simple basic idea is that of support and resistance and some people say they use nothing else. They find a stock that is following a trend and then buy it when it falls back to its support level and sell it when it reaches its resistance level. Then wait for it to fall back and do it all over again !

So there you have it, the basics you need to know to trade stocks online. Get a discount broker. Learn how to understand charts. In particular learn to recognize support and resistance levels. Watch out for the 200 day moving average. THere are other things of course but they come into the category of not quite so basic. Trade well and prosper !