The key to successful (and profitable) stock trading is to understand how the market works. If you’re a newbie who lacks the experience and understanding to make educated decisions, then you’re left with two options: guessing (which isn’t a good idea), or better yet — starting out with a few professional trading tips. I, personally, would rather believe that I make my own luck and prefer to try and learn from the best. So, to help me and maybe some of you avoid some costly mistakes, I’ve put together a list of stock trading tips to keep in mind as you go down the road toward successfully participating in the stock market.

Stock Trading For Dummies: How To Profit From Trading

Tip #1: Know how much you can lose and stick with that limit.
Stock market trading is a lot like Vegas gambling, except that you actually have a great chance to win some money. But, smart traders know when they’ve reached their limits and stop before they lose the house, so to speak. The best way to manage your losses is to fund your online broker trading account with the amount of money you are willing to lose to the market. Your account will go up and down based on your successes and failures in the market. The goal here is to make a profit, then move your growing funds to a different, safer account once your balance hits a designated monetary level. But if the opposite happens and your account balance goes down to an uncomfortable level, it should be time to pull the plug for a while. The point here is that you need to set a limit on what you are willing to lose.

Tip #2: Do your homework.
You have to know all about the company you want to invest in like the back of your hand. Not only that, but if it’s relevant, you also need to know the ins and outs of the particular product you want to invest in. You need to understand risk and how it changes from one industry, company or product to another. You need to understand what your potential gain (and potential for loss) is so that you make smart decisions.

Tip #3: Don’t buy stock on a downswing.
A lot of first time investors (and those who are inexperienced) try to time a stock’s downward spiral and buy at the lowest point so that they can make the most profit. The main problem with this approach is that it’s almost impossible to tell when the stock has reached its lowest point, potentially costing you a great deal of cash if it continues to slide. It is much better to buy after the stock shows signs of recovery, even if it means that you lose a few dollars in the process. Make sure though, that you don’t make decisions purely based on the behavior of a stock’s price. Follow the fundamentals and check out the charts and avoid buying on emotion. Rely on strategy — whether its fundamental analysis, technical analysis or a combination of both.

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A lot of people often wonder about the difference between common stocks and preferred stocks. When I first embarked on learning stock market basics, I thought that a stock was a stock was a stock, but apparently not. So, after days and days of research and talking to a couple of stock brokers, here’s what I’ve found out.

Preferred Stock vs Common Stock Investing

Preferred stock is just like common stock in a lot of respects. Preferred stockholders, just like common stockholders, have a claim of ownership in the company for which they hold the stock. Just like with common stock, the value of preferred stock goes up and down based on how well the company is doing financially and based on normal market fluctuations. But that’s where the similarities end.

Preferred stockholders have a set dividend they receive at the appointed dividend payment cycles. Common stockholders can receive dividends, if the company chooses to pay them, and the value of those payments are based upon the value of the stock at that time. You can read more about this in our article on how to invest in shares of common stock.

Preferred stockholders also get preferential treatment in a bankruptcy proceeding in the event that the company goes belly up. This means that holders of preferred stock get compensated for their stock before common stockholders. But, in consideration of the static dividend payment, preferred stockholders give up the right to vote. That’s right folks, preferred stockholders might get preferential treatment when it comes to payments, but it would bother me not to have a say in the way a company is run, if I’m a part owner of the company.

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I used to think that investing simply meant that you gave your money to some stock broker who worked in an office with a really large name on the front (think Solomon Smith Barney) and that in thirty years, when I’m ready to retire, I would be rich. So, I put off making any kind of move toward saving for my eventual retirement other than a haphazard contribution to my 401(k) until I started making enough money that I could finally sock some away. Well, here I am, 36 years old and nothing to show for it except a $1,400 balance in my 401(k). How in the heck did I expect to retire by the time I was 60 without ever getting started? Sure, I’m going to get a pension, but how much is $1,200 a month going to buy me, 24 years from now?

Getting Started With Investing

So, I made the decision to take control of my financial future and start investing. The first thing that I discovered, thanks to those cute little babies on TV care of ETrade brokerage ads, was that I could learn to invest on my own with a little know how and a lot of motivation. You can learn more about the world of investing by perusing free tools and educational material from the best online brokers out there. Here is a quick list:

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Earlier, I discussed some investment products such as stocks, options and mutual funds. Continuing this theme on types of investments, let’s take a look at a few more options to consider for the money you’d like to invest.

Certificates of Deposit or CDs

Certificates of deposit can be thought of as a reverse loan. You, as the investor, are loaning your bank a specified amount of money for a specified amount of time. The money you earn on your loan is the interest rate you are charging your bank for the use of your money. Kinda cool, huh?

CDs are a great way to sock some money away for a rainy day if you are in a place to leave your money in the hands of the bank for an extended amount of time. There are stiff penalties that are levied against you in the event you withdraw your money before the CD matures. There are a couple of types of CDs that you can invest in. Let’s take a quick look at these.

1. Brokered CDs: A brokered CD works just like a CD that is issued directly from the bank with the exception that a broker can buy or sell the CD for you. What’s really nice about these is that they are covered by the FDIC, meaning that if for some reason the bank is unable to pay you your money at the maturity date, then the government will. This is a risk free investment as long as the amount of money you invest is under the FDIC guarantee.

2. Jumbo CDs: Jumbo CDs are just like regular CDs with the exception that the minimum buy in is $100,000 and you can’t buy these from a broker. Jumbo CDs are only available through the banks that offer them.

3. Long Term CDs: These CDs usually have the highest interest rate out of all the CD products available on the market today. But the reason is because the maturity date for these products is 20 years or more. They make really great retirement investments, but if you need to withdraw the money before the maturity date, be prepared. It’s going to cost you.

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If you’re just beginning to check out the stock market to begin a “career” in investing and trading, then read on. To facilitate the learning process, let’s take a look at the different investment products that are available for trades.

Investment Product Classifications

Previously, we discussed some stock market basics. If you’re starting out as a first time stock trader or investor, you may want to review these investment product types:

Stocks

We’ve already learned what a stock is: ownership in a publicly traded company. But stocks come in several flavors. Let’s take a look at some of the different types of stock available for purchase.

1. Common stock: Common stock is like plain vanilla when it comes to the available types of stock on the market today. Most of the stock issued today is of this variety. Owning common stock gives the stockholder certain rights when it comes to governing the issuing company like voting for management changes and making certain policy decisions. The number of votes you have and therefore the amount of influence you have as a stockholder is directly tied to the number of shares of common stock you own. Common shareholders may be entitled to dividend payments based on decisions made by the company.

2. Preferred stock: Preferred stock is a little more exotic than common stock in this way: preferred stockholders generally have no voting rights; however they generally profit more based on the fact that dividend payments are somewhat more structured than common stock. This means that preferred stockholders tend to have the pleasure of earning a static dividend payment whether the company does well or tanks. The dividend payment does not fluctuate with the financial well being of the company. Preferred stock is issued separately from common stock and at a different price. The company has the right to suspend issuing preferred stock at any time.

So what’s the main benefit of being a shareholder that holds preferred stock? Well they have a “preferred” status when it comes to the bankruptcy of a company. This just means that these guys get paid before the common shareholders do, when the company gets liquidated. Still, having this status is in no way a guarantee of payment if the company goes bust.

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I’ve always held a fascination for investments and online stock trading ever since I watched Trading Places with Eddie Murphy and Dan Aykroyd. I watch the ticker run across the bottom of the screen on the all day news channels and vigorously read columns like the Motley Fool. But those articles on the Dow Jones Industrial Average and NASDAQ, stocks and bonds, options and Forex might as well be written in Latin for all I know.

I mean, I get the basics. Buy low and sell high to make a profit, but how do you know when low is really low? And what about when to sell? I actually thought about taking a job with Edward Jones for a while just so they could teach me what it all meant, but I was just too chicken to go.

Learning Stock Market Basics

So, here I am. Still just as lost as ever, but ready to dive head first into the basics of how the stock market works and learning how to “do it myself” when it comes to buying and selling stocks. If that little smart aleck baby on the ETrade commercials can do it, then so can I. And I’m hoping that my adventures through the tangled web of investing will get some laughs, spark some debate, and even teach you something you might not have known before. For those of you who are in the same boat as I am, welcome aboard. For those of you who left me far in the dust years ago and made your fortune on Wall Street, please feel free to drop in and leave a few hints, tips and tricks of the trade.

If you’d like to learn about the stock market with me, then hop on board! I hope you enjoy.

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The stock broker is probably the most important player on the floor when it comes to buying and selling stock. This is the guy that actually gets up early in the morning to study the stock market trends on TV and the computer and in the newspaper. He’s the guy that puts on the suit and tie and goes to battle for his clients, conducting the actual transactions required to buy and sell stocks on the stock market.

What It Takes To Be A Stock Market Broker & Professional Trader

In order to be a stock broker, the brokerage firm and individual brokers have to undergo rigorous training, background checks and take a licensure test administered by the SEC or Securities and Exchange Commission. These are the guys that oversee all of the functions associated with the stock market. If you may recall, it was the SEC that got involved when AIG almost came tumbling down a few years back. They were involved with exposing Enron and MCI for the frauds they were. The SEC is the stock market police.

Okay, so back to the stock market brokers. You can think of these guys as the real estate agents of the financial world, the caddies of the stock market. These guys are an investor’s best friend and their only ticket into the fast paced world of the stock exchange. We as individual investors cannot initiate any buy or sell transactions on our own. We must act through a broker. They buy when their clients say buy and sell when their clients say sell. They provide sound advice buy and sell advice to their clients based on years of research and market trend analysis.

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