How to invest $500 – The Warren Buffet way
Warren Buffett, one of the richest people on the planet, didn’t get there by accident. He accrued his billions of dollars through decades of sound and disciplined investments. Buffett invests 90% of his money in stocks which gives him the opportunity for aggressive growth. Stock trading consists of buying and selling the same securities (stocks / shares). Buying them low when other traders are panicking or fearful and selling them high when you reach your profit target and other traders are greedy and euphoric.
Example: Buying Amazon stock when Trump tweeted negatively about the company and price fell $5B (panic = low price). Then selling it when its shares surged past the all time high for the first time and every trader wanted a piece of the action (greed and euphoria). No stocks go up in price continuously, they cycle through highs and lows.
What Stock Traders Look For
Traders look for three elements in securities. These are:
- Liquidity –easily obtained securities, so there is little lapse between purchase price when ordering and purchasing
- Volatility –securities changing in value over a short time, ideal for shorter term traders
- Volume –how much a security is traded during a specific time period. Analyzing volume indicates trend health.
How Traders Choose a Brokerage
Traders choose a brokerage based on various factors, including an easy-to-use trading platform with up-to-the-minute data. Other important aspects include:
- Rates – fees for various trades eat into the day trader’s profit margin, so day traders want competitive rates
- Service – customer service is crucial. Look for a brokerage with 24/7 customer service access via phone, text or email
- Leverage – a borrowing amount for a margin account, expressed in ratios. A 2:1 ratio means you could purchase 100k of stock if you had 50k in your account.
- Commissions – lowest commissions are great, but not everything. Traders also want brokerages offering a discount on long-term accounts
|Online Stock Orders||$0.005 /share||$4.95/trade||$9.99/trade||$9.99/trade||$7.95/trade||$7.00/trade||$8.95/trade|
|Options Contracts||$4.95/trade + $0.50||$9.95/trade + $1.00||$9.99/trade + $0.75||$9.99/trade + $0.75||$7.95/trade + $0.75||$7.00/trade + $0.70||$8.95/trade + $0.75|
|Leverage||6 to 1||3 to 1||4 to 1||4 to 1||4 to 1||3 to 1||4 to 1|
This data was collected on August 30, 2016 and may change at any time.
Types of Stock Trading Orders
- Market orders – buying or selling a security at an asking price.
- Limit orders – buying or selling a security when the price reaches particular threshold. Buy is below the current price, while sell is above the current price.
- Stop Order- the opposite of limit orders. Buy the security when the threshold is above the current price, and sell when it is below the current price.
- Stop Limit Order – similar to stop orders, except it can be used at a better price than threshold.
What You Can Trade
- Stocks – shares of publicly traded companies
- Options – derivatives allowing purchasers a contract to buy or sell securities at a certain price at a specific time
- Forex – foreign exchange markets, open 24 hours a day on weekdays, with no daily closures necessary
- ETFs – exchange traded funds, securities tracking indexes, commodities or bonds, traded like securities.
Pitfalls to Avoid
When trading, never let emotions rule your decisions. Remember what I said about panicking and greed above? Rely on data rather than “feelings.” Learn to discipline yourself and develop a strategy. Keep good records so you can learn from your mistakes.
My investing story and the brokerage I use
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Disclosure: I am a professional blogger and receive compensation from the companies whose products I review. I test each product thoroughly and give high marks to only the very best. I am independent and the opinions expressed here are my own.