STEP-1 , Assess your investment goals
The type of trading activity you will do depends largely on why you want to invest in the first place. Before you begin investing, consider what you want to achieve through your investments. Write these goals down, and develop your strategy accordingly.
For example, if you want to save money for retirement, to buy a home, or to send your kids to college, you likely want to invest money as you earn it, and earn an interest rate greater than what a savings account would provide. Your goal may be to invest $200 a month, and to achieve an interest rate of 10%.
If you have more short term goals, like saving money for a car down payment, you might want to invest one sum of money and earn 6% interest until you have enough to buy the car you want.
STEP-2 , Consider Your Timeline
Most investors can be classified as either short or long-term investors. Decide which of these fits your needs best. For example, if you have spare money and would like to try investing to make short-term profits, your strategy for trading will be different than if you are investing for retirement or for a child’s future education.
Short-term investing is generally defined as holding a security for less than 3 months, and is higher risk than investing for longer periods of time. Very short-term investments, like day trades, do not tend to provide the same kind of returns as long-term ones, and you should do short term trading only if you plan to dedicate a fair bit of time or hire a financial advisor.
Long-term investments average higher returns as securities tend to recover over the long-term from short-term losses.
STEP-3 , Consider Your Risk Tolerance
Risk tolerance or your ability and willingness to ride the ups and downs of the market, is dependent on numerous factors. Generally, a younger investor has a longer timeline and can afford to wait for riskier investments to pay off. An older investor with a shorter timeline may have a lower risk tolerance.
You also need to consider your net worth (your assets minus your liabilities), risk capital (extra money you have to invest or trade), your level of experience, and your investment objectives.
STEP-4 , Determine the Types of Investments you will make
The most common types of investments are stocks, bonds, futures, options, and low grade “penny” stocks. Most beginners start with stocks and bonds, which are the more straightforward of the investment options. A big mistake of many beginners is to want to trade everything; fight that urge and focus. You will have the most success if you learn and practice in the type of investments that meet your specific investing goals.
If your goal is to maximize the return of a long-term investment, consider purchasing both stocks and bonds, but not futures, options, or penny stocks. Stocks and bonds tend to provide much higher returns than traditional savings accounts, but are not as risky as futures, options, or penny stocks.
Only invest in futures, options, penny stocks, or other complex investments if you have extra money and extra time. The markets selling these securities are very risky, and often don’t have the same financial reporting requirements traditional stocks and bonds.
Diversify your portfolio by investing in multiple types of investments, so that if one does not do well over time, the others in your portfolio make up for the loss and you still end up earning money overall.
Technical and fundamental analysis of securities are two different methodologies you can use to evaluate the market or the stock itself. A technical analysis reflects the psychology of the of the market and attempts to predict how the market will change and how that will influence what security will cost in the future. A fundamental analysis instead looks at the intrinsic value of the security and help you determine if the security is under- or overvalued.
STEP-5 , Make a Plan
At this point you should know how much you are investing, over what time period, and with what purpose. Now you can formulate a plan to meet your investing goals using these three factors, and determine how often you will buy and sell investment securities.
Determine how often you will buy stock, as well as deciding ahead of time on when you would pull out of an investment due to loss. By deciding this ahead of time, you will save yourself the stress of trying to decide whether or not to sell your stock on a day-to-day basis.
Most investment experts advise new investors not to try to predict changes in stock prices day by day, and instead to invest with the expectation to hold the investment for at least 25 days or more, absent significant drops in investment value.
If you do choose to do more short-term trading, day trading (enter and exit the same day), swing trading (enter and exit in two to five days), and position trading (enter and exit in five to twenty days) are the most common methods. You should choose which you want to use and then make your trading decisions accordingly.
In the short-term, stocks tend to move on rumors and news rather than reported earnings. As a consequence, trading stocks on a short-term basis is very risky.