If you’re anything like me, you like to play it safe with your personal wealth. I prefer my money right where I can see it – safely stowed in a savings account. It would be right for you to presume that I’m not much of a gambler, either – I’m the Vegas traveler who forgoes casinos for Cirque du Soleil. Which is why, when tasked with being RATESDOTCA's online trading guinea pig, my initial reaction was somewhat dubious: “You want me to do online trading? With actual money? Are you sure?”
What the Heck is a Stock, Anyway?
I wasn’t lying when I said I was green. Up until a few weeks ago, I’d spent my life blissfully ignorant to stock trading strategy. So, needless to say, getting a grip on how the stock market works has been a steep learning curve – and my first challenge was learning the lingo.
First, a lowdown of the vitals:
Stock: Essentially, to own stock (also called a security), is to take ownership of part of a corporate entity – the value of which is based on their profits and assets. Opening stocks to the public creates growth opportunities for the company – and can create big payoffs for those who choose wisely. Think being in the right place at the right time – buying when prices are low and selling when they go up again = profit for you. Simple, right?
Option: This is where things get a bit more convoluted. Basically, an option is a security investors can use to speculate on the future profits (or losses) of a sector/company. An option is really a contract that allows the holder to either buy or sell the option at a certain price during a set time frame. So, if you think the price of the stock in question is going to go up, you can secure yourself a potential bargain – and then sell it for a profit.
Stock Exchanges: What’s the Difference?
Ok – now that I’ve wrapped my head around the concept of speculation (and how to keep my eye on a company’s profit factors), it’s time to ponder stock exchanges – how do they factor into my decision? There are dozens of exchanges from every corner of the globe, so I felt it best to focus on the local offerings:
NYSE: Consider this the ivy league of exchanges – the New York Stock Exchange can trace its roots back to 1792, and was put in place by 24 NYC stock holders. Unlike many other stock exchanges today, the NYSE still has a physical trading floor (making Wall St. a perpetual tourist trap) and companies need to play a big game to be traded there. The requirements: pre-tax earnings of over $10 million and an average of 100,000 trades per day, for starters.
Nasdaq: Compared to the storied past of the NYSE, this completely virtual exchange is a modern marvel. Established in 1971, it has become the haven for all things tech – blue chip stocks like Microsoft can be found here – and offers a big caveat to the NYSE. Because stocks are traded completely floor-free, the Nasdaq offers a higher trade volume per day. Companies looking to trade here need the same kind of profit and average trade volume as the NYSE.
TSX: Being a Torontonian, I was immediately curious as to how my city’s exchange compares to the NYC heavy weights. Turns out, it’s the niche for energy-specific stocks, such as electricity and natural gas. The TSX, established in 1852, is also virtual, and actually became the largest floorless exchange after closing its trading floor in 1997.
Want to learn more about the TSX? Check out our S&P/TSX series here.
LSE: Looking to go a bit more global? The 300-year-old London Stock Exchange offers stocks from over 70 countries. While a bit smaller than its North American counterparts at about 250,000 trades a day, the LSE is also home to many U.S. companies, who list there as well as on their home exchanges.
Practice Makes Perfect
A few days of research, and I felt ready to talk the talk. But I’ll admit – the thought of trading at this point still had me shaking in my boots. So when I heard mention of a practice online trading account (think Monopoly money for grown ups), I knew it was the perfect option to try out my newly hatched trading strategies.
After some shopping around, I signed up with Questrade’s free IQ Web practice account – their extensive learning resources, not to mention the $500,000 in practice cash they give you to play with, clinched the deal for me. Eager to get started, I logged into my first session… and my screen lit up like a Christmas tree as I took in the trading interface for the first time. Thank goodness the Questrade practice account comes stacked with a bevy of video tutorials to help you sort out everything from placing an order to analyzing the performance of your executions.
These are the features I learned to rely on:
Watch List: This quickly became my favourite feature – simply type a ticker symbol into the menu, pick your preferred exchange, and you’ll be presented with the gist of how that stock is performing that day. As a newbie, I found it was a great help to check out stocks I saw cropping up in the news – for reasons good and bad – and see how they were currently holding up.
Balances: Perhaps an obvious tool, but I quickly developed a compulsion with checking this tab. Compiling my profits, losses and total buying power, I was able to check in on my current standing, instantly.
Snap Quote: Thinking of placing an order? Be sure to hit this button first for the latest market quote – and compare with your Watch List to see if waiting a bit can save you a buck or two.
Charts: This was another research tool that I found particularly handy. Essentially a visual representation of my Watch List, I was able to track the historical performance of a potential stock over the day, week, or even months. I used this frequently in conjunction with my list before picking anything.
Like a Kid in a Candy Store
Now that I had $500,000 in play funds at my disposal –and some semblance of knowledge on how to use it – it was time to pick my stocks. This is where things get kind of fun – and even more overwhelming. First of all, you’ve got tens of thousands of offerings to choose from, across every sector and industry, all trading on different exchanges. And talk about pressure! This is not an area to traipse into blindly. Desperate to put a method to the madness, I Googled – and came upon a number of different investment strategies.
Fundemental Analysis: When it comes to picking your poison, it’s sound to run a potential stock through the fundamental analysis wringer. This method attempts to evaluate all economic and industry-specific conditions to determine a stock’s intrinsic value. I found Investopedia.com’s guide to be fairly inclusive while trying to make heads or tails of this.
Check Out the Registration Statement: Every American company is required to file this statement with the Security and Exchanges Commission (Canadian companies must file with their provincial regulator) when making their first Initial Public Offering. The statement includes detailed information on the company’s business model, namely how revenues are generated. Be sure to pay close attention to the Risks section, which outlines any external or internal economic factors that could cause the company loss of profit.
Go With What You Know
I’ll admit, this isn’t the most… analytical method to stock picking. But I needed a starting point now – and with play money in the bank, I felt it was fair to be a bit frivolous. My first practice buy? Lulu Lemon (LULU). Following up on news that they were reporting a larger-than-expected Q1, I figured they’d be a good bet. Plus, I really love their yoga pants. So I picked up an initial 50 shares at $61.50 each on the NYSE.
Next up, I decided to be a bit more controversial and take a chance on the dark horse Facebook (FB). Picking up 200 shares at $30.63 (my Watch List assured me there’d been a semblance of growth over the past few days) I forked over $6126 of my play money.
Psst - In case you're wondering why world's largest social media provider would be a contentious choice, check out What Is An IPO: Lessons Learned From Facebook.
My third buy - well you only live once (and have guilt-free access to $500,000), and I felt a little spendy. So... I bought 100 shares of Apple (AAPL) on the NASDAQ at $586 a pop. Uh oh – this is starting to feel a bit like shopping for shoes –really, really expensive, designer ones.
Show Me The Money
At this point, my practice account was running low on time – I had to make a move. Noting that Facebook had edged above my buying price to $31.81 on my Watch List, I struck – and made a tidy profit of $236 as a result.
Wish I could say the same for my other pickings – the last few days of my trial account showed nothing but red, day after day.
So what’s next for this investing guinea pig? Stay tuned – next week I’ll put my newfound knowledge to work, and this time we’ll be playing for keeps. So check in to see what stocks I pick, my first option purchase and my first short sell attempt – this time without the monopoly money.
Have stock picking suggestions for our guinea pig? Tell us in a comment, tweet us, or write on our Facebook wall!