How to Trade Stocks in 2021. Beginners Guide
To start trading stocks, you need your main instrument – a trading account. You can open it either at a broker or bank. However, how do you choose the right and reliable company if you’re completely new to the market?
We’ve made a checklist for you.
Checklist for choosing a broker
1. Make sure that the financial organization is licensed. You can easily find all the documents on the official website of the company.
2. Check for how long a company has been operating on the market. No secret that the longer this period, the more reliable a company becomes. Choose brokers that are at least 5 or, even better, 10 years “old”.
3. Check the trading conditions. You are interested in the following:
- Commission fees for money depositing and withdrawal: whether they are high or low.
- Fees for trading stocks – of course, the lower, the better.
- The number and types of available instruments: if a broker allows trading premium-class stocks only, such as Tesla or Google, you might simply be short of money to invest in them. Diversity is the key here.
4. Check a broker on aggregators and in ratings. Usually, they provide all the information mentioned above as well as the feedback from other traders that might help you make up your mind.
As soon as you’ve chosen a financial partner, open a trading account there.
How to define the amount of investments?
Now you need to decide how much you are investing in stocks.
On one hand, the answer to this question looks simple: invest as much as you can afford to lose. This is the most rational approach.
The larger your investment – the higher your potential profit, but the greater your risks. There’s no magic number that is suitable for all the traders in the world.
Also, account for the volume of your investment (or, how many stocks you buy) and the price of one asset (meaning the price of 1 stock). Moreover, note that some brokers set a minimum investment for trading stocks which can be practically any sum they want.
Now let’s decide what to invest in, or which instruments to choose.
What kind of instruments to choose for investing?
Here we’ll discuss not just the stocks of separate companies but the types of assets. The thing is that:
- Stocks of companies comprise stock indices that you can also invest in.
- You can trade stocks via CFDs.
- Also, there are ETFs, or Exchange-Traded Funds.
Here are more details.
- Indices. In simple words, an index is a set of stocks. For example, a popular Dow Jones index (you must have heard about it) consists of 30 largest companies traded on US stock exchanges. Mind that indices are never traded as they are, traders operate their derivatives, such as CFDs.
- A CFD stands for a Contract For Difference. The difference is in the stock prices – the one you buy a CFD at and the one you sell it at. There are CFDs on indices, stocks, metals, and so on. The main difference between trading “real” assets and CFDs is in the opportunity to use leverage.
- As for ETFs, they are, generally speaking, sets of stocks traded as one instrument. There are ETFs for indices, that are copying stock indices; commodity ETFs, uniting certain goods, say, precious metals; branch ETFs, uniting stocks of one sector, and others. An ETF is quite a new instrument gaining popularity.
To sum up: on step three, choose your instrument for investing in stocks.
If you choose CFDs, you will get access to higher leverage and will be able to open buying and selling positions. More information about what is leverage and how to trade with leverage you can get from our previous post.
Also, you can choose classical investments in stocks: in this case, your starting investment will be larger but your risk a bit smaller.
Another option is trading ETFs. If you are interested in investing in a certain sector of economy or a stock index, ETFs will be a perfect choice for you.
What have we learned?
1. Choose your broker.
2. Decide upon an affordable sum of investment.
3. Choose your trading instrument.
Allright. We finished with the theoretical part and now going forward to the analysis part, where we’ll tell you about most promising stocks to invest in 2021.
How a beginner investor can choose stocks for investing?
We need to find out, stocks of which companies or which sectors of economy are most likely to grow at the beginning of 2021. Let’s analyze the market situation.
We can describe 2020 in just one word – coronavirus. It has become the driver of the economy, pulling certain companies to the bottom and pushing others up.
Who are the outsiders and who – the leaders of 2020?
We’ll start with the first ones.
Those who suffered the largest losses in 2020 are the oil and gas sector, airlines, and tourism. There was a moment when the healthcare sector joined them, with its negative profitability.
If the problems of the first three sectors are on the surface, the trouble of pharma companies are less obvious. The year started quite vigorously for them: governments paid for the development of the vaccine, investors were enthusiastic, and the sector grew by 32% in spring. But then something went wrong.
At the beginning of the year, everyone who wanted to work on the vaccine – got the money. Now investors have become pickier, while some lost interest to this story for good. Also, the drugs by certain companies turned out inefficient at early stages of testing, and the development of the vaccine on the whole happened to be more difficult than it seemed at the beginning of the year. This is the main reason for the overall slump of the sector.
However, the invention of the vaccine can send the stock price of a company to the stars.
Just look how the market reacted at the news about the vaccine by Pfizer at the beginning of November – the stocks sky-rocketed from 36 to 41 USD in almost a day. However, it started declining back to 36 at once.
The growth of the stock price was purely emotional. And until large investors join in, such swings are inevitable after any positive news.
Moreover, there are plenty of companies working on the vaccine. Why guess which one will turn out the most efficient? It is more logical to invest in the companies which stocks will grow anyway, regardless of who introduces the vaccine.
That’s why we exclude the pharma sector from our investment plan for 2021.
Now let us have a look at those who did manage to grow in the second half of 2020.
The first sector we’ll mention is renewable energy. The demand for oil fell, while the interest towards ecology and alternative energy sources increased.
NextEra Energy. Its stocks have grown by over 20% since mid-summer. Another lucky example is Duke Energy Corporation. Its stocks performed growth by 17% during the same period. Overall, the sector is growing by leaps and bounds – just look at the ETFs that include such companies. Many of them have grown by 200-300% since spring.
The trend is unlikely to stop. Why? Oil is under pressure not only economically but politically and socially as well. Ecology parties winning all over the world is the proof. What’s the alternative to oil? You’ve got it right - the renewable energy.
We can’t expect, though, the humanity to swap dirty energy for clean one overnight, but there’s definitely evidence of the beginning of this shift.
Hand in hand with ecology goes the sector of electric cars and their accessories. The major player in this field is Elon Mask and his company Tesla, of course.
Other stars of this sector are:
- The Chinese prodigy NIO, which stocks have grown by 340% and keep on growing.
- General Motors that has virtually bought Nikola and is trading at its 5-year highs.
- Also, the Workhorse Group – the Americans producing electric vans with a 90% growth in their stocks prices.
The plan of all the players here is to produce more electric cars, decreasing their price gradually to make them available for everyone. More potential consumers, more money for the producers.
The sector is growing actively, so we will add it to our investment plan as well.
Communication services sector
Last but not least, the sector of communication services that demonstrated a 5% profitability in the second half of 2020. It includes Alphabet (known to everyone as Google), Facebook, Netflix, Zoom, and others. The stocks of all these companies are trading at their all-time highs.
This is the sector that, unlike the others, profited from the corona-crisis. Many companies sent their employees to work from home and had to purchase corresponding products: software for video calls, cloud storages, software for product management, etc.
Nowadays many large entities plan to go on working remotely even when the crisis is over. This provides the communication sector with a bright and profitable future.
Hence, it’s the third on our list.
So now, we have our investment plan for 2021! It is comprised of companies from the sectors of renewable energy, electric vehicles, and communication services.
Which companies would you include in the list? Share your thoughts in the comments down below!
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