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How to Start Stock Trading in 6 Steps

Stock trading is buying and selling shares for short-term profits. But before diving in, it's important to consider the risks.

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Stock trading involves buying and selling shares in public companies — called stocks — to try to make money. You may earn a profit by selling stocks for more than you paid for them.

Stock trading means buying and selling stocks for profit on a short-term basis. It's riskier than long-term investing, but you can manage risk somewhat by following these six steps:

Open an account ?️ You can open and fund a brokerage account online in just a few minutes.

Set a budget ? Only invest money you can afford to lose — not money that you'll need for short-term expenses.

Market order or limit order ? Market orders buy or sell stocks immediately, at the best available price. Limit orders are only filled if you get the price you want.

Practice with paper trading ? Many brokerages allow you to learn the ropes using play money.

Choose a benchmark ⚖️ Measure your results against a market index like the S&P 500. If you're underperforming the market, consider index funds instead of individual stocks.

Stay grounded ? Stock trading isn't a get-rich-quick scheme. Most successful investors hold their stocks for years.

Building positions slowly, ignoring hot tips, keeping good records, and balancing short-term trading with long-term investing can also reduce your risk.

Keep in mind that certain kinds of stocks, such as international stocks, penny stocks and dividend stocks, come with their own unique risks and potential benefits for traders.

What is stock trading?

Stock traders watch the short-term price changes of stocks closely, and then they try to buy low and sell high

Most investors are best served by putting their portfolio in long-term, well-diversified investments like index or mutual funds. But if you have extra cash and you want to want to learn how to start trading, online brokerages have made it possible to trade stocks quickly from your computer or through mobile apps.

But before you dive in, you should make sure you know how the stock market works and the details of trading in it.

» Learn more: Stock Trading vs. Investing: What’s the Difference?

Types of stock trading

There are two types of stock trading: active trading and day trading.

Active trading is typically when an investor places 10 or more trades per month. They often use strategies that rely heavily on timing the market. They try to take advantage of short-term events (at the company or in the market) to turn a short-term profit.

Day trading means playing hot potato with stocks — buying and selling the same stock in a single trading day. Day traders care little about the inner workings of the businesses. They try to make a few bucks in the next few minutes, hours or days based on daily price swings.

» Read more: How to day trade

Brokerage firms

on Charles Schwab's website

on E*TRADE's website

on Vanguard's website

on Fidelity's website

How to trade stocks in 6 steps

If you're trying your hand at stock trading for the first time, the logistics of trading stocks comes down to six steps:

1. Open a brokerage account

Stock trading requires funding a brokerage account. That's a type of account designed to hold investments. If you don't already have an account, you can open one with an online broker in a few minutes. But don’t worry, opening an account doesn’t mean you’re investing your money yet. It just gives you the option to do so once you’re ready.

» See NerdWallet's ranking of the best brokers for stock trading

2. Set a stock trading budget

Even if you're great at trading stocks, putting more than 10% of your portfolio in an individual stock can be risky.

"If all of your money’s in one stock, you could potentially lose 50% of it overnight," says Nathaniel Moore, a certified financial planner at AGAPE Planning Partners in Fresno, California.

Other common dos and don’ts include:

Do invest only the amount of money you can afford to lose.

Don’t use money that’s earmarked for near-term, must-pay expenses such as a down payment or tuition.

Do ratchet down that 10% if you don’t yet have a healthy emergency fund and 10% to 15% of your income funneled into a retirement account.

3. Learn to use market orders and limit orders

Once you have your brokerage account and budget in place, you can use your online broker's website or app to place your stock trades. You'll be shown several options for order types. These dictate how your trade goes through. We go through these in detail in our guide for how to buy stocks. These are the two most common types:

Market order: Buys or sells the stock ASAP at the best available price.

Limit order: Buys or sells the stock only at or better than a specific price you set. For a buy order, the limit price will be the most you're willing to pay. The order will go through only if the stock's price falls to or below that amount.

4. Practice with a paper trading account

"Try investing in the market without putting money in the market yet to just see how it works," says Moore.

You can do that by investing your time, he says. Pick a stock and watch it for three to six months to see how it performs. You can also learn the market via the paper trading tools offered by many online stock brokers. Brokers that offer paper trading let customers test their trading skills and build up a track record before putting real dollars on the line.

» Learn more: Best online brokers for paper trading

5. Measure your returns against a fitting benchmark

This is good advice for all types of investors — not just active ones. The ultimate goal for picking stocks is to perform better than a benchmark index (a stock index is just a list of stocks, for example, the S&P 500 is a list of 500 of the biggest U.S. publicly-traded companies). So ideally, the one stock you pick should outperform the S&P 500 as a whole. It could also be the Nasdaq composite index (for those investing primarily in technology stocks). Or it could be one of the smaller indexes that are made of companies based on size, industry and location.

Measuring results is key. If a serious investor is unable to outperform the benchmark (something many pro investors struggle to do), then it makes sense to invest in a low-cost index fund or ETF — these are automatically invested so they closely align with one of the benchmark indexes.

» View our list: The best-performing stocks this year

6. Keep your perspective

Being a successful investor doesn’t require finding the next great breakout stock before everyone else. By the time you hear that a certain stock is poised for a pop, so have thousands of professional traders. The potential likely has already been priced into the stock. It may be too late to make a quick turnaround profit, but that doesn’t mean you’re too late to the party. Truly great investments continue to deliver value for years. That's a good argument for treating active investing as a hobby and not a get-rich-quick scheme.

How to manage stock trading risks

Wherever you fall on the investor-trader spectrum, taking things slowly, ignoring "hot tips," keeping good records and holding long-term investments along with your trading positions can help you do it safely.

Lower risk by building positions slowly

There’s no need to cannonball into the deep end with any position. Taking your time to buy (via dollar-cost averaging or buying in thirds) helps reduce exposure to price swings. Moore says you can also look into high-dividend stocks, which pay out a portion of earnings to investors, and ETFs, which allow you to spread your risk out among multiple companies.

Ignore so-called hot tips

People posting in online stock-picking forums and paying for ads touting sure-thing stocks are not your friends. In many cases, they are part of a pump-and-dump racket. That's when shady people purchase buckets of shares in a little-known, thinly traded company and hype it up on the internet.

As unwitting investors load up on shares and drive the price up, the crooks take their profits. They dump their shares and send the stock careening back to earth. Don’t help them line their pockets.

Keep good records for the IRS

If you’re not using a tax-advantaged account — such as a 401(k), or a Roth or traditional IRA — taxes on gains and losses can get complicated.

The IRS applies different rules and tax rates and requires the filing of different forms for different types of traders. If you've sold stocks for profit, make sure to set aside some extra cash for a larger-than-normal tax bill. Another benefit of keeping good records is that loser investments can be used to offset other taxes through a neat strategy called tax-loss harvesting.

Balance short-term trading with long-term investing

Trading stocks can bring quick gains for those who time the market correctly, but most people, even professional investors, fail to do that the majority of the time. A single company's fortunes can rise more quickly than the market, but they can just as easily fall.

“Trading isn’t for the faint of heart," Moore says.

Just because stock trading is risky, doesn't mean you need to avoid it entirely. But it probably shouldn't be your only investing strategy, or even your main one. A rule of thumb some financial advisors recommend is to devote no more than 10% of your total portfolio to individual stock trades, and keep the rest in long-term, diversified investments such as index funds.

Where to trade stocks

To trade stocks you need a broker. But not just any broker. Pick one with the terms and tools that best align with your investing style and experience. A priority for active traders will be no commissions and fast order execution for time-sensitive trades.

New traders should look for a broker who can teach them the tools of the trade. Some offer educational articles, online tutorials and in-person seminars. (See NerdWallet's roundups for the best brokers for beginners). Other features to consider with stock trading apps are the quality and availability of screening and stock analysis tools, on-the-go alerts, easy order entry and customer service.

No matter what, the time spent in learning the fundamentals of how to research stocks and experiencing the ups and downs of stock trading — even if there are more of the latter — is time well spent, as long as you’re enjoying the ride and not putting any money you can’t afford to lose on the line.

How to trade different types of stocks

If you're interested in trading a specific type of stocks, such as international stocks, over-the-counter (penny) stocks, or dividend stocks, there are a few additional things to consider, especially when it comes to choosing the right broker.

International stock trading

There are a few different ways to get exposure to international stocks, including ETFs, U.S. exchange-listed foreign companies, over-the-counter shares of foreign stocks (more on that below), and direct investment in foreign stock markets.

Almost all brokers offer the first two items on that list, but some restrict OTC stock trading, and only a handful offer direct access to stock exchanges in other countries.

One word of warning: International stock trading can be even riskier than domestic stock trading. Foreign stocks often have less volume than U.S. stocks, and less data available to help traders figure out when to buy or sell. Other countries may also have different laws, investment taxes and trading hours than the U.S. Be careful about trading international stocks unless you've done the research on these country-to-country differences.

Penny stock trading

Stocks with a price of less than $5 are sometimes called penny stocks. Many trade off the major exchanges, on the OTC markets.

As mentioned above, some brokers don't offer OTC stocks at all, and others that do may only offer a limited selection of OTC stocks, or charge extra fees on those trades. If you're interested in trading penny stocks, it's worth researching different brokers to make sure you're using one that offers broad access to OTC markets and low or no fees.

» See the best brokers for penny stock trading

It's worth noting that penny stock trading, like international stock trading, comes with even more risk than regular stock trading. Many of the extra risks of penny stock trading are similar to those of international stock trading, especially if the penny stock in question trades OTC. Low volume, high bid-ask spreads and a lack of trading data are all hazards to be aware of before diving into penny stock trading.

Dividend stock trading

Unlike penny stocks or international stocks, stocks that pay dividends are not necessarily more risky than other types of stocks. In fact, many dividend stocks are large, long-tenured, highly-profitable companies with more stable (and more boring) price charts than most.

If you're especially interested in trading dividend stocks, make sure you understand how dividends work. For example, if you want to receive a dividend payment for a particular stock, you'll need to look up its ex-dividend date, buy the stock before that date, and sell it after. You should also make sure that your broker offers dividend reinvestment plans (DRIPs), which can help compound your returns by reinvesting dividends.

» See the best brokers for dividend investing

Frequently asked questions

Which stock trading site is best for beginners?

NerdWallet has reviewed and ranked online stock brokers based on which ones are best for beginners. This list takes into consideration the stock broker’s investment selection, customer support, account fees, account minimum, trading costs and more.

What's a good stock trading strategy for beginners?

First, practice with a virtual trading account, or paper trading account, then start by investing low amounts to avoid unnecessary risk. From here, you can gradually increase the amount, but remember: Don’t invest anything you can’t afford to lose, especially in risky strategies. Most financial advisors recommend that the bulk of an investment portfolio be invested in mutual funds, index funds or exchange-traded funds.

Can you trade stocks with $100?

Yes, as long as the share price is below $100 and your brokerage account doesn’t have any required minimums or fees that could push the transaction higher than $100. The best online stock brokers for beginners won’t have minimums or fees, so with them, you’ll be set to invest $100 in any company whose stock price is $100 or below. Some brokers also allow you to purchase fractional shares, which means you can buy a portion of a share if you can’t afford the full share price.

What's the difference between stock trading and investing?

The main difference is how frequently you buy and sell stocks. Traders buy and sell more frequently, while investors typically buy and hold for the long term.

What time can I start day trading?

Normal trading hours on the New York Stock Exchange and the Nasdaq are 9:30 a.m. to 4 p.m. Eastern time on non-holiday weekdays. However, there are also premarket and after-hours sessions — not all brokers allow you to trade during these extended-market hours, but many do. Learn more about after-hours trading.

» The best brokers for after-hours trading

Helpful resources