Do you want to make it in the Tech rally? Here is how you can start trading tech stocks.
Unless you have spent the last year living under a rock, you have probably heard everyone discussing two things, COVID19 and Tesla’s stock rally. Tech stocks have had a bumper year in 2020, with the Nasdaq Composite Index almost doubling from its low in March. Tesla on the other hand increased by almost 7 times to $700!
The rally in Tech stocks was caused by the pandemic, which greatly increased the appetite for tech products and the adoption of technology that would have otherwise taken years. If you are also interested in making money by trading then here’s how you can do it.
Before we go into more details of stock trading, it is important that you know about Nasdaq, since some of the largest technology stocks such as Apple, Tesla, Microsoft, Google, Intel, and Amazon, are listed there.
Essentially, Nasdaq is an exchange that allows for the buying and selling of securities. Unlike the New York Stock Exchange (NYSE), the Nasdaq does not have a physical trading floor, instead, all trades are conducted through its state of the art electronic trading system. Furthermore, Nasdaq is a dealer’s market, meaning that participants do not transact securities directly among themselves but rather do it through a market maker.
“Nasdaq” also refers to the Nasdaq Composite Index that includes almost 3000 stocks listed on the Nasdaq exchange. Although it includes all companies, the Nasdaq Composite Index has a heavy tilt towards technology stocks, making it an apt gauge for the performance of these stocks. The index uses a market capitalization methodology of weighting constituent stocks.
Currently, the Nasdaq Composite Index is at 13,100 points, up from its low in March 2020 of 6,860 points
Find a stock broker
Now that you know about Nasdaq, you should look for a broker in order to trade stocks. Essentially, a broker provides a trading platform through which you can trade with participants on various exchanges and markets.
You can find many brokers online but before you do, here a few things that you should look for: low commission and fees, quick executions of orders (within milliseconds if you are day trading), strong reputation. Another thing you should consider is that the broker also provides access to strong research tools, such as an economic calendar.
You should carefully choose a broker and find one that matches your needs and trading style.
If you want to buy and sell foreign currencies then you need to look for a Forex broker. One example is capital.com – you can read a review of capital.com here. This is an online trading platform that charges zero fees and commission.
Find your trading style
Another thing you need to consider is your trading style. Your trading style will depend on your ability and willingness to take risks (we will talk about this later). A few common trading styles are:
- Buy and hold: Buy and hold is the least risky strategy among these and made popular by Warren Buffet. It basically entails buying fundamentally undervalued stocks and holding them for a long period of time which could be months or years. Imagine someone who bought Tesla’s stock at $50 and has been holding it since!
- Swing Trading: Swing trading involves relatively shorter-term trades that last for around several days. This allows for quick realization of gains but is riskier and requires you to be more active.
- Day Trading: Day trading basically involves buying and selling stocks during a single day. Since the daily upside percentage is relatively low you need to do a lot of trades. Day traders often use high leverage which can be very risky especially for newcomers. Some intraday trading strategies are scalping, range trading, news-based trading, and high-frequency trading.
- Short selling: Short selling basically involves borrowing stocks (that you believe to be overvalued) on leverage, selling them, and then buying them back when their prices go down. Short selling is very risky and not appropriate for novices; a quick Google search about people who shorted Tesla will let you know what we are talking about.
Other trading strategies include long/short and market neutral strategies however, these are beyond the scope of this article.
Consider your risk
Before you start trading tech stocks you should know that trading in itself is risky. Risk is defined by both your ability and willingness to take risks. Basically, your ability to take risk is the amount you can lose without substantially hurting your financial standing. On the other hand, your willingness to take risk depends on your personality and how comfortable you are with taking chances.
Unless you are consulting with a financial advisor, you should choose the lower of the two. Furthermore, before buying a stock, do some research on it. Find relevant news articles and look at what the experts are saying. One metric you should know about is the price to earnings to multiple, which is essentially the stock’s price divided by the earnings.
Generally, a high P/E multiple means that a stock is expensive but tech stocks are a little different as they trade on high P/E multiples due to their growth potential.