Learning to trade stocks and bonds is a two-part process. Interested potential investors can easily find excellent trading biographies, beginners’ guides and technical journals detailing money management and trading strategies. Traders should refine what they learn into a trading program that is consistent with their personality. Practice trading by buying and selling securities under a variety of economic circumstances.
Use free resources and materials from banks and brokerage firms to learn basic terms. Be wary of Internet sources, though there are many very good blogs and technical groups. Consider joining an investor group (see Resources below) and learn from others. Community college resources are also good places to learn about financial institutions and how macroeconomic factors affect the stock market.
Know that interest rates most affect stocks and bonds. Trading stocks and bonds is about maximizing risk and reward in a way that the individual is most comfortable. Buy bonds for steady income and less price variation. Know that the lower the credit rating and the longer the maturity, the riskier a bond becomes. Learn that junk bonds are extremely risky, but offer equity-level returns.
Learn how diversification, the need to buy many different types of investments, improves the risk/return profile of any portfolio. Diversify your holdings to improve the variability of returns in good and bad times and to provide a steady cash flow. Plan the proper mix of stocks to include high dividend stocks, preferred stocks and low dividend stocks held mainly for capital gains in your portfolio. Always include bonds for a broad mix of assets.
Learn how stock markets are grouped into industries and sectors. Buy stocks from strong sectors, but be diversified by buying only the best companies in several industries. Consider mutual funds for small amounts of money and if you are a passive trader who does not want to be directly engaged in trading. There are several subscription services that rank mutual funds with excellent professional management capabilities.
Learn about investing in stocks and bonds through fundamental analysis. Fundamental analysis concerns itself with broad economic and accounting factors that create long-term trends. Use technical trading to time the specific entry and exit of stocks by noting the changes in price and volume in stocks. These techniques complement each other, and neither should be used exclusively.
Learn to paper-trade or keep detailed records of different trading techniques and styles. Decide whether you prefer short-term trading patterns or intermediate and long holdings. Never purchase bonds beyond their first-call feature in order to eliminate early redemption risk and the possibility of having to invest in a much lower interest rate environment.