Everything You Need to Know to Start Trading

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So you've decided you're going to put money into the stock markets. That's a good decision; investing is one of the most important ways you can guarantee your future.

But there are a few things you need to know first. Before you do anything else, you need to think about your financial goals, whether in terms of increasing your capital or generating an income. Spend some time plotting out where you want to be in five, ten or twenty years and the kind of returns you'll need to get there. Then look at what you can afford to invest now, and work out whether you can do better – or whether you have a shortfall. If you're coming up short, you need to take higher risks for higher rewards, or find another source of funds.

Think about your risk/reward ratio. Shares in nearly bankrupt companies made huge gains in the ‘dash for trash' in 2008-9, but investors risked the total loss of their funds. You might decide you are unhappy with a prospect of more than 20% downside risk, even though that will mean making a lower return. Learn how to evaluate risks and stick to your strategy.

As well as identifying stocks to buy, think about your exit strategy – whether you use stop-losses, portfolio rebalancing, or fundamental valuation, be clear about when you'll take some or all of your profits.

Next you'll need to track down where you'll get your information. Ninety percent of what's out there isn't useful, so you need to find sites which will deliver you the five percent that's worth knowing without wasting your time. Find sources of statistics and bookmark them, rather than reading the couple of hundred words some journalist edits them down to. Find people who write intelligently and interestingly about economics and the markets, and follow them.

You'll need to get your financial education up to scratch, if it isn't already. Books by great investors like Benjamin Graham can teach you how to value stocks and search out shares that are going cheap. Put Graham's The Intelligent Investor on your Christmas present list. Philip Fisher and Peter Lynch are well worth reading, and you might throw in The Big Short by Michael Lewis as a cautionary tale that also shows you how asking tough questions and doing your own research can keep you out of a ton of trouble.

You'll also need to set some basic principles for your investing. Will you use a stop-loss, for instance? A stop-loss means you will automatically sell any stock that falls a certain amount, thus limiting your losses. How large a percentage of your portfolio (and of your total wealth) are you willing to tie up in a single stock? (The correct answer is never 100%.) And how often will you sit down to monitor your performance and assess the shape of your portfolio? That's a discipline that can vastly improve your returns, as you recognize mistakes you've made, understand why you scored your successes, and can see clearly if your portfolio has become too skewed towards a single stock or sector.

If you really want to hit the new year running, you'll also need to do some research into the best brokers to use. A bad broker will cost you money on every deal, whether it's by charging commissions that are too high, or giving you a bad price for the stock. Check that the house you choose offers the complete range of investments that you're interested in, and has a clean and easy to use web site.

Perhaps the most important thing you need to understand before you get started is the magic of compounding. The sooner you invest, the longer your money has to work for you – and in the long run it's time in the market, not timing the market, that counts. That's why you need to get started as quickly as you can – so crack on with your education and get ready to make that first investment.

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