Top 10 Reasons Why You Should Trade Stocks

If you are visiting a website like TradingMarkets, then there's a pretty good chance that you have already decided that trading stocks (or forex or options or exchange-traded funds …) is for you. But even those who have decided to start down this road often do not realize just how much stock trading has changed -- even over the last decade.

The good news is that this means that there are now more reasons than ever for you -- once you've fully funded your 401(k) or IRA, and built up your family's rainy day fund -- to begin trading. And because more traders than ever are looking to the equity markets as the markets they want to trade, it seems like a good idea to look at some of the specific reasons why you should trade stocks.

Commissions are Lower Than Ever

Compare the average per trade stock commissions of today with those from twenty or even ten years ago. The rise of the discount brokerage, followed by the rise of the online discount brokerage, has done as much as anything to bring stock trading to the masses.

Lower commissions are not just a boon for investors and traders in general. The lower cost of doing the business of trading stocks actually makes certain trading strategies possible for the average trader. Some trading techniques, including many shorter-term trading strategies, require traders to make several trades in a single day. Years ago, this kind of trading would have been prohibitively expensive for the average trader based on the fees involved alone. Today, with low commissions being the norm and even greater savings for the sort of higher volume and/or higher frequency traders who need them the most becoming commonplace, one of the oldest obstacles challenging retail traders has been all but eliminated.

More Information Than Ever Before

The economic boom of the 1980s and the financial boom of the 1990s led to a proliferation of finance- and business-oriented newspapers and magazines. And the majority of this new financial media was all geared toward the same purpose: helping the average trader get a piece of the action.

Nowadays, researching information about both specific stocks and the stock market in general is one of the most popular past-times on the Internet. No less than Jim Cramer, founder of TheStreet.com and host of CNBC's Mad Money has spoken of his amazement at how easily those trading stocks today can get information with a simple mouseclick that used to take him an afternoon in the annals of the New York Public Library.

For traders looking for information about companies, managements, earnings, balance sheets, and even rumors and insider buying, there is more information more readily available than at any time in the history of finance. Retail traders can now listen in on earnings announcements and conference calls that were restricted to professional stock analysts only a few short years ago.

Markets are Running Out of Stock

It may sound hard to believe, but there are simply fewer stocks out there for investors and traders to choose from. A large part of this has to do with the Buyback Era, in which companies learned that one way to increase their earnings per share was to reduce the number of shares outstanding by using their cash to buy back their own stock.

Thus companies from a wide variety of industries began new programs to buy their stock. The bullishness of such buyback programs became so strong at one point that traders and investors would react positively as soon as the buyback program was announced -- even if the actual buyback date or the number and value of the shares involved was unspecified.

While buyback mania is not now at the same levels it was in the recent past, buyback still represent the sort of demand for stocks that can help support a directional bias in certain situations that stock traders can exploit.

Profit in Up Markets and Down

Trading stocks -- as opposed to simply investing in them -- means you can make money whether the market is moving higher or lower. When markets are moving higher, you can buy the breakout, ride the trend, or if you are already long stocks, sell into strength. When markets are moving lower, you can sell breakdowns short, ride the bearish trend downward, or buy the dips. As a trader, all you want is volatility -- direction is a secondary issue. As long as stocks are moving, you will always have a chance to win.

Easy to Buy, Easy to Sell

Stocks are highly liquid. Unlike speculating in real estate or starting a business, stock trading is a purely financial endeavor that requires very little in the way of equipment, inventory, or a virtual fleet of salesmen, appraisers, inspectors, agents and other middlemen that are required personnel when it comes to many other ways that people have traditionally tried to make money. Trading stocks not only allows you to be your own boss -- it allows you to be your own, sole employee, as well!

Accountability Within and Without

While legislation like Sarbanes-Oxley drives many free marketers crazy, it is evidence of one thing: when it comes to the financial markets, someone is always minding the store. From the SEC to the stock exchanges themselves, stock traders as a whole are protected by an army of government and other watchdog agencies and organizations both private and public.

More even than this is the fact that the market itself is made up of legions of buyers and sellers who all have a very vested interest that the game is being played fairly, and that no one participant in the market has an outsized advantage over any other. While in practice, there will always be better and more informed traders -- just as there will always be mismanagement, fraud, and scandal (Societe Generale!) -- knowing that there are people paid to keep score and enforce the rules means that over the long term, stock traders can trust that the game is not rigged against them.

Outperform Mutual Funds

For investment, and for those with little time to devote to the markets, mutual funds are a perfectly legitimate option. But for those with a little more capital and a little more time, trading stocks is a far more effective way to make money than trading mutual funds.

Although many stock traders have attempted to trade mutual funds, many mutual fund companies have increasingly imposed steep fines and penalties to restrict accountholders from trading mutual funds in their accounts. Not only do stocks not have this problem, but a portfolio of well-chosen stocks -- such as the high PowerRating stocks published by TradingMarkets -- has been shown to beat the market by a significant margin since 1995.

More Tools than Ever Before

Along with the overwhelming amount of information available to retail stock traders today, there are more tools that traders can use to analyze stocks on their own. Analytics, charts, and trading message boards are just a few of the tools and resources that are available to do-it-yourself stock traders. Gone are the days, for example, where technical analysts and chartists were required to hand-draw charts after the market close, tediously updated their graph paper charts with all the attention (and efficiency) of a medieval monk.

Now, with a click of a mouse, traders not only have eye-poppingly informative price charts to study and analyze, but the sheer computer power available to retail traders of all types makes it possible for the average guy (or gal) to be able to test and backtest trading strategies, experiment with technical indicators, and review and process far more stocks in a short period of time than would have ever been possible in decades past.

Intellectual and Emotional Challenge

Most people who trade for any length of time become interested in the mechanics of trading, sooner or later. This is often true even if they start out with a service that just provides entry and exit signals. Whether that means looking at a price chart (such as our PowerRating charts) to confirm a recommended buy or sell, or using other technical or analytic tools to understand how a given system or service makes the recommendations it does, the desire to want to "look under the hood" and see how a certain trading system really works is both an understandable and a healthy temptation. Many traders have referred to trading and trading systems as being like putting together puzzles, calling it some of the most intellectually challenging work they've ever done.

Not only can trading stocks give your brain a workout, but also your heart is likely to feel more than a few heavy thumps as you embark upon your trading career, as well. Anyone who has traded stocks for any length of time will tell you trading stocks is one of the toughest vocations you can get involved with in terms of playing with your emotions. The idea that trading is 10% method or strategy and 90% psychology is no secret among stock traders, who know that even the best stock trading system or method will fail if the trader does not have the requisite confidence and discipline to follow it.

Opportunity to Make Money

Last, but not least, trading stocks provides a great opportunity for people to make money outside of their 9 to 5 (or 8 to 6, nowadays) jobs and careers. There are a variety of techniques -- from intraday and "day trading" to swing trading to position trading -- that stock traders can choose from, making it possible to find a trading style that matches both their person (i.e., full-time worker, student, retiree, work-at-home parent) as well as their personality.

One of the best things about trading stocks is that there really is no "one way" to trade stocks. Contrary to popular wisdom, there are plenty of people who make a fine second income trading stocks -- and almost none of those people trade in the exact same way. Moreover, many popular myths about trading -- from the idea that technical analysis doesn't work to the notion that you cannot trade unless you use stop-loss orders to the idea that buying low and selling high is not as effective a strategy as buying high and selling higher -- are really just that: myths and habits that have worked for some, and not worked for others.

The trick is to find a method that works for you, test it, and if the tests are good, trade it. Who cares what anybody else thinks about your personal style of trading -- as long as you are making money?

So, Do You Wanna Be a Stock Trader?

Invest for retirement, looking to buy and hold the best stocks for as long as possible. Start a business if you want to get rich -- as the saying goes, nobody ever got rich working for somebody else. But to simply enhance your lifestyle, to make everyday living that much more potentially rewarding and secure, or to afford those creature comforts that provide just the right amount of spice to life, there are fewer better methods than trading stocks. And no better time than the present to get started.

* One way to get your life as a stock trader off to a sound start is to register for our free TradingMarkets Path to Professional Trading course. Registration is quick, easy, and the best thing you can do today to improve your chances of trading success tomorrow.

David Penn is Senior Editor at TradingMarkets.com