When you’re more interested in taking short to medium-term positions in stocks and not holding forever, then it’s important to learn all you can. Many people who day-trade stocks or invest and don’t plan to hold forever find that they’re learning new lessons almost daily.
Picking up some tips as a beginner is never a bad idea either. Accordingly, here are 7 stock market trading tips that will be best digested by open-minded traders who are new to investing or making quicker trades.
1. Keep Your Expenses Low As They’ll Stack Up Fast!
Brokerage fees will add up quickly because brokers usually charge per trade. Most offer a desktop and a mobile app service – some even over the phone – which is expensive to operate. It creates inefficiencies that add to their operating costs, which are then passed on to the customer in the form of high fees.
If you’re going to have more than one broker to get full coverage of domestic and international stock markets for trading purposes, then be sure to check out Wealthsimple. They’re one of the online stock trading Canada based platforms that use a streamlined operation to be able to charge nothing per trade. Yes, really. They also have no account minimums, so it’s not necessary to wait until you have a spare $10,000 or $25,000 lying around doing nothing before you open an account either.
2. Properly Assess Your Appetite For Risk
People think of risk in different ways.
Risk Measurement And What It Is To You
To some people, the risk is denoted by a permanent loss of capital. For many on the stock market, the risk is connected with beta – the price volatility of an investment – rather than the loss of capital per se.
For traders in the stock market, the beta is usually initially more of a concern. This is because when the ship they’re sailing in becomes unsteady as the stock market seas produce worrisome waves, it may be time to bale out.
Selling Out In A Panic
Going into fight or flight mode by panicking following a price drop and then rushing to sell a security is not going to help your trading account. This is because if you behave like many concerned investors, you’ll wait irrationally until the price has risen and then buy fewer shares at higher prices with your remaining funds. This is the epitome of selling low and buying high!
Properly Assess Your Risk Tolerance
It’s necessary to understand your risk tolerance. This is extremely difficult to do ahead of time. It will be tested during a steep price drop again and again. Be forewarned!
Let’s assume that shares of a purchased common stock are acquired and then it declines by 33% shortly thereafter. The right-thinking to this is to double-check your investment thesis – the reason for purchasing the first place – for mistakes or errors of omission.
Consider questions like:
- Do you still believe the purchase was the right decision?
- Is there negative news that’s been reflected in the price decline? Does this change the prospects now?
- What is your price for when it’s below your comfort level and you’ll want to bailout?
- What’s your confidence level now?
- If you knew then what you know now, would you still have purchased the shares of the company?
- Is it time to sell up?
3. Ensure You Have An Investment Thesis For A Stock Acquisition
As a trader, it’s easy to get caught up with the excitement of finding interesting prospects. Diving right in and grabbing shares at an attractive price is enjoyable.
The worry that the price will rise while you investigate the company as you perform your due diligence will always be present. However, money is hard-won and easily lost, so temperance is needed even as a busy stock market trader.
Whatever system you are using to find and perform some analysis on potential stocks, ensure it’s robust enough to stand up to scrutiny. Also, not only must the price be at an attractive level, but there must be an investment thesis relating to it.
For instance, a stock may be cheap because it’s going through corporate restructuring and the market is unsure how it will shake out. They could have received some bad news, which it is felt will require years to resolve with the price decline reflecting that reality. An investment thesis needs to be clear about why the price will subsequently recover. There are plenty of stories where companies stayed in the weeds for decades and ended up being a value trap. Don’t get caught in one.
4. Decide What Cash Balance Level Is Acceptable
Not every trader wishes to be “all-in” leaving almost no cash as a balance in the account. While being fully invested provides the potential for the highest trading profits, there are some downsides to this strategy too.
Cash is seen as a dry powder that can be deployed into new trading ideas as they arise. When there’s no money sitting ready to invest in this manner, it can be frustrating as a trader. You may find that it’s preferable to invest less per trade to leave a larger cash balance for additional ideas that will inevitably come. It will also help to diversify your trades more as a beginner to avoid getting almost wiped out should a couple of positions perform badly.
When having a cash balance is more important to you, then either pick an amount that feels safer to you or that’s sufficient to choose additional investments. From the safety angle, if you’re trading on margin, then larger cash balances are preferable to cover potential margin calls. However, if cash steadies your nerve as a trader, then it’s worth considering keep cash in a savings account away from the trading account for peace of mind.
5. Learn How To Calculate Market Returns Correctly
When trading the stock market, it’s critical to both calculate the potential returns of a new investment and tot-up the totals for the end-of-year investment returns too.
There’s plenty of tales of people who thought they were trading well only to discover they were doing the calculations incorrectly. The most famous case is perhaps the Beardstown Ladies who ran an informal investment club. They later had a book published claiming over 23% annualized returns, which when audited turned out to be a below-market annualized return of 9.1%.
To know if you’re performing well as a stock market trader, it should be considered a prerequisite that you correctly determine the profits from your various trades. Otherwise, you’re just operating blind and deceiving yourself. Admittedly, it’s easier said than done, will require specific knowledge to do so correctly, and the use of an Excel spreadsheet or Google Sheets is recommended.
6. Study Great Market Traders
Take the perspective that you’ve always got things to learn instead of believing that you’re the best. Traders who become overconfident often get into positions they shouldn’t and can’t tell when it’s time to get out. As a result, they often overextend their hand and lose big time!
To stay humble, read books on profitable traders to see how they did it and what tips you can pick up from them. Some will be old stories that still have relevance today (e.g., Market Wizards by Jack Schwager), and other books will be about the latest hotshots.
Also, look out for stories in the racier investing magazines chasing the juicy byline about young traders catching early attention. They’ll probably be mentioned in these publications before being featured in a trading book.
7. Find An Investment Style That’s Right For You
Not every trader is a day trader or trades quickly. Others may be referred to equally as traders or investors. Some will dive into interesting prospects with the understanding that they’re cheap for a reason and will require years of patience to see a price recovery.
Find an investment style that is particular to yourself. If you’re most interested in technology stocks and follow the latest start-up news, then finding stocks on the Nasdaq while remaining nimble might be perfect for you. Expecting to get stuck into other sectors that you have zero interest in is often a lost cause and a rabbit hole worth avoiding.
Trading needs to be interesting and occasionally fun. If it’s putting you to sleep intellectually, then narrow it down to the style that you prefer. Avoid copying the styles of other traders just to fit in. Learn from others but do your own thing.
Finding your feet as a beginner trader is not easy to do. Be patient with yourself to find a style that you prefer, a sector that holds your interest, and a way of working that’s best. This way, you’ll feel comfortable with your approach despite being new to it. Learn from other traders but avoid copying or trying to emulate them. When coming across different investing situations, you won’t know how to go through the decision-making process if you cannot decide for yourself.
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