Purchasing stocks isn’t difficult. What’s difficult is picking companies that are going to outperform the market.
That’s a skill that most people don’t have. Or something they’re not interested in learning. But for those who take the time to learn stock trading 101, they’ll be able to act calmly and decisively.
Investing in the stock market is one of the greatest ways to grow one’s wealth. Unfortunately, a poorly managed portfolio can have the opposite effect.
Continue reading and we’ll walk you through some of the most helpful pro tips on stock trading.
Leave Your Emotions at the Door
Being successful in the stock market doesn’t mean that you have to be smart. What you need to be is cool, calm, and collected.
According to the Prospect Theory, people feel their financial losses much more strongly than their financial gains. If you can’t control your emotions, you might end up selling everything on the first bad day you have, which is a poor investing strategy. You have to be able to be forward-thinking and have the ability to see the market from a macro view rather than a micro one.
Pick Companies, Not Stock Symbols
It’s easy to forget that those strings of letters running down the ticker tape of the various news stations represent actual companies. But you shouldn’t let stock picking become an abstract concept to you. You need to remember that you’re purchasing a share of a company’s stock, and thus becoming a part-owner of that company.
You want to invest in companies that you care about, that you use, and that you know. Just because a talking head on television starts talking about a foreign biotechnology stock that you’ve never heard of, doesn’t mean that it’s something that you should invest in.
The closer you are to the company you invest in, the more you’ll be able to understand how they operate.
And before you buy stock in a company, you want to learn everything about it. What is its business strategy, long-term prospects, competitors, and is there room for growth?
Plan Ahead for Panicky Times
Investors are considering cutting ties or investing more in certain stocks. But making decisions in the heat of the moment can lead you to break one of the most important stock trading rules: buy low and sell high.
One way to prevent this is to keep a journal. You want to jot down what makes every stock in your portfolio worthy of your commitment. You also want to write down what would have to happen for you to dump the stock.
You can start by writing about what you like most about the company and what growth opportunities they have. What metrics matter most? What milestones are you going to use to judge the progress of the company?
Write out the possible pitfalls and mark which ones would be signs of a temporary setback and which would be game-changers.
When it comes to knowing what would have to happen to make you sell, you don’t want to worry about the stock price movement. Although it could be helpful to set a certain price, whether one that’s very high or low, where you can say that you’re out if it hits that level.
Really what you’re looking for are fundamental changes that would make you want to sell. For example, if the company’s CEO were to retire, if they lose a major customer, or if they lose significant market share.
Consider Options Trading
Options are financial tools that are derivatives based on the value of stocks. A person is able to buy or sell a stock with an options contract.
These contracts involve a seller and a buyer, where the buyer pays a premium in order to possess the contract. Speculating on options allows a trader to hold a leveraged position in a stock at a lower price than buying shares of the stock. Investors can also use options to reduce or hedge the risk of exposing their portfolio.
While trading options can be a lucrative business, it can also be a bit confusing when just getting started. You should check out more information if options trading sounds like something you’d be interested in.
Gradually Build up Positions
Successful investors care more about time rather than timing. It’s almost impossible to time the market, so it’s not worth trying. Instead, you should be investing for the long-term, which means that short-term trends won’t make a big impact on your portfolio.
Consider the dollar-cost averaging strategy. This strategy states that you should choose a set time interval and a set amount of money for a specific stock. For example, you can decide to buy $250 of stock in Disney (DIS) on the first Monday of every month.
Some months you’ll be able to buy more shares than others. But this should even out over time. This will also help you avoid moments of panic.
Use These Stock Trading 101 Tips to Improve Your Portfolio
As we all know, there is no way to guarantee a successful portfolio. But by following the stock trading 101 tips listed above, you’ll be improving your chances of increasing your wealth. If you’re new to investing, then start very small and slowly build up your positions as you get the hang of it.
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Interesting related article: “What is a Trader?“