7 Basic Rules to Follow When Buying and Trading Stocks
When it comes to investing you want to make sure you are making the right choices. Here are 7 basic rules to follow when buying and trading stocks.
Did you know that 1,700 people become millionaires in the US every day?
A large number of wealthy people and indeed some of the richest people in the world attribute their fortune to the stock market.
However, buying and trading stocks can be intimidating to new entrants.
Equipping yourself with basic knowledge on the stock market can open a whole new world of opportunities for you and can help you minimize the chances of making expensive mistakes.
Buying and Trading Stocks: How It Works
Stock trading happens in secondary markets. Here, owners of shares sell to willing buyers. Typically, the companies listed on the stock market do not directly sell their shares to you.
The exception is new share issues or stock buybacks.
However, these are not day to day occurrences, and when they do happen, it’s usually outside the stock market confines.
Bull vs Bear Market
These are terms you will come across severally in your journey. What do they mean?
A bull market happens when the economy is doing well, unemployment rates are low, and stock prices are high.
A bear market, on the other hand, refers to a period when the economy is doing badly. This is characterized by high unemployment rates and falling prices.
Here are 7 expert stock tips for beginners to help you invest like a pro.
- Reduce Risk with Diversification
When you start trading stocks, diversification allows you to spread your risk. By investing in a range of stock, you reduce the chances of one bad investment severely injuring the return on your entire investment.
Although diversification does not guarantee wins, it’s among the few things you can do to minimize loss. However, there are two types of risk.
Here is a brief look at both:
This is also known as systematic risk. This risk is not specific to a particular industry or company. This means it cannot be eliminated or reduced by diversifying.
This is also known as unsystematic risk. It’s specific to an industry, country or company. For this reason, its impact can be minimized by diversifying.
The decision to diversify can be influenced by how much money you have to invest. If your investment kitty is small, you might have to start off with two or three companies.
- Get Well Informed
Instead of just investing in stocks, invest in a company. This means picking a company operating in an industry you understand.
Similarly, think of stocks in the broader sense of buying the company as opposed to just buying its stocks.
When evaluating a company, here are some things to look at:
- The company’s management team
- A company’s competitive advantage, also known as an economic moat
- A firm’s revenue and profit trends in the past few years
- The price to earnings ratio
- Credible analysis on the best stocks to buy now or in the future
- Stock trading apps
This is just basic information for when you are starting out. As you get more and more knowledge, you can start doing a much deeper analysis of the stocks you want to trade in.
- Find the Right Broker
Finding the right broker is one of the most important decisions you will have to make. This decision will impact:
- How much you pay in fees
- Which investments you will have access to
- What your returns will be
Some full-service brokerage firms will make the investing process difficult for beginners to understand.
Do your research on several firms and look at their reviews from other clients before settling on one.
In essence, a good broker is transparent, upfront and will provide you with as much information as you require to make informed decisions.
- Begin with a Safer Stock
When starting out, it’s best to start with safer stocks. This means to pick less volatile stocks with promising long term prospects.
Consumer staples, for one, are perceived to be safer. These stocks tend to hold up even in hard economic times because these are items people need. These include clothing, food and medical supplies.
It’s important to note that these stocks will not give you the huge gains enjoyed from more aggressive stocks.
- Don’t Pay Too Much in Fees
Strive to aim your investment funds towards stocks with lower fees and no upfront loads or hefty annual expenses.
Whatever amounts you save in this way can be used for additional stocks which will steadily grow your portfolio and earn you more over time.
Discount brokers typically have lower fees because they don’t give investment advice and provide fewer investment products.
When doing your initial broker research, this should be a key factor to consider.
- Risk What You Are Willing to lose
While spreading the risk and doing your research minimizes your risk of making bad investments, you can still back the wrong stocks.
For this reason, it’s important only to invest amounts you can afford to lose.
Losing money set aside for investments is traumatic enough. Borrowing money from your mortgage or your kid’s college fees is disastrous if your investment does not take the direction you expect.
- Take Emotions Out of It
Fear and greed are two emotions that have cost investors a lot of money. In a bull market, investors can be tempted by the lure of quick wealth.
Listening to grand stories of how investors made it big can lead you to buy shares without doing your due diligence.
A bear market, on the other hand, can cause panic selling. This is usually at throwaway prices leading to losses.
At whichever point the market is in, evaluate other factors surrounding stocks to try and make judgments on future events. Greed and fear should not form the basis of your investment choices.
You will realize that once you start buying and trading stocks, you will understand the market better. Also, you will naturally enjoy advancing your knowledge.
Starting small allows you to learn and make mistakes without too much risk. Want to know what the best stocks for 2019 are? Check out this blog for insights.