Stocks are an asset that private investors use extensively. However, only a small portion of this category of market participants approach asset selection and decision-making with proper justification. As a result, many end up with unintended losses instead of the desired capital growth. To avoid such a negative scenario, you simply need to treat stock trading on the exchange as a serious job and, of course, listen to stock trading tips from experienced investors.
Must-Know For Anyone Trading Stocks
Stock trading is one of the profitable and relatively safe investment options. According to statistics, more than 96% of private investors and nearly 100% of institutional investors invest in these securities. However, success here is achievable only with a highly responsible approach to your capital, trading tools, and the trading process as a whole. Several stock market advice tips can help you form this approach.
1 — Carefully Choose Your Strategy
Successful trading strategies begin with creating a personal investment plan. In this plan, you must specify your investment goal, investment horizon, and acceptable risk level. Based on these factors, you can determine which strategy suits you best: passive, conservative, or aggressive.
The result of choosing a strategy should be to limit the list of assets — not specific stocks, but groups of stocks, such as:
- Blue-chip stocks.
- Dividend aristocrats.
- Growth stocks.
- Value stocks, etc.
Only after such a selection can you preliminarily assess the potential profitability of investments, the possibility of achieving the set goal, and the potential drawdown level.
Important! To obtain higher-quality results when choosing stock market strategies, consider consulting market professionals (brokers or investment companies) to create an investment profile or risk profile.
2 — Never Forget About Diversification
One of the main investment tips is always to diversify your investments. Purchasing multiple assets from different issuers, across various industries, and if possible, different countries, is always better than investing in a single instrument. The selection criterion should be a low correlation coefficient — the lower, the better (this doesn’t negate other factors for choosing the most suitable stocks but can significantly adjust the result). Due to such a correlation, price drops in some stocks will be offset by the growth of others.
It’s essential to remember that those who claim that everything falls during a crisis are only partially correct. Even during the most significant market panic, some stocks remain stable or show moderate growth. These should be in your portfolio at such times — this is the purpose of diversification.
Whether using Markowitz’s portfolio theory or other methods, diversification should be as deep as possible. Of course, one of the main limitations will be the size of your capital. But in any case, you should buy the maximum number of different types of securities.
Note! This primarily applies to investments in stocks. If the goal of trading these assets is to quickly gain speculative profit, diversification requirements can be much more relaxed. However, in this case, the risks will increase significantly.
3 — Choose the Right Broker
Successful stock trading starts even before making your first trade. When you, as an investor, understand how you plan to make money, it’s time to choose a broker whose conditions best match your trading style. Indeed, for:
- Numerous intraday trades, you need quick access to trading and minimal transaction fees.
- Short sales and high yields, the ability to make margin trades is crucial.
- High-quality market analysis, you need access to news feeds and analytical materials, etc.
Make sure your broker can meet these requirements.
Important Note! Pay attention to the trading platforms available for accessing the market. The main requirements for them are functionality and ease of use. Before entering into an agreement, it’s recommended to test the platforms in demo mode.
4 — Ensure Your Capital is Sufficient to Start Trading
Today, numerous promotional materials convince potential investors that you can start with just $100. This is true; in the stock market, beginner stock trading can start with such a small capital. But before transferring this hundred to your broker’s account, consider whether it will bring you the desired result.
Buying a couple of shares is not investing; such investments are more like an experiment. To achieve the expected profit and meet your investment goal, you need a corresponding amount of funds. This capital should be sufficient for:
- Diversification to build a high-quality, profitable portfolio.
- Maintaining open positions during drawdowns.
- Reserving for margin trading.
- Buying more at better prices during market downturns, etc.
Practical Note! To work successfully, consider starting with at least $1,000. With such an amount, trading for beginners will be safer. Of course, you won’t be able to buy all the stocks you want, but you can build a stable and profitable portfolio.
5 — Strictly Follow Your Trading System Rules
A strategy is only a guideline for how to achieve success. Its concrete implementation is your trading system. Develop its principles, including risk and capital management requirements. Once these rules, which indicate how to trade stocks, are established, adhere to them rigorously. Achieving success in stock trading doesn’t require spending all your free time at the terminal. What’s important is knowing exactly what to do in any given situation and consistently applying this knowledge. A systematic approach to the market, assets, and trades will inevitably bring success.
6 — Never Exceed Your Risk Level
If the drawdown on an open position exceeds the risk level set in your investment plan, the trade must be closed. This limits losses, preserves capital at a level from which it’s easier to recover in subsequent market entries, and saves the investor’s nerves. Such tips for stock traders are often ignored not only by most beginners but also by many experienced private investors. As a result, they never succeed and instead hand their capital to more fortunate, or rather, more disciplined, market participants.
Just consider the numbers! To recover a 10% loss of your initial account size, you only need an 11% gain in the next trade. However, if you lose 20%, you’ll need a 25% profit to break even.
Important! Losses can be limited in various ways — by constantly monitoring the balance and closing the position manually, or by setting a stop order. The latter is preferable as the order is placed in the exchange’s order book and executed regardless of the trading terminal’s operation, connection quality, or the trader’s participation.
7 — Learn to Select Stocks Correctly
Blue-chip stocks are highly sought after by investors but are not always the best choice for a portfolio. The stock market has many instruments that, with comparable risk levels, surpass the leaders in returns. To find such assets, study:
- Fundamental analysis.
- Methods of financial reporting by issuers and how to work with them.
- Information on multipliers, their calculation, and significance.
- News calendars and the impact of events, including corporate ones, on stock prices.
- Technical analysis tools.
This toolkit will help identify the best assets to buy at a particular moment or determine the optimal time to enter the market for a specific instrument. Such a stock trading guide may seem extensive and complex. However, if you want to work in the market and earn a lot and consistently, mastering these skills is essential.
8 — Always Know When You Will Sell Your Stocks
Achieving maximum possible profit depends not only on entering the market correctly. It is equally important to choose the best moment to lock in profits and sell assets. Remember, profitability is just an abstract figure; it becomes real income only when converted to cash.
That’s why when buying stocks, you need to know exactly what will signal an exit. These conditions should be formulated before you make the trade.
Very Important! This rule applies in all cases. It’s relevant even for the “Buy and Hold” strategy, where the exit condition is either reaching the investment goal or the end of the investment period. A crucial part of this rule is limiting losses, which has already been discussed.
9 — Invest in Education
The best investments are investments in yourself. This rule is especially true in the stock market. As your level of knowledge increases, so will the percentage of successful trades, the number of mistakes will decrease, and your strategy and trading system will become more thoughtful and versatile.
Remember, 90% of beginners believe their chances of becoming successful investors are above average, but they only end up losing money. In reality, only those 10% who do not neglect education actually succeed.
By the way! You don’t necessarily have to spend a lot of money and time on education. Practice shows that self-study through books and new publications, as well as engaging with the community, can be just as effective as getting a university degree.
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