3 Basics of Stock Trading : How To Acquire A Mindset That Breaks Down The Complex World of Trading in Stocks
The world of stock trading can could be heaven. A financial heaven that happens to share a picket fence with hell. ” One day you’re cock of the walk, the next you’re a feather duster.” Piers Morgan’s catch line suffices to describe the ups and downs of investing in stocks. Nonetheless, I’m weary of labeling the stock trading as gambling as some have. Unlike the casino, the player could as well be the house. As the saying goes, “the house never loses.”
[dropcap]T[/dropcap]ake this article as a mindset piece. We will not be delving into the nooks and crannies of how the stock market works. Neither will be recommending which stocks to buy. Nor devouring popular metrics of stock analysis such as P/E (price-to-earnings) ratio or NAV (net asset value). Or appraising formulas on how much of your personal portfolio or business portfolio, if you are entrepreneur seeking to diversify, should be in stocks.
Though definition of terms like stock broker or stock market would have been a good place to start, we’ll leave that to the reader.
Precisely because breaking down the doors to the world of stock trading requires the novice’s mind to be perpetually on the search. Whether your intention is to make a money-making hobby of investing in stocks; or building a career as a day trader through online stock trading, these three tips are invaluable.
Stock Trading Tip 1: Like any investment, an investor in the stock market should always mind their money even when the going is smooth
Many investors find the world of stocks a complicated affair and choose to altogether keep away or entrust their fortunes in the hands of strangers. While there are obvious benefits of entrusting the business of stock trading to experts like investment bankers, lessons learned from the aftermath of scrupulous individuals of the Bernard Madoff ilk are well-known.
Besides, even when dealing with legitimate stock brokers and investment banks, the input of the investor is as critical. I’d liken the investors input to the value of a patient’s complaints to the work of a doctor.
In addition, there is always the risk that your engagement of an investment banker may serve the purpose of the said investment banker in meeting his/her work targets. Not about putting money in your pocket, but safe guarding their perks.
In spite of the competency of the stock broker or the expanse of the resources available to them, the investor should always strive to be a capable partner. Once again the patient-doctor analogy suffices. In modern medicine, the patient ought be sufficiently involved if optimum health outcomes are to be achieved.
Stock Trading Tip 2: Understanding stocks simply entails understanding the world that we live in
In the most basic of terms, a stock is a unit of ownership of company. Owning the stock of a company means that you get to share in the profits. This happens through earning dividends and increase in value of the stock. You also share in the losses by missing out on dividends or worse, losses in the value of your investment.
Companies operate in the real world and are thus affected by day-to-day happenings. For instance, if the unstable political situation in the Ivory Coast degenerates to the Somalia situation, investors in a company like say Cadbury would be squeamish in their seats. Why? Because the Ivory Coast produces 40% of the world’s cocoa. Cocoa is an important raw material for companies in the confectionery business.
Take another example in the triple Japan disaster which had a two-fold effect. First, Japan’s output which mainly entails electronic goods and automobiles took a severe blow. Major automobile companies like Toyota had to shut down operations in some of its manufacturing plants. This happening would have been of concern if the company you have invested in trades in Japan manufactured automobiles.
Secondly, the earthquake-tsunami-nuclear crisis dealt a sever blow to the Japanese economy severely dampening the outlook this financial year. An economy on its knees implies that the population’s spending power is also in the ICU if not the HDU. For a company whose products major market is Japan, this may translate to reduced sales and subsequently revenues.
This tip is especially important considering the globalization of world trade in the 21st century. The ebbing global financial crisis serves as testament to this.
Stock Trading Tip 3: Success is only measurable in the presence of yardsticks
It is only through benchmarks that we are able to evaluate progress in any undertaking. In stock trading, the SMART approach still suffices. As an investor you need to align your stock trading activities with your personal finance objectives. The objectives need to be Specific, Measurable, Accurate, Realistic and Time bound.
Thus, the rookie stages of your stock trading need to sufficiently tackle the task of goal formulation and definition. This should additionally be coupled with mechanisms by which constant reevaluation and assessment of progress. A savvy investor should organize their daily activities in such a way that success becomes the more likely outcome. This includes application of the principles of personal budgeting in such a way that funds are availed to finance their stock trading endeavors.
Diligence, financial discipline and dedication are values that cannot be emphasized enough. Mechanisms of identifying financial errors and subsequently cutting losses before they run too deep are an absolute must. Stock trading is very much an active conscious activity. It is devoid of get rich quick tricks. It requires hard work, sweat and occasionally tears.
These three tips lay the ground for what is set to be an informative, richly rewarding journey. Stock trading is very much a journey that like any other, begins with a single step.