Best practices from a newcomer in the industry
Before you skim through, let me tell you a little bit about myself.
I am an MBA with a 20+ years’ finance career. I worked in top tier Fortune 500 companies across South Asia, the Middle East, and Europe.
Yet, I stumbled in the beginning as a stock trader.
This is what I learned in my first 16 months in the trade.
1. Improve your knowledge
Have you ever seen an amateur flying an airplane, building a house, or finding a cure to a disease? Not possible right! So, how is it possible to be a successful stock trader without learning about the business first? You should dedicate a time slot each day to improve your knowledge level in stock trading.
Here are a few things you could do:
- Read articles (industries that interest you).
- Attend webinars (sharpen your trading skills).
- Attend training (stock markets).
- Attend courses (finance, accounting, and business analytics).
2. Apply tools to get timely information
Every day, the markets move. In every kind of situation, there are opportunities. It all depends on how ready and well informed you are. The real deal is how you access the situation, make a decision, and put in place your calculated move. You should have all the resources in place and get a ping as things happen.
Here are a few good ones that I use:
- Follow business news like Bloomberg or CNBC at least in the opening hours of your stock market.
- Be part of a Whatsapp or Facebook group to get the news and views.
- Consider subscribing to a paid information portal for stocks update.
- Develop a strong network on Twitter to get information as it happens.
3. Make a bucket list of your favorite companies
One should have a bucket list of favorite companies. This can be your experience in the industry/company or interest in the nature of business.
Reasons for having specific companies as your favorites may vary. But, the following points may be relevant:
- Visit their websites for updates on business strategies.
- Keep track of dates for the financial results going public.
- Track stock prices and their fluctuating trends.
- Maintain a calendar for dividends.
- Follow relevant commodities. It may impact the stock prices e.g. crude oil price hike may also increase the stock prices of oil companies.
4. Develop multiple investing strategies
You need better risk management, more profitability, and continued success. So, invest your capital in a variety of ways.
Some of them are as follows:
- Build a portfolio (high/low priced, varied industries, commodities…etc.).
- Invest short-term (a couple of weeks, a few months, or max. up to 1 year).
- Invest long-term (more than 1 year, more is better).
“If you aren’t willing to own a stock for ten years, don’t even think about owning it for ten minutes.” (Warren Buffet).
- Buy stocks for yielding dividends (mark ex-dividend and payment dates).
- Buy split stocks (buy blue-chip stocks for a fraction of their real price).
- Buy penny stocks (remember: companies’ data is generally not reliable).
- Maintain liquidity (e.g. to tap a good opportunity or exit a loss position).
5. Don’t be too greedy
As in the game of cricket, you win matches not by hitting big shots but by taking singles. It is wise to make small profits from more trades. Don’t wait too long too much for making exorbitant profits in a few trades.
Remember there is always a lot of fluctuation in the stock prices. So, it is advisable to make a reasonable amount of profit from each trade and close the position. Going for the extra buck can lead to a loss that could cost you a lot of time and money.
6. Pay attention to less expensive stocks
There is no doubt that big names attract more investors. But, high valued shares also need a big investment. Yet, gains are also possible by investing in lower-valued shares. This is a good option in case you have set aside less capital or want to have a variety of stocks in the portfolio.
This is ideal, especially for the early starters. They can start investing in some stocks that are not too expensive. It won’t be too difficult to come out of a position in case of a loss.
7. Margin trading is a big risk
Margin trading is investing with your own + borrowed capital. The borrowing facility could be as high as 1:50 or more. This means that if you have USD 1,000 then you will be able to buy shares worth USD 50,000.
Needless to say more. This business model is risky. If the stock price plunges too low, you can lose your entire investment.
One of the main reasons for Stock Market Crash and The Great Depression of 1929 was due to margin trading. Don’t believe it, then watch the video below.
If you are only running through the article, fast forward to 13:50 and give it a a few minutes. Still busy, go to 26:46 and watch as much as you can.
8. Look out for a big market plunge
When the news breaks, the markets react. This is the time to prepare yourself for a potential move. The impact of any good or bad news lasts a couple of days (it is not a rule but this is how markets run). But it all depends on the event’s severity.
14-September 2019: There is an attack on Aramco oil fields (Abqaiq and Khurais) in Saudi Arabia. The crude oil prices dropped 20% overnight.
17-November 2019: Look no further, the outbreak of a health crisis from China is the best example in recent times. This ignited the stock market crash on a global scale which is still not revived.
As bad as it seems, every coin has two sides. If you take your shot at the right time, even the smallest investment can turn into millions.
Stock markets react to changing scenarios. So, we have to keep our eyes open and make strategic moves as and when needed.
9. Take a loss before it is too late
Price volatility is a common feature in the shares business. So, in case of a loss situation, you should be able to bear it. When and how much is the question you need to ask yourself. But, it is ideal to decide on a percentage or value that suits you the best.
If the price goes down beyond a certain price level, you should immediately sell it. This is very important. Many times, shares get stuck in a position and it takes a long time to arrive at a breakeven point. This is a big opportunity cost that you have to pay. As a result, you are not able to invest in other more profitable shares as your capital is already tied up.
If you are motivated enough, give it a push, and start your journey!