The stock market is well-known as a venture that makes money, but few really understand the true essence of it, which is finding and investing in value. What sounds as noble and good intentions of making some money soon turns out to be a day-to-day gamble at the mercy of the stock market. To help save you from the headaches of holding losing positions and seeing your account balance gradually drop, here are six tips that will make you a more effective investor in the stock market:
Start with enough capital
With minimum account deposits starting as low as $50, it’s tempting to open an investment account and start growing your petty cash into next month’s rent. But an underfunded account can indirectly increase risk, with the investor buying and selling more frequently to try and catch the daily ups and downs of the stock market. This could work for the first few trades opened, but over time it only serves to increase your risk of losing money. Not only do you stand to lose from your positions depreciating in value, but you also have to pay your broker a commission fee each time you open and close a position. Start with at least $1,000. If you don’t have the money yet, save up for now.
Pick a good broker
It might not make that much of a difference, but a good broker can complete orders faster, offer more competitive fees on round-trip trades, and overall make investing easier for you. Pick a broker who is also financially stable to avoid any account turnover or refund issues that result when the company goes under. If they do, your money could end up being lost in a sea of paperwork and legal proceedings. Good brokers should also be reachable whenever you need them. Make sure your broker can be contacted either via phone, email, or better yet a website support chat window.
Pick a strategy
There is no need to reinvent the wheel. Dozens of strategies exist and whatever you think is a unique approach may have already been done in several variations by other traders and investors in the past. Strategies including value investing and credit spread trading are few of the examples that you can adapt and use. Of course, strategies are more of a set of guidelines rather than rules. You can adjust parameters of the strategy to better fit your investing style and personal circumstances.
Automate the process
Investing can be hands-on, but few people are really passionate about looking at stock charts and price ticks all day long. Once you have a strategy, automate the process of getting in and out of the position by setting the parameters in advance and letting your broker platform’s EA software handle the rest.
Acknowledge risk and losses
No matter how careful you are about picking your stocks, there will always be an unforeseen event that will move the market in the other direction. There is no stopping this harsh reality; there is only accepting it. The sooner you accept this fact, the more effective you will be at dealing with losing positions. Once a position starts to turn bad, close immediately.
Stick with what you know
There is no sense in investing in the stock of a company who you haven’t heard about until now. Sure, people may be going crazy over company XYZ for its impressive quarterly earnings, but if you don’t know what the company’s product/service is or what it’s competitive edge is, you probably shouldn’t be buying it. As Buffett says and practices himself, invest in companies you understand, have known for some time, and/or whose products/services you’ve used before.
The stock market is a double-edged sword that can do as much damage as it can grow wealth. Don’t think of it as a slot machine that can make you rich overnight; instead, use it to grow your petty cash and savings.
DISCLAIMER: This article expresses my own ideas and opinions. Any information I have shared are from sources that I believe to be reliable and accurate. I did not receive any financial compensation for writing this post, nor do I own any shares in any company I’ve mentioned. I encourage any reader to do their own diligent research first before making any investment decisions.
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