The stock market has existed in some form or other for almost 400 years and ever since it began many people have made and lost fortunes on it. Now a highly sophisticated, multi-trillion-dollar industry, the stock market is not for the faint-hearted. It has been likened to the world’s wildest roller coaster ride.
From time to time, the stock market has crashed dramatically. The most famous crashes include the one of 1929 which led to the Great Depression in the USA, Black Monday of 1987, the 2001 dotcom bubble burst, the 2008 global financial crisis, and most recently the 2020 COVID-19 pandemic crash.
Yet people are still fascinated by trading in stocks, and many still make fortunes by having their money work for them. Playing the stock market is a way of investing your money so that it works for you while you do something else.
One of the modern world’s most famous stock market investors is American billionaire Warren Buffett. He has defined investing as “…the process of laying out money now to receive more money in the future.” The endgame of stock market trading is growing your money by investing it in one or more types of stocks, share and other investment vehicles.
If you are keen to enter the complex world of investing and want to learn more about stock trading this article will help you get started and show you how to maximize your returns.
Buy High, Sell Low
Basically the fundamental goal is to buy stocks at a low price and sell them for a higher price once they have increased in value. But in reality this is a very difficult thing to do because when you are using your own hard-earned cash, your emotions get in the way and your gut-instinct is to sell off any stocks that are losing value while desperately trying to buy some of those that are increasing in value.
It is important to set your investment goals carefully and to have a clear investment timeframe. For example, are you looking for a quick fix, or are you in this for the long term. If you take the long view and plan to hold a stock for decades, then you can weather even a two or three year downturn in the expectation of gaining increased profits well into the future.
Diversification is a key investment strategy and one that you would do well to pay close attention to. You need to spread your investment across a number of different markets and sectors. By doing this, you will ensure that you do not suffer large losses if one sector of your portfolio does not do well. Diversification is difficult because it requires greater resources. For this reason, if you are just starting out we advise that you consider equity-driven mutual funds as your starting point. By doing so you will ensure that you get a diversified portfolio from the beginning, even with a modest starting budget of say $500. The key is to avoid putting too many eggs into just a few baskets – because this is a huge gamble. For example if your one basket is Microsoft then you are laughing, but if its Enron you could be wiped out.
It is also important to understand that when you buy stocks, you are actually buying into a real working business. In a sense, you become a partner in that business. This can be likened to buying a car or a house, and before deciding where to put your money it is vital that you are diligent in researching everything about that business. You need to look into the history of the company, the leadership, the management. Find out whether it is successful and financially stable. In particular, make sure that the people who made it successful are still involved. If they are no longer part of the management team you should hear alarm bells ringing.
In addition, you need to learn the importance of key ratios, such as price-to-earnings and return-on-equity, so you can judge whether a company is trading above, below or at its value. Make sure you watch the news carefully so that you know whether the particular region, sector, industry or market in which the company is involved is experiencing any kind of trouble.
Short-term stock investing is called “day trading” – but this does not mean that you have to make trades every day. Even if you are doing your own trading rather than using a broker, there are costs associated with every transaction. If you’re constantly turning overstocks in search of a quick profit or a quick escape from a losing investment, you’re generating fees that will eat into your profits. They’re small but they add up, and can make a dent in your profitability that a little care and patience will help you avoid.
One of the biggest issues that causes in-experienced traders to fall on hard times is a lack of commitment. If you’re serious about investing directly, you’ve really got to commit to it. This means following the markets every day, keeping up with the news about your market sector and everything going on there. You cannot afford to sit back and just watch the ticker on your particular stocks. This takes a considerable amount of time and energy and if you are not committed you could lose a bunch of money. This is why so many people choose to use a broker to handle their stock market ventures. Day trading actually takes up as much time and effort as a full-time job. If you are not prepared to put in this kind of time and effort you would do well to become a buy-and-hold investor. This means you keep a consistent portfolio for the long term. In this case you only need to review your holdings on a quarterly basis.
Diversification is considered to be the only free lunch in the business of investing. By investing in a wide range of assets, you can reduce the risk of one investment’s performance severely hurting your overall returns.
In reality, the best and easiest way to do this is to invest in mutual funds or exchange-traded funds. Both of these types of funds include a large number of stocks and other investments, which makes them more diversified than a single stock.
Don’t be put off by the thought that you need a large amount of money to become a trader. It is actually possible to start with quite a small sum of money. But it is vital that you make yourself aware of the restrictions that you face as a new investor. You will need to do your homework to find which companies require what level of minimum deposits and then compare this to the commissions charged by brokers. And don’t expect to make your fortune overnight from a couple of small investments. Sure there are some amazing success stories out there, but the vast majority of successful traders have been at it for a long time and have put in a lot of hard work and money to get where they are. So be patient.
These days more and more people are moving towards online stock trading. You need to be aware that there are pros and cons behind this. The cost of online stock trading is much lower as there are no traditional brokerage fees and commissions to be paid. The middleman is eliminated completely. In addition, trading can be done any time, anywhere. But the downside is that there are literally hundreds of thousands of online platforms available – some of them charging very low fees indeed. But then of course you also cut out the advice and experience that a broker can provide – and essentially you are on your own and at the mercy of unscrupulous websites and inaccurate or misleading information. Here again it is vital that you are diligent about doing your research and making sure you are plugged into reliable sources of news.