One of the most common misconceptions people have about stock trading is that buying stocks is some sort of one-way ticket to riches.
Let me tell you, if you’re trying to figure out how to buy stocks and you think that public company shares will necessarily make you rich, you’re playing the wrong game. You’re probably better off buying a lottery ticket.
Focusing on riches is not a winning strategy. You have to understand that if you are looking to figure out how to buy stocks, stock trading may not be what you think it is. It’s all about winning some and losing some. That’s probably not the answer that you’re looking for. You’re probably not all that excited, but this is the reality.
No amount of greed, impatience or fear is going to make this go away. For every winner, there are losers. If you have a diversified portfolio, you end up in a situation where you win some and you lose some. That’s the nature of the beast.
Now that we have gotten that out of the way, here’s the secret. What is the number one way to win with stocks? Here’s how to buy stocks and keep on buying. The key to winning with stocks is to keep on buying winners and exiting losers.
A lot of people won’t have a problem with the first part of this piece of advice, after all, it’s pretty self-evident. It’s quite obvious too. But most people would have a tough time with the second part because of the sunk cost fallacy.
Have you ever gone to watch a movie and almost right from the beginning of the movie, you realize that it sucks. You just hated it. But what happened? If you are like most people, you’d probably remain glued to your seat. You stayed not because you developed a liking for the movie, but because of the sunk cost fallacy. You paid for the ticket, the popcorn, and the soda. Might as well ride it out.
That is the sunk cost fallacy.
This is barely tolerable when people suffer from it when it comes to movie tickets, but it’s absolutely toxic if you apply this mentality to your stock trades. There is such a thing as cutting your loses.
When you get into a stock at ten thousand dollars and it tanks and you’re left with eight thousand bucks pay per value, it makes sense to get out of that stock because you can turn that money into ten thousand dollars later on.
This is much better than putting in ten thousand dollars, the stock sinks and your evaluation is eight thousand bucks and remains that way for five years before you go back to ten thousand dollars. In other words, you waited five years to get back to where you began. To most investors who know what they’re doing, that’s a losing situation. This is why you need to learn how to exit losers. You have to cut your loses.
You can’t let the sunk cost fallacy hold you back and drag you down from the gains you could otherwise be enjoying. How do you keep on buying winners and exiting losers?
You Learn By Doing
The best way to learn is to do it. You have to have some sort of plan going in. You also have to filter the stocks properly, but it’s all about learning by doing. Winners and losers will reveal themselves.
If you start out with a hundred thousand dollars and you bought ten stocks, I can guarantee you that some of those stocks will appreciate in value. Some will remain the same. The other will sink.
You may be thinking that the loser stocks are the only companies that suck. Wrong. If you want to make money on the stock market, count the companies that kept their value as losers as well. What you want is to build a portfolio of winners. These are stocks that appreciate over time. You don’t want to screw around with stocks that remain in the same place or go down in value.
Unfortunately, there’s no other way to do this except by doing. There are many trading platforms out there that have simulated traits like online stock trading games where you don’t spend any real money but you “buy into” a stock. That might be entertaining, but once real money is involved, you start making irrational decisions. You may be great at pay per trading, but when it comes to actual trading, you might get different results. Bottomline is-Just Do It. Put your money where your mouth is and do actual trades.
How To Spot Winners
First of all, you know you’re dealing with a winner when it’s stock price goes up. If it stays in place, that’s still a loser. This is the first criterion, don’t start and end your analysis here. You have to pay attention to where the company is in its industry. Does it own the industry? Is it positioned to own or disrupt the industry? Is it number two and rising fast? Whatever the case may be, look for companies that are poised to own their industry.
Next, look at their level of innovation. Is this company just making money and posting profits because it’s efficient? Or is it efficient and also innovative? With everything else being equal, focus on a company that is efficient, effective and innovative. This is how you know that this company will either be number one or is already number one in its industry.
Keep Buying Winners
Bottomline is simple. Once you’ve identified winners, keep buying them. Sell everything else. If a stock maintains it’s value, sell it. If it sinks, sell it. If it’s a company that grows in value but doesn’t own its industry and not all that innovative, sell it. You need solid winners.
How To Exit Losers
There are many exit scenarios for losing stocks. Focus on the following.
When you buy high and the price crashes, buy more at the drop. Let’s say you bought it at ten and the stock promptly crashes to five, buy more at five. What’s important is that you buy more volume as the price decreases. When you do this, you engage in something called dollar cost averaging.
This means that the average cost per share of the stock is closer to the bottom end of its price range than the top. If you do this right, even though you bought it at ten, the fact that you bought a huge chunk of stock at three enables you to exit the stock at a profit if the price goes up to four, five or six.
That’s the power of dollar cost averaging.
It enables you to lower your exit point. Compare this to how a lot of clueless investors play it. They get in at twenty, and the price crashes down to fourteen. They wait for the price to move past twenty for them to unload.
That is the foolish way to play the stock market because the opportunity costs you’re suffering from increase as time goes by. You could have taken that money that you invested at ten and invested it in another stock that could’ve gone up in value. Instead, you’re stuck with that stock hoping that it moves past a certain point.
Engage in dollar cost averaging. Sure, it’s gonna cost you a lot more money in the short term, but if you do this right, you lower you exit point enough so you can exit gracefully and profitably and focus on winners.
Buy Income Stocks
Finally, you can buy income stocks. These are stocks that pay a dividend. When you buy these stocks, after a certain date in the calendar, they would send you money. This is called a dividend. This is your share of the profit. Take this income and invest it in more winners or you can save this money and use it to buy more income stocks.
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