Make no mistake about it. There are lots of basic training stock trading books out there. In fact, there are so many that a lot of people are simply confused. I don’t blame them. Usually, when consumers are faced with a tremendous amount of choices, they usually don’t feel all that good.
I know, you’ve probably have heard that a wide selection and a tremendous amount of freedom of choice are good things. I would agree in theory. But when it comes to reality, too much choice leads to 1 predictable behavior: people freeze up.
I’m sure this has happened to you. You may have come to some sort of store with a particular product in mind. Well, when you get there, it turns out that there are so many different attributes, variations and brands and models to choose from. What do you think happens next?
If you are as sensible consumer, it would be very easy for you to freeze. That’s right. You don’t make a decision. In other words, you follow the same advice that most other consumers follow: when in doubt, leave it out.
That’s how things work out and it’s no surprise that while there is a huge supply of basic investing guides and basic stock trading learning programs currently on the internet, people are as confused as ever.
If you are reading this, there is an easier way. You don’t have to suffer through all sorts of books that are refereed by all sorts of self proclaimed experts. You have to understand that there’s no shortage of self proclaimed financial and stock trading experts out there and a lot of them are wrong.
They’re wrong not because they recommend products. They’re wrong because they think that one particular product is better than the other. They’re more than justified to do that. But they can only recommend things that work for them.
They have a certain amount of experience. They have a certain educational level. And they have all sorts of expectations. When you put all these differences together, then their recommendations make sense.
But just because their recommendation makes a lot of sense in that context doesn’t necessarily mean that that’s the right choice for you. Do you see the problem? Do you see the disconnect?
Thankfully, there is a better way to go about doing this.
How to learn stock trading basics the right way
The first thing that you need to pay attention to is yourself. I’m not talking about the stock market. I’m not talking about how much money other people are making and I’m definitely not referring to the amount of hype and exaggeration out there.
Believe me, there’s just simply too much of that to go around. Instead, I’m focusing the analysis on where it should begin. That’s right. I’m talking about you. Different investors have different needs. This should be as obvious as the noon-day sun.
But unfortunately, a lot of self proclaimed financial experts and financial education gurus our there conveniently overlook this fact. They think that there is some sort of one size fits all stock trading basic system that will work for all people at all times under all circumstances. How I wish that were true.
If that were true, then most people will be making the right stock trading decisions all day, everyday. Now, you and I both know that that’s simply not the case. In fact, the main reason why you’re reading this book is because you probably have read some sort of stock trading book in the past and have gotten burned. Welcome to the club. You are hardly alone.
The reason for that is because a lot of these people are simply talking to others who went to the same MBA or business school program they went to. That is all fine and dandy if everybody’s on the same page as far as expectations and backgrounds are concerned.
But not all of us went to business school. Not all of us went to college. Not all of us went to some sort of post-graduate program. Not all of us have worked in finance.
In fact, a lot of us are simply trying to grow the amount of dollars we slaved so hard to pile up. It’s really that simple. Surely, this is not too much to ask, right? Well, here’s a better way to figuring out the stock trading basics that will work for you.
These tips have less to do with stock trading basics and have more to do with you.
Begin where you are
If you have a tough time telling apart all sorts of stock trading lingo, jargon and specialized terms, don’t try. Don’t get in over your head. Don’t pick up a book on stock trading and automatically think that you understand what those terms mean.
It’s perfectly okay to start where you are. Don’t think that you’re being dumb. Don’t think that you are lowering your standards or setting yourself back. You’re not doing any of that. Instead, you are doing the smartest thing you could ever do in this situation. You are starting where you are.
If you don’t know what a price to earnings ratio is, that’s fine. Most people don’t. Most people are clueless about this. If you don’t know what price to book ratio is, welcome to the club. My point here is that you should overcome this perfectly understandable but ultimately self defeating mindset that just because you don’t understand certain jargon that you are dumb.
There’s nothing to apologize for. You don’t have to be something that you’re not. You don’t need to pretend to be somebody that you’re not. If you don’t know the first thing about stock trading, then admit it to yourself. Don’t jump into an intermediate book.
Instead, use stock trading basic books that are so simple and so basic that anybody can understand them. No, this doesn’t mean that you have a low IQ. This doesn’t mean that you are dumb. This doesn’t mean that there’s something wrong with you.
Instead, this means that you are simply being a responsible adult and taking bite sized pieces so you can efficiently and quickly ingest them while scaling up to greater and greater amounts of knowledge. That’s how you play the game to win.
Unfortunately, a lot of people have this in reverse. They’re doing the precise opposite and that’s why they get burned time and time again. They zoom in thinking that they know what price to book, price to earnings and other key factors are all about.
In fact, they end up giving too much credit to what the experts are saying and they’re simply taking dictation. In other words, if an expert says “Buy stock X” they just jump in with both feet and without looking, but stock X. How come?
Well, the self proclaimed financial guru rattled off certain figures like price to earnings ratio, industry positioning and the rate of growth of the stock. Lost in translation are pieces of information that can lead to timing.
Please understand that when it comes to learning the basics of stock trading, you have to figure out when to get in and when to get out. The problem is when people get their heads around stock trading basics, they only manage to focus on when to get in.
This is easy to understand. How come? Well, when you turn on the TV and you get on MSNBC or CNBC and other financial channels, what do you see? What do you hear? Well, they talk about a stock that’s breaking out. They talk about a hot stock. They talk about shares that are on the move.
It’s very easy to get excited. Unfortunately, before you know it, you’re in over your head and if you don’t know when to get out, your initial excitement turns into very bitter disappointment. Instead of looking forward to thousands upon thousands of dollars in profits, you actually end up behind $1,000.
Now you and I both know that those are paper losses. You never really lock in your losses until you liquidate your position. Still, you’re losing. This is an opportunity cost. How come? Well, you could’ve not made that decision and still have that money in your hands so you can invest on something that is making money.
Do you see how this works? A lot of this has to do with emotions. So instead of just going in and blindly listening to certain jargon that you are vaguely familiar with, take a step back. Cool your heels. Pay close attention to the terms being thrown around and fully understand what they mean.
Learn the real issue behind stock prices
Here’s the most eye opening piece of information I ever learned about stocks. When I got into stock trading, I was very naive. I was under the impression that people bought and sold stocks based on the underlying value of the stock.
The conventional wisdom is that if a company is valuable because it’s going places in terms of its business and people are getting a lot of value from the company, then that company stock is going to go up.
On the other hand, if the company is badly run or is not making any money, its stock is either on its way down or is already down. Pretty straightforward, right? It even sounds like common sense. Well, it turns out that in the stock market, common sense is not all that common.
In fact, things that may seem like black and white are the other way around. It’s as if somebody flipped the script. What am I talking about? There are many companies, like Twitter for example, that don’t make any money. But they have extremely crazy market capitalization.
That’s just a fancy way of saying that the stock market thinks that that stock is going places. That’s why its stock is so expensive compared to its underlying value if you’re going to define value in terms of earning a profit.
This turned on a light bulb in my head. I wish I could tell you that it did so instantly. No! I learned this the hard way. I would avoid stocks that I thought were dogs and went for stocks that I thought were solid.
These were stocks like utility companies and oil companies that made real profit. They produced products that I can understand. They are in industries that are easy to slice and dice in terms of the numbers. But what happened?
Well, I’m not saying that I didn’t make any money on these stocks. I did. But the problem is I could’ve made even more money, and I’m talking about ten times more if I invested in companies that did not make any money but had a lot of buzz.
Which brings me to my main point. If you are looking for growth in the stock market, focus on company perception. As the old saying goes, perception is reality and interestingly enough, the stock market is all about reputation.
If you were a level headed, completely rational and objective investor, you probably would not touch Facebook with a ten foot pole. At the very least, you would not pay the kind of money investors are plowing into Facebook stock. But there it is.
It shot up like a rocket. It’s only fairly recently that Facebook started to suffer from the effects of gravity. A lot of this had to do with its fairly aggressive privacy policies. But it can not be denied that Facebook is not your classical reasonable level headed stock pick choice.
But Facebook has one thing going for it. It has a reputation as a growth stock. When you have enough financial managers who are in charge of buying and loading billions of dollars worth of stock, reputation is all you need.
This is my best advice to you. While it’s important to pay attention to the fundamentals of the businesses behind the stocks that you’re thinking of buying and selling, also pay close attention to market reputation or evaluation.
At the end of the day, market evaluation really is all about market opinion. As you probably already know, opinions are like noses. Everybody’s got one. But in this situation, heard mentality counts for a lot.
If the market sentiment is pointing towards a certain industry or towards certain players, it’s a good idea to get in and ride that sentiment to its logical peak point and quickly get out. People who know how to play Facebook are already out of the stock.
That’s right. They didn’t wait until its recent downturn to exit. Instead, they’re disciplined. They know that the hype is going to last. They know that sooner or later, people will wake up. I’m not just talking about Facebook here. I’m talking about all sorts of “growth” stocks.
If you’re trying to understand stock trading basics, the bottom line is that you have to figure in stock market sentiment.
It’s mostly about emotions
I can’t say that the stock market is all about emotions. There are some rational factors involves in stock trading basics. You still have to pay close attention to how much money the company is making. You still have to get a good understanding of its industry.
The quality of its leadership will always be a factor. But outside of these, while the biggest determinants of stocks performance is the opinion of the market. If the market thinks that the internet is sexy, guess what happens next.
That’s right. Mobile app companies as well as other internet related companies get a premium. They kind of get a pass. They don’t necessarily have to make money. They just have to have enough buzz behind them.
But you and I both know that this is really valuating a company based on air. So the key here is to figure out which companies have a lot of buzz at a particular time and plan when you will get in and when you will get out.
Now, it’s very easy to think that this is pretty straightforward and simple. But you’re overlooking one key emotion. Just as emotion drives stock valuation, it also alters investor behavior.
The rational side of your brain is telling you 10% or 20% appreciation is enough. That’s fine and dandy in theory. But once you get in and you notice that your stock has gone up 20%, what is your #1 impulse? Believe me, it’s not about getting out.
Instead, you’re thinking to yourself “Well it went for 0 to 20%. How much more can I ride this until I squeeze every dollar worth of profit from the stock?” That’s when you get into dangerous territory.
Please understand that you have to commit to watching your stocks like an eagle or you have to hit the exit button once your maximum initial expectations have been met. In other words, you have to practice self discipline.
If coming in you said that you will be fine with the 20% maximum appreciation, then act like it. Get out of the stock once it hits 20%. Believe me. A lot of investors end up in worse financial shape trying to ride out a growth stock.
Growth stocks are known for their volatility. They swing high but they crash very low as well. So if you want to know the basics of stock trading or at least want to know enough to start doing test trading, read the book mentioned below under recommended read.
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