You probably have a little money saved up. Maybe you signed up for a 401k at your job.
Whatever the case may be, you have to understand that it’s too easy to lose money in the stock market regardless of the platform or exchange system. Doesn’t matter whether you’re playing the New York stock exchange or the Nasdaq.
Wouldn’t it be a good idea to guard every red cent’s worth of value your money has?
Unfortunately, playing the stock market, as far as beginners are concerned, can be very confusing. This article demystifies the stock market for beginners so as to increase your likelihood of making money.
Losing Money Is Not What You Think It Is
You’re probably feeling a bit discouraged right now. I’m sure the last thing that you’d want to hear is the fact that it’s too easy to lose money in the market.
Well, you have to understand that this does not have to involve you putting in ten thousand dollars, and then walking away with five thousand less. In fact, losing money in the stock market often takes a different form. This is called Trading Sideways.
Believe it or not, even if you keep your money in stocks, you are still losing money. How?
Here’s how it plays out. Let’s say you invested ten thousand dollars in stock ‘A’. The company behind the stock goes through some bad quarters and is not making as much money as it could have. However, instead of the stock tanking, it stayed at roughly around the same price you bought it in. In other words, your ten thousand dollars remain the same.
Now, how can this be a bad thing? There is such a thing as an opportunity cost. In other words, if you invested your money in something that maintained the value of your money, by definition, you didn’t invest that money into something that may have doubled the value of your money.
In terms of opportunity cost, that ten thousand dollars you invested in stock ‘A’ could have been better put to use by investing in stock ‘B’ or “Real Estate”. If it turns out that an investment in stock ‘B’ would have yielded a net positive gain of ten percent or a “Real Estate” investment would have given you twenty percent return, you’re losing money.
Stock investment is all about growing your money. It doesn’t mean you should be happy that your money’s value is preserved.
Trading sideways is actually worse than a loss. That sounds crazy, after all, keeping your investment value of ten thousand dollars is much better than losing money, right? Well, not quite. If your investment in stock ‘A’ dropped to five thousand dollars and you pulled out, you can still invest in something else that can give you a net positive gain.
Export traders do this all the time. It’s called cutting your loses. For example, they come in at ten thousand dollars and the bet does not pay off. They sink down to eight thousand. What they do is they cut their losses and invest in something that has a higher chance of increasing their money. The bottom line is, avoid trading sideways.
Fundamental Trading Demystified
If you’re trying to play the stock market, you’re probably aware of legendary investors like Warren Buffett. It’s one thing to read about Mr. Buffett, it’s another to actually understand his trading strategy.
His strategy is actually pretty simple. He’s all about buying and holding. He doesn’t believe that you should buy stocks because you want to make money on the stock. Instead, his strategy revolves around the belief that he should only buy companies that he truly wants to own.
In other words, when he buys stock in a company, it’s because he wants to own it for many years. This might sound pretty basic and straightforward, but when you look at the skill set involved, it’s quite mind-blowing.
You have to understand that Mr. Buffett does not go on factory tours. He doesn’t interview the people in the companies behind the stocks he buys. Instead, he reads annual reports. By looking through the financial sections of those annual reports, he would get enough information regarding major stock purchases.
The bottom line is, fundamental trading is all about buying the company, not the stock. You’re probably wondering what’s the difference. When you buy a company, you’re buying the potential of the said company.
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- Is the company well positioned to dominate that industry?
- Is it in an industry that’s growing?
- Is the company growing into other industries?
These are fundamental questions that can reveal the true value of the company. Mr. Buffett has been known to pay a premium for a company because he has this gut instinct about the actual value of the company.
For example, If the market currently prices a company at a hundred dollars a share, it’s not unusual for Mr. Buffett to keep buying that company until it hits one hundred twenty dollars a share. You may think that he’s overpaying, but it turns out that in his estimation, the company’s worth three hundred dollars a share.
So don’t let current market caps evaluation throw you off. Focus on the company, not the stock market’s opinion of what the company is currently worth.
Technical Trading Explained
A lot of investors shy away from technical trading. They think that it’s a lot like gambling, that it’s hard to predict.
Well, believe it or not, technical trading uses software platforms based on hard data that are actually quite predictable. If you know the trading patterns, you can make money with technical trading. The missing ingredient is discipline. This is what screws up a lot of newbie traders.
They think that once they buy a stock and it starts exploding that they have to write it out. They know that they should exit the stock based on their pre-set target. They throw all discipline out the window because the stock is exploding. They let their greed take over.
Technical trading is actually pretty straightforward. It’s all about using predictable data patterns to lock in on a gain. You can make money going up and you can make money going down. People tend to get either too greedy when the stock is going up, or too scared when it’s going down.
There are many built in factors to technical trading that would minimize your losses or temper your gains. It’s all about discipline. If you’re new to stock market trading and people are trying to talk you into technical trading, understand the importance of discipline and you’ll be okay.
Regardless of How You Plan To Trade, You Need These
To demystify the stock market for beginners, let’s get down to the basics.
Regardless of whether you’re trying to mimic Warren Buffett, or you plan to make quick gains using technical trading, you can’t overlook the following factors. Without these, you are essentially doomed. That’s kind of a big statement to make, but this is the truth.
First, you need the right trading platform. You need something that publishes prices on a real-time basis. The faster the platform, the more money you’re going to have to shell out. That’s just the nature of it.
Second, the raw ingredients that you need are historical tools. This is especially true if you’re doing technical trading. You have to remember that stocks and big data analytics all follow a pattern. If you don’t give yourself the right tools, you’re going to miss out on these patterns.
While a stock’s trading pattern may seem random when viewed in a three-day window, it’s actually following very predictable patterns when you’re looking at one-year windows. So give yourself the right historical tools so you can detect patterns that can make you money.
Another key ingredient to successful stock market trading is a low-cost broker. Yes, there are a lot of brokers out there that try to pass themselves off as discount brokers, but don’t believe the hype. Real low-cost brokers cost very little where it counts.
If you’re going to be doing active trading focused on extremely low transaction costs. That’s the bottom line because if you’ll be doing volume, and we’re talking about moving tens of thousands of dollars every single month, those little transaction costs can add up. Do yourself a favor and go with a broker that specializes in volume trading for non-institutions.
Also, you need to have a big picture attitude. It’s very easy to freak out if you have a hundred thousand dollars riding on a bet, but if you don’t have a big picture mindset, that money that you’re worried about can easily turn into twenty thousand dollars. It’s so easy to let your fear or greed get the better of you and end up in a very bad position. You have to know how to connect the dots and look at broader patterns.
This is what separates Warren Buffett from a guy who makes a million dollar profit in a day. You probably heard of those stories. In fact, this blog can enable you to get those kinds of gains.
The problem is maintaining the gains. It’s like somebody trying to lose weight. They can lose twenty pounds after thirty days and get all excited. But if they don’t have a plan or a big picture attitude, they can easily go back to their original weight or weigh more.
The same applies to people who wreck one million dollar gains. That’s an awesome day, but the problem is if you keep trading without a big picture view, that one million dollar payday would just be a distant memory. It’s a great memory, but it’s in the past because following that day are severe losses that can lead to bankruptcy.
Finally, to truly demystify the stock market, focus on your attitude. I’m not just talking about the big picture view. I’m also talking about impatience. Impatience is your number one enemy.
Things are never as bad as you think they are and they’re never as hopeful as you imagine them to be. Don’t be impatient. Focus on the big picture and goals. If your goal is to make two percent gain today, stop your day trading activities of two percent. If you were able to turn a hundred thousand dollars to a hundred and two thousand dollars, that’s it. You’ve won. Stop there.
Unfortunately, I know too many traders who think that once they hit one hundred two thousand, they can go for more. Remember, they came in at a hundred and this is what gets them every single time. Remember, the market is not as intelligent as you think it is. The problem is you are fighting against your own greed and impatience and fear. That is the real enemy.
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