If you thought buying stocks was a tough gig, you’ll be happy to know it is actually very easy. The tough part is choosing those businesses that can consistently beat the market.
This is the point where many people have a difficulty, this is why many novice investors will opt for a diversified plan that includes low-cost index funds and a longer-term strategy. The plan is so solid that many of the die-hard investors and those with many years of experience in the market will swear by it.
But, if you have taken the time to read this concise guide to buying stock, you are obviously a discerning individual with a knack for research, the patience to let your investments mature and the brains to set parameters to how much you will invest in the market.
As a rule of thumb, 10% of your holdings is a good number to shoot for. But an equally clever plan is to never use cash you will need in the next five years.
If you understand the wisdom of this advice, then you have more experience than many in the stock market. Here are five more essential habits for successful trading.
#1 Dispassion is the Name of the Game
You will find that endurance is the name of the game when it comes to getting ahead in the stock market. If you can keep your cool and stick to your plan when everyone else is jumping at shadows and “apparent opportunities” you just might survive long enough to make a buck or two — or two million?
A market is an exciting place where opportunity awaits behind every door. But until you fully understand what a golden opportunity really is, and more importantly, how to take advantage of this opportunity, you could make a bad move by yielding to an impulse.
All the experts in the market will tell you the same thing, develop your cool temperament and stick to your plan like white on rice.
#2 Pick Companies – Not Ticker Symbols
It is easy to see a game as nothing but a string of numbers at the bottom of the screen while you watch the news, but this is a poor trading mindset. This mindset makes your stock decisions an abstract concept and robs you of your role in the experience.
Never forget that buying stock makes you an owner of that company. You can buy penny stocks under 5, to begin with, and then work your way up to a larger stake.
By fully embracing this role you will take an interest in the company, it’s history, long-term goals and plans, its major competitors and even its operations. This will allow you to decide if the company really brings value to your portfolio.
#3 Plan ahead for panicky times
Every seasoned investor has hit a moment where they have an urge to change the relationship they have with their trading game. This can lead to an impulsive decision, possibly even based on a really good reason, but they invariably lead to the Tao of Trading defeat: Selling Low and Buying High!
This is where keeping a journal is a good idea. You can choose Chamomile tea or Scotch Neat, but the journal you keep will allow you to refine and define your trading strategy.
In this journal, you will write down what makes each and every stock you own worth owning and at the same time, while in a moment of clear dispassion, what would need to happen for you to sever this relationship.
#4 Ask These Two Questions:
Why I Buy? — detail exactly what you find attractive about this company, do you see an attractive future in and happy expectations? What are your expectations? Consider what would be a potential pitfall here and would be grounds for you to sell and which are only temporary setbacks and can be weathered.
Why I Sell? — sometimes a break up is the only resolution. For this sad part of your journal, you will write out your investment prenup which is essentially what would have to happen for you to give up your stock and place it back on the market.
This doesn’t refer to the price of the stock, especially not in the short term, but to the long-term value of the company. For Example, if they were to lose an important client, the new CEO is taking the business in a new direction, a considerable competitor enters the market or the investment plan has not increased much after a specific amount of time.
#5 Build Up Positions Gradually
Time is the best ally, contrary to timing as many people think. A savvy investor puts cash into a company because they expect to get a reward for their effort.
The rewards could be dividends or value appreciation for their shares, but they will invariably be available over years or even decades. This means you can take your time when making these decisions.
Here are some strategies that you can apply to your trading strategies that will make you less susceptible to the hazards of price volatility.
Dollar-cost average — this involves choosing a set amount of cash that will be invested in a company regularly, this could be weekly or monthly but you will always spend the same amount of cash. If the company stocks increase in value, you buy less, when they decrease your cash buys more.
Many brokers will allow you to set up an automated investment scheme.
Buy in thirds — In this plan, you will divide your investment into three parts and pay them at different intervals, this could be at regular times or after specific company event. For example, you can choose to buy a share before an important product launch. Later depending on how the launch went you can reinvest the second amount, or choose to apply this elsewhere.
Buy “the basket” — can’t choose between several great options, take them all. You can choose to divide your investment between the top choices in your investment journal. This way if one of them takes off you have peace in the pie already. This also helps you define your strategy of picking companies as you can find out what really makes “the right one” for you.
#6 Avoid Trading Overactivity
While it is tempting to check the values of your stocks every five minutes, this can lead to becoming antsy and overreacting to a small innocuous event.
This can lead to actions that will be regretted. It would be a better idea to keep an eye on your stocks quarterly and investigate the performance of your stocks then. If you notice a sharp increase in price, take the time to find out why this happened.
Remember how much of the trading game is a learning experience and the trading journal you keep is a textbook on how to do it right. Once you have filled out your first textbook you will have the perspective to begin adjusting your game.