Let's imagine you would get a chance to have lunch with some of the best trading experts and ask them where to start. Sounds exciting, right? But, unfortunately, this is not always possible. While you are waiting for your lunch appointment, we compiled 5 fundamental tips for everyone starting out as a trader.
1. Leave your emotions behind
"Emotional control is the most essential factor in playing the market. Never lose control of your emotions when the market moves against you. Don’t get too confident over your wins or too despondent over your losses."
- Jesse Livermore
Here is a short throwback in the history: during the WWI it was very common for German army commanders to punish their soldiers for complaining about their fellow soldiers and officers. However, they only got punished if they filed a complaint on the day of an incident. What was the reason for this seemingly-violent rule and why do you need to know about this? The army commanders believed that no one can make a well-considered decision when captivated by emotions. The exact same rule works today for good traders.
Let's say you bought a stock and in just some minutes it starts losing its value. You are looking at your account balance dwindling away. What would you do? Unfortunately, most people would rush to sell the stock as fast as possible. They would sell it even for a very unfavorable price simply out of fear of losing even more money on it. It might seem perfectly logical but then comes the questions why did you buy this stock in the first place?
Last year, Tesla's (NASDAQ: Tesla Motors [TSLA]) stocks were continuously falling for 9 long months. Many people sold their stocks believing that Tesla will never recover from it. This was not the case and Tesla got back in shape shortly after, generously rewarding those who stuck around.
2. Never follow the crowd
“Be fearful when others are greedy, be greedy when others are fearful”
- Warren Buffett
Oftentimes market hype is brought about by the media creating buzz around some financial news that were not yet thoroughly analyzed. At these moments, it is very hard not to jump on the bandwagon of overexcited traders and start buying stocks that everyone is talking about.
Later, when it turns out that this was nothing but a hype, you don't want to be one of those traders who are struggling with selling the stocks for close to nothing when the hype is over. The best example to illustrate Buffett's quote would be the notorious Dotcom crash that left countless number of traders with devalued stocks.
3. Trading is not only about graphs
"One of the very nice things about investing in the stock market is that you learn about all different aspects of the economy. It's your window into a very large world."
- Ron Chernow
Everyone would agree that investing involves much more than simply buying some stocks. Indeed, by entering the world of trading we involuntary delve into politics, economy, ecology and financial markets, learning more about what is going on in the world than we would ever expect.
But the trick is that it works the other way around just as well: the more you know about the world, the better you invest. That's why when you are thinking about making a new investment into a company, try to analyze their business as thorough as you can. The time you invest in this step will pay off later.
When analyzing a graph, never neglect the news section that goes together with it. Lots of important information can be hidden there.
4. Know where your money go
"The worst thing you can do is invest in companies you know nothing about."
Back in the 70's Lynch invested in Hanes (NYSE: HBI) simply because his wife loved their L'Eggs pantyhose. During the time Lynch had Hanes in his portfolio, the stock value raised for more than 6 times. He was sure that the more you understand the business you invest in, the more confident you can be about your investment.
Why should you invest in a tech startup if you have absolutely no idea about the technology they are developing? Would you be the one to predict which mobile app will be the next Pokémon GO? Stick to the companies that you understand and learn everything about them. Looking at the capitalization of similar businesses and such factors as income, earnings, growth rate, risk characteristics and capital structure is always a good idea. A company that looks good at first sight is not always a smart investment.
As Warren Buffett said:
"Never count on making a good sale. Have the purchase price be so attractive that even a mediocre sale gives good results."
5. Invest in young promising companies before they get big
"Look for the good companies with the bad balance sheet and solve for yourself how far you can go to minus"
- Sam Zell
Zell's advice goes in a completely different direction from Buffett's as Zell suggests searching for companies that are going through bad times but have a big potential. He buys their stocks in bulk for a low price and helps the company to go back in business and produce lucrative dividends. Even though it sounds risky, Zell's principle can be applied at stock market just as well. Try to find struggling companies whose history shows that they are capable of going through financial difficulties and buy their stocks while they are down.
For example, in spring of 2013, FedEx's (NYSE: FedEx Corporation [FDX]) stocks did not look that good and were sold for $90-95 per unit. But for someone who analyzed the company's history, it would be clear that FedEx is not a business that sinks down easily and can be expected to improve in the future as it was created during the 1973 oil crisis. So, if you had bought their stocks for $93 on 19 April 2013, you would have made $90 for each already on 12 June 2015.
If you want to try these tips on practice, register on Tradernet now and get 500 points for free. You can use these points with your first broker commision under €10.