What is the basis of the stock trading system? Is stock trade meant for you? Can it be used as a steady source of income? Well let us deal with the questions one at a time, starting with the first one first.
Imagine that a company wants to expand its business. It needs money for the expansion. This is the time when the company floats shares in the stock market. If you expect the company to succeed in the future, you will buy some of the shares, thus investing in the company's business. This gives you a kind of partnership with the company, and also with its profit and loss. This is stock investing.
Now, since different companies have different success and popularity levels, even their shares differ in their demand among the buyers. Which company would you like to invest in ? a company that is renowned and sees a bright economic future or a struggling company with an uncertain future? Obviously, you would like to go for the former one. This will cause more people to get interested in investing with the former company. Such a high demand among people would result its share prices to climb up. Conversely, the stocks of a company with low demand will see their prices drop. Not only this, the varying performance of a company in the market also causes constant fluctuations in its stock prices. This rise and fall in the prices form the base of the trading. The stock trader buys the stocks and expects to sell them when their demand, and hence price, increases. This low buying and high selling gives him a profit whereas loss is resulted when the reverse occurs. This entire process is stock trading.
Is it meant for you? Well it is always a good way of earning money unless you are in debt. If you are in debt, it is often not suggested to invest in stocks. The debt will cost you a 15% interest rate. If you pay it back, it means you are saving the 15%, which is as good as earning it. However, if you are free from debts and have money to invest, stock exchange is one of the best ways to earn. Since stocks come in all prices, almost anyone can invest in them. And if you are a little careful and make well-informed decisions, the stock exchange can pay you huge profits.
Can it be a steady source of income? If you are a beginner and have another job, it is not advisable to leave your job and take stock market as a full-time source of income. It was a bit hectic to consider stock investing as a part-time earlier. In the present days, however, this is possible through the online stock brokers. They also operate at very low commission rates, thus optimizing your profit. If you have a computer connected with the Internet and registration with one of the many online stock brokers, you can start trading from any corner on the globe. Perhaps its ease of operation is the reason for a large number of people are flocking into online stock trading. Just connect to the online stock market whenever you find time and you can start trading, without having the need to leave your full-time job.
One of the hardest things about stock trading is self-discipline. You have a set of rules you use for trading, whether you realize it or not. The hard part is sticking to those rules. For example, you may tell yourself that you will never buy a penny stock. Then one day you get a spam email that is boasting about "the next big thing" in the stock market and you go ahead and buy that penny stock. One day later, you have lost 50% of your investment and you are mad at yourself for violating your own rules!
A good solution to the self-discipline problem is to write out your rules on a piece of paper. Better yet, make many copies of this paper with checkboxes next to each rule. Before you place a trade, make sure the stock fits within each of your rules and put a check next to them. That will help you stay on track! It may sound silly, but it is actually quite helpful. After all, we are human, and humans like to break rules!
In fact, one of your rules might even say, "There are no rules." There will be times when it's okay to break one or two of your rules because of a special scenario. You may find a stock that is a "sure thing" and you just have to ignore those couple rules that it violates. Of course if you get burned on the trade you will know why! Remember, there are no sure things in the stock market! There are no stocks that can guarantee a profit or a dividend. They can always drop in price or go bankrupt. So stick to those rules as much as you can!
Here are my rules:
1. Never put more than 1/3 of your money into one stock. 2. If no opportunities are found, stay out! 3. Avoid trading on Mondays. They have big drops sometimes. 4. Look at charts of the Dow to see how the market is doing. 5. Keep track of economic news schedules, such as Fed meetings. 6. After a huge loss, take a week off. 7. Research your holdings once a week. 8. Never short-sell more than 50% of your account.
Here are some stock-picking rules used by other people:
1. Predictable growth in free cash flow 2. Rich in assets, with little or no debt 3. Low multiple of price to free cash flow 4. Generous returns on equity, coupled with a reasonable cash flow multiple 5. Insider ownership and shareholder-friendly management 6. Insider buying, especially by executive officers 7. Leadership of an important niche
Feel free to use these rules or modify them to suit your trading style. There should also be different rules for day trading, short-term trading, long-term trading, and so on. Also, getting an accountability partner will help you stay on track. Show them your trades, when you bought them, why you bought them, and when you plan to sell.
There's a popular saying on Wall Street that goes, "Plan Your Trade and Trade Your Plan." That simply means, decide when you're going to buy and under what conditions you will sell, and then stick to your plans!
Both Vijay & Nicholas Swezey are contributors for EditorialToday. The above articles have been edited for relevancy and timeliness. All write-ups, reviews, tips and guides published by EditorialToday.com and its partners or affiliates are for informational purposes only. They should not be used for any legal or any other type of advice. We do not endorse any author, contributor, writer or article posted by our team.
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