Advice to Stock Market Newbies
Tip #1 Do your homework
Sure you can easily buy stocks with a name such as Amazon (AMZN), Netflix (NFLX) or Starbucks (SBUX). But do you know why you are buying the stock? Most people don't.
You always need to know why you are buying the stock. This is after all a business at the end of the day. Always know how to read financial statements.
Companies are required to release these statements on a quarterly and yearly basis. Make use of that information.
Remember, just because the company is a big name company, it does not mean it is a good time to invest now.
Sometimes even the biggest companies lose money from time to time. Sometimes the company may be making money but the stock prices are inflated.
Treat this as buying into a business. Is it making money? Is the company viable? How is the cash flow? Is the company an industry leader?
You have to look at data coming from the previous quarters and years. Are the numbers getting better or getting worse?
If the numbers are good, then go for it!
Tip #2: Always do your technical analysis.
You need to know the movements and status of the stock you picked. Is it on an uptrend, a downtrend or stuck in consolidation.
Does the stock have sufficient liquidity with enough buyers and sellers or does the stock have very few?
If you see the stock is going up and has sufficient volume, it is a good buying signal.
At times, the sheer volume of demand is enough to push prices up.
If you see the stock going down and the volume drying up, you need to stay away else you lose money.
Charting is a good way to get a visual representation of stock movements.
Take the time to learn to chart and learn the basics such as candlestick patterns and different indicators such as moving averages and relative strength indicators.
Tip #3: Create a trading strategy
Failing to plan is planning to fail. You cannot just go blindly into the stock market, buy and sell stocks and expect to make money.
It is not that simple. Otherwise, everyone would be making money.
Study the different indicators and learn how they can help you determine future movements.
One of the most common ones is the SMA (Simple Moving Average). This is simply the average closing price during a specified period. The commons SMA's are 50 and 200 days. The 50-day SMA determines short-term trends and the 200-day SMA determines the long-term trend. Another common indicator is the RSI (Relative Strength Index). This indicator helps determine if the stock is overbought or oversold. An overbought stock is a stock that has shot up too high and is due for a pullback in price. An oversold stock is a stock that has gone down too much and is due for a rebound in price.
There are many ways to skin a cat. Some people make money in the stock market by long term investing in companies with high growth potential. Some like to bottomfish and try to bargain hunt undervalued stocks. Some buy the hot stock and buys when there is a strong upward price momentum.
The strategy you pick should fit your personality. If you have a lot of patience and do not have a large risk appetite, investing in blue chip companies might be for you. If you are a bit impatient and want to get quick cash, you might consider buying volatile trending stocks that have a high upside.
Tip #4: Plan, plan, plan.
While stock trading is not rocket science, you need to be definitive in your trading plan.
Set parameters. When do you buy? At what price point? When do you sell at what price point?
If you are wrong, at what point do you cut your losses? Do you do it at 3%, 4% or 5%?
Grab a pen and paper and jot down your parameters. Be disciplined and follow those parameters. Sure, it may be painful to lose your money when you cut your losses, but you are saving yourself from further losses down the line.
If you are an intraday trader, how much percentage do you want to earn on that particular stock you bought? Place a target price.
If you are a long term investor, just follow your trading plan.
Try to separate your emotions from your trading. When you hit your target price, sell. Do not be too greedy. Your gains could easily turn into losses in the blink of an eye.
If you are wrong and need to cut your losses, pull the trigger. Do not cling on to false hope the stock will recover. It may or may not. Do not dig a hole you cannot get out of.
Tip #5: No to FOMO
People want to always be with the "in" crowd whether it be in terms of food, fashion and trends.
Do you have the latest I-phone iteration? Do you have the latest Intel processor? Do you have the latest pair of Air Jordans?
People always want what is hip and cool.
People do not want to be left out.
The same is true for the stock market.
A lot of people try to be with the high flying stocks. The issue is they buy it when the stock has already flown and went up significantly.
They buy when the golden butterfly has already flown!
This is no different than cramming for your exam the next day. Both result in failure and disaster.
Do not chase prices. That is a surefire way to lose money.
Sit back. Relax and sip a cup of coffee or open a can of Budweiser. No need to stress over a flight you missed.
Do not get victimized by hyping traders. They already have bought and accumulated when prices were low and do not have your best interests at heart.
© 2018 Mike Dave-CYbORG