Stock trading can be confusing. We have put together this article on stock trading for beginners to get you started. When investing in stocks, you effectively buy a piece of a company. Each stock you own represents a share of ownership within that company. As a result, it gives you the right to receive the company’s earnings, assets, and future growth.
Interestingly, when looking back at the basic concept of wealth creation, the rich got richer by sticking to these three rules. As a would-be investor, make sure you have the proper knowledge and resources before investing independently.
Here are three rules for making money off of stock trading. Let’s call it the beginner’s guide to stock trading.
Three rules to making money when stock trading that aren’t so obvious
1. DO QUALITATIVE RESEARCH ON STOCK TRADING FOR BEGINNERS.
It’s not advisable to own stocks you know nothing about. Valuating stocks involves fundamental, technical, and qualitative analysis. The qualitative analysis represents subjective research. We refer to this as soft metrics. The qualitative analysis focuses on areas of a company that aren’t quantifiable or easily explained by numbers. Areas of qualitative research can include employee, supplier, and consumer satisfaction.
Qualitative research can also feature branded products, advertising, organizational structure, and customer service. An excellent qualitative analysis focuses on facts that illustrate why the company does what it does. The most crucial part of any qualitative analysis is avoiding opinions and sticking with facts. Opinions are fine for asking why something is or might be, but they should never be used as a basis for making decisions.
One of the best ways to get a good qualitative understanding of a company is by looking at its annual reports. Annual reports will usually have a letter from the CEO that discusses what happened in the past year and where the company is going. They’ll also have financial information, usually at the back of the report. Annual reports are a few places where qualitative research can become quantitative.
2. HAVE AN EXIT STRATEGY – TAKE PROFITS WHEN YOU MEET YOUR TARGET.
You should always have an exit strategy when trading stocks. By establishing a target price, you can control your profits and avoid being swayed by the potential for more significant gains or losses. Remember, stock trading is not a get-rich-quick scheme; it’s a business, and like any other business, it requires careful planning and strategy. If you continue to be influenced by the potential for greater profits or losses, you will most likely not be successful in stock trading. Having an exit strategy is critical to your trading success!
3. DIVERSIFY
Diversification applies to all areas of investing. Creating a broad portfolio across varying asset instruments and classes is essential. These factors help protect your portfolio from single stock losses. How you diversify dictates the risk taken in your portfolio. For example, diversifying between two stocks creates a higher risk than owning 70% of your portfolio in 500 stocks/companies and 30% of your portfolio in bonds.
Companies range in sector, size, and style. Diversify your portfolios by investing in the myriad of companies with differing sectors, sizes, and types. When you fill your portfolio of these companies, you are on your way to diversifying your portfolio. In simple terms, don’t put all your eggs in one basket.
There are many benefits to diversity, and investors would be wise to take advantage of them. By diversifying investments as a whole, investors can access new markets, new ideas, and new assets. In addition, diversification can help reduce risk and volatility. When markets move in one direction, a well-diversified portfolio will not be as greatly affected as one that is not diversified.
Finally, it is important to remember that there is no perfect way to diversify a portfolio. Every investor’s situation is different, and each must tailor a diversification strategy to fit their own needs.
SUMMARY
Stocks can offer traders significant returns. But new investors who are just starting can benefit a lot from keeping to the three rules we stated in this article: Do your research; Have an exit strategy and make sure you diversify your portfolio.
