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Stock Market Investing Tips For the Newbie

The world of stock market trading has changed dramatically over the last 20 years. Trades that used to take more than a week to process now take only moments. Almost all trading was done through a broker and large commissions were commonplace. Now, just about anyone with a computer and an internet connection, or for that matter a smart phone, can trade with the ease of a few key strokes and with commissions a fraction of the old days.

Because of this ease of trading, it can become very tempting to trade too often and to take bigger risks than we should. Stock market investing can become similar to gambling with that thrill of the big win. However, the possibility of huge losses is ever present. Better to think a little bit like the professional traders, buy value and hang on for a long time.

Be prepared to educate yourself with as much information as possible. While it’s true that even the most informed traders make mistakes, the more you know, the less likely this will happen. This means immersing yourself in reliable, timely and knowledgeable advice. If you’re not willing to take the time to properly educate yourself, you might want to leave investing to your broker.

How do you know if online stock market investing is for you? Here are a few tips that will hopefully tip the balance to the side of winning.

1. Open an account with one of the well known discount brokers. Scottrade and Ameritrade are two of the best but by no means your only choices. Find out who fits your needs the best in terms of minimum balances, commission structures, educational materials, online services, and most of all customer service. If you are new to this game, having a reliable source for answers to your questions or helping a trade go through in some cases is a valuable asset.

2. Be very careful about acting on “stock tips” from just about any source. Unless you can verify the information is legitimate and timely, don’t waste your money. There are so many scammers out there pumping the markets with false information to take advantage of the uninformed trader. I would suggest you find a reliable newsletter that fits both your stock trading style and your budget and try a subscription. Many of them would probably send you a free copy if you wrote and requested one and almost all of them will let you cancel and refund the remaining part of your subscription if you want to discontinue receiving the letter.

3. If you’re going to trade individual stocks, you need to spend some time managing your account. No, I don’t mean you should be looking at your account every few hours or for that matter even every day. However, keeping an ear out for what the market is doing every few days and checking the performance of your stocks at least once a week would be reasonable.

4. Try to find stocks or investments that are undervalued and have strong positions in their industry. Research them a little to find out if they have unique advantages over their competition or have high barriers to new competition entering their market. Buy stocks that you can hold on to for 3-5 years if possible and get to know them well. You don’t see Warren Buffet trading companies everyday do you?

5. Always use limit orders when buying and selling stocks. A “limit order” is simply stating the price you will pay for a stock when you purchase, or what you will sell it for when you are selling. Yes sometimes you will miss getting a stock at the that price, but if you always place market orders you will bet burned by a market maker who will manipulate the pricing and gouge you. Getting the best prices when stock market investing sometimes takes patience and persistence.

6. Use trailing stops with all of your stock market investing. A trailing stop is a price set usually 25% below the current price of the stock. It should be calculated immediately when you purchase the stock in case the stock misbehaves and reverses direction. This will preserve your capital and prevent large losses. If the stock goes up as planned, you make adjustments to the trailing stop to follow that upward movement. This lets you lock in some profits in case of a reversal in direction. You can calculate this 25% stop manually or there is a service that will track it for you and send you alerts. You can find them at Tradestops.com. I think the cost is around $69/year.

7. There is an old saying on Wall Street that the market is driven by just two emotions: Fear and Greed. This is probably on oversimplification, but it often is true. I think one of the best tips I can leave you with is some sage advice from Warren Buffet about how to avoid these two emotions. “We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful”.

This is by no means a comprehensive list of things to know to become competent at stock market investing. I have been investing for over 34 years and still study and learn all the time about the markets. Just like most things, they are constantly changing. However, if you will follow these few tips it will go a long way toward getting you started with some good stock market investing habits. Good luck.