FUNDAMENTAL TIPS WHEN TRADING STOCKS
“These simple tips will save you thousand of dollars in investing mistakes on the market stocks”
At the core, the principle of investing is simple; to increase your wealth.
The problem is investors are often influenced by emotion, speculation and the unknown.
Investing is key to financial freedom and it doesn’t have to be a stressful or arduous process.
We’ve all seen our friends or coworkers losing money while try to invest. If they only knew better, they would have got that dream holiday in the Bahamas.
Below are the key principles which I use when investing in the stock market.
MARKET STOCK INVESTING; THE DO AND DON’TS
#1 – Do check out the company before you buy
I’m amazed about how many investors buy a company based purely on price/charts and only later analyze the company’s fundamental.
The problem is there are many more factors than only share price to investigate before taking in consideration to buy a share.
Let’s be clear, few minutes will not be enough for a company’s fundamental analysis.
However, once analyzed a company, your valuation will be valid for at least six months and sometimes even years.
I periodically analyze companies following the reports of my favorite brokerage firms.
Sometimes I do one company per week, sometimes more.
I put all the data on an Excel spreadsheets, calculate the intrinsic value of the company share price and with my judgment, give a price tag of the stock for the next 12 months.
You heard right, there isn’t only numerical calculation or a magical formula to pick the stock, but my personal thinking about the company’s management, products, market environment, competitive advantage are the few other factors that help me to give a price to the stock.
People tend to think there is a magical formula (or the marketers want to make you think that), but it is an illusion.
If that were the case, the price of shares wouldn’t fluctuate few points every day.
The consequences not doing your homework can cost you dollars in lost of investment and opportunity.
#2 – Do your own homework
It’s important to learn about the company you are going to buy shares.
Would you buy a car without test it, first?
Whenever buying shares, you’are one of the owners, so do your due diligence.
How long time do you spend in researching a US$500 laptop purchase? Maybe 4 hours?
If you are going to buy US$5000 in shares, you should at least spend 10 hours analyzing the company.
That might sound like a lot of your time, and maybe a bit boring but when you will see your stock picks growing, you will be glad to have invested your time so well.
However, don’t need to spend so much time analyzing all the about of a company, such cash flow, financial sheets and all the numerical jungle out there, but just read a trusted broker report and do some personal research about their products and reputation.
A good start is the company’s website where you can get all the info about the company, management and products.
There is a lot of helpful information to give you an idea about the company.
Few questions that will come to your mind are:
- How can you see this company and their industry in five years time?
- Has the company a solid history?
- What about competitors?
With little of homework, constant research and monitoring of the market, you can profit and reduce your portfolio risks.
To me, doing my homework means to get educated, to have a plan, to do analysis (both FA and TA), to invest or trade according to my plan and to have a risk management strategy in place.
#3 – Do know your time frame for a stock
Now you have a rough idea of how much a particular company is worth today, and you have a rough idea how much the company should be worth next year.
Let’s say one share of Apple is worth US$100 and at the moment is trading at US$ 95.
You buy in, but the next problem is for how long should I hold?
For example, a simple strategy could be; if the share price doesn’t move forward US$100 within 30 days, I sell the lot.
This is just a simple sample of time framing that is important for your investment strategy.Without time, there is no plan, and without a plan you're going to lose control of your investments.Click To Tweet
Write it down somewhere and stick to it. This might be one day, one week, months or years.
The another day I bought shares of companies in three different sectors (diversification strategy) with the intention to hold for at least 15 days. The only condition is to sell the lot at the first indication of index losing momentum.
Time strategy is been beneficial for this investment, after three days of rising, a sector bad news stopped the climb of the index. Immediately I locked in the profit by selling all the shares.
In the next weeks, the index and the stocks I sold went for a wild ride down. My strategy paid off.
Frame time my investments, give me a clear strategy to follow taken away any emotional reactions which potentially could hurt my portfolio.
#4 – Do set an exit price for the share, in positive and in negative
If the stock skyrocket for unknown reasons, take your profit.
If you make a bad trade, take your losses and moved on. Don’t hope the price will go up tomorrow. That day might never come.
Setting a price is like setting a time frame, it is all part of your investment plan to be successful in investing. Don’t let the market get into your head, this is the reason why it is important to write down your exit strategy.
There are only two ways you can get out of a trade; by making a gain or taking a loss. In finance, the terms are take-profit and stop-loss.
Developing an Exit Strategy
For long term investors (hold shares for more than one month), you should focus in the follow:
– Develop stop-loss points to reduce the downside risks and preserve your capital.
– Take profit in increments over a period of time. This is useful when the stock is on the rise for more than 2 weeks. Every few days or weeks, sell a percentage of your shares, this will help you to lock in profit.
– Create exit strategies based on fundamentals over the long term.
How much risk are you willing to take?
This strategy will determine the length of your trade base on price fluctuation. The higher your risk factor, the less trade you will do because wide fluctuation of the stock price will not force you to sell, after all, you are in for the long term.
#5 – Do have discipline in investing
Discipline is a key ingredient in investing as in life.
A disciplined investment strategy will keep you focus and ensure emotions are held in check. Buy and sell by your plan, do not act on emotions, it will cost you money.
I have discipline in balancing my portfolio of 50% equity and 50% fixed income periodically, usually every six months.
During times of strong market stock growth, my portfolio could be 60% equity and 40% fixed income, so I re-balance by selling equity and buying fixed income to go back the original mix.
This constant weight asset allocation system is been useful to take advantage of the up and down of stock markets.
Tactical Asset allocation is another strategy used by me in early basis where I forecast the movement of currency and different stock markets, allowing me to participate in economic conditions more favorable for one asset class than for others.
For example, if I expect the US stock market to underperform this year, I would allocate more resources to the currency market away from the stock and vice versa.
Dynamic Asset Allocation is a natural strategy to move investments where is expected the highest returns. With this strategy, you sell assets that are declining and purchase assets that are increasing, making dynamic asset allocation the polar opposite of a constant-weighting strategy.
For example, the market stock is showing weakness, you start to sell shares and buy them back once the market show sign of improvements.
#6 – Don’t Panic!
What ever happen don’t take rush decisions, they will get you into trouble.
You aren’t a stock trader, you are in for the long term, remember?
You buy stocks overtime with a strategy in mind, take your plan and read it. This should calm you down.
Whatever happen today, it is only a day.
Some bad news might have knocked off some of your stocks, but think about the fundamental of the companies. However, after a strong correction of the share price, it will not change the daily outlook, so you have time to decide if sell, hold or buy.
However, after a strong correction of the share price, it will not change the daily outlook, so you have time to decide if sell, hold or buy.
#7 – Don’t buy high and sell low
Do buy low and sell high. Sound simple, isn’t it? So, why the majority of the investors does the opposite?
So, why the majority of the investors does the opposite?
Well, because maths is only one part of investments, the other is psychology.
Let’s look at the boom in the past years, like the “.com”.
Average investor got the news about the huge amount of stock return during that period and everyone wanted a piece of the action.
The result? They jump in at the pick and lost their saving.
Why happen that? Greedy, in one word.
People were blind from the lie of a quick profit. They wouldn’t see the reality of these companies with huge valuations and no products, customers and history.
Instead, when the market is low and the companies are sweet deals, people will always look at the return of the stock market in the previous year and not feel excited about the modest return.
They will avoid investing.
#7A – Don’t invest all you money
Keep always a reserve of cash for great opportunities that come along with a decline.
You never know when the market is going to correct, but what you can do is to keep some cash in your trading account and when the market as a whole plunge, buy in some more share to add your portfolio.
I usually keep a 20% reserve, but this is my habit. Someone will hold 10%, other 30%; there isn’t a real magic number.
During a correction in August 2013, I had some 50% cash in the account while the stock market was going lower daily.
I purchased 10% lot of shares every five days, till I was fully invested.
The result? The market went down for two weeks, bottom out and turn around. I made a healthy 16.6% profit in less than 30 days.
Cash is your best friend to grab opportunities.
#8 – Don’t let opportunities pass by you
This is a tough one. New investors tend to buy in good times and sell in bad once.
Don’t waste the opportunity to buy at a discount during a downturn.
Correction/downturn are hugely profitable times to buy because the share price fluctuates wildly offering high returns with minimal risk.
Don’t let the fear to stop you from profit, take advantage of market corrections.
As always, leave a comment if you have a question! I’m here to help.