Updated: Sep 21, 2020
The stock market is created as platform for traders and investors to transact the secondary equity market in a regulated transparent way. It gives opportunities for investors to create capital in longer time periods, for traders to transact short periods and for speculators to gamble on price differences. Some professionals get a side income and accumulate their fortune in decades while active traders make their daily living and pay their bills off it.
The stock market is any way you would view it, and everyone is different. There are different investment vehicles for any one with varying risk appetites and investment goals. For risk adverse, you can invest in value stocks, blue chips and collect dividends, others may go for high growth stocks. With knowledge in stock market, you can also learn about bonds and funds (for the risk adverse), and commodity and currency futures (for the higher risk takers)
Universally, one principle holds: Little knowledge is dangerous……
I highlight some ideas how one can be successful in the stock market
Acquire knowledge on Fundamental Analysis: both macro. and micro.
· Understand that you are buying into that business as a shareholder, therefore you must believe in that business
· Learn stock valuation terms such as market cap, EPS, P/E ratio, dividends, book value, DCF, NAV etc.
· Learn how the financial market works, and how government, central banks and economic events e.g. stock catalysts affect the stock market. Learn what kind of news are important and kind of news are just noise and will not affect long term trends.
· Learn how to read a financial statements of a company and what are the key financial ratios to evaluate the health of a company.
· Always conduct detail research before buying a stock. The value of the company is estimated based on future projected profit so assess the future demand of the goods or services that the company offers.
· Make a diversified portfolio covering industrial sectors within your COC (Circle of Competence), and monitor announcements, news and economic events based on your sectors.
· Learn portfolio hedging strategies to prepare for any Black Swan Events and understand the need to make profits on both sides of the market (bullish, bearish and neutral).
· Develop money management skills to allocate funds into your portfolio.
Learn Technical Analysis even if you are passive investing
· Learn how to read financial charts for the market and for individual stocks, you will understand how the market and stocks behave on daily basis.
· Learn trend lines and terms such as support, resistance, reversals, pullbacks, break-outs, break-down, short covering and profit booking.
Formulate trading plan and practice discipline
· Practise trading plan demonstration account with paper money, and keep a journal for records (including trade mistakes), until you are confident to trade with real money.
· Do not buy a particular stock based on rumours. Do not believe in media, and stock pundits.
· You will easily frame the rules that you are comfortable with and minimize the capital loss. Plan your trades before entering: define risk to reward , position sizing ,scale in or scale out, stop loss, profit target.
· Practice discipline to stick to your strategy you formulated. If it does not show results after some time, do a review and modify your strategy.
· Learn risk management strategies to control risk, protect capital and how to let profit run. Learn pyramiding strategies to scale up profits.
· Understand that fundamentals of trading will never change, Trading strategies are as not important as your mindset and execution. You need to be flexible and adapt trading strategies based on market conditions.
· Learn to be accountable and do not blame others for your losses. Your own expertise and the market are reasons for your success or failure.
Learn how to control your emotions and trading psychology
· Do not invest hastily and think that if you do not buy a particular stock before research, you will miss opportunity. Overcome this fear as opportunities will return as the market is cyclical.
· Do not get emotionally attached to a particular stock. If the company’s fundamentals change and does not meet expectations, it is time to exit that business.
· Do not look for get rich quick “no brainer” tips, rather learn the skills to invest and trade independently. There are no 100% guaranteed signals and automated trading systems, depend on them at your own risk.
Here I also highlight some lessons that I have learnt in the investment journey:
Lesson 1: Companies which make popular products may not be good investments
I presumed that if a company makes great products which are highly popular, it could make huge profits and its stock price will naturally rise. I have come to learn that even if products are good, high profits and stock price appreciation can still elude these companies, especially if the company is hyped up.
Do not assume that a great product will lead to a great stock and do not make the mistake of investing in brilliant products that do not have healthy companies ascribed to them.
Lesson 2: Investing in smaller businesses may not be inferior compared to huge corporations (or conglomerates)
I previously believed that if a company with wide businesses interests was a superior investment to a company with single business line. Not only are companies with widely varied businesses difficult to manage due to its complexity, complicated accounting practise also pose a higher risk to them. If you are invested in one these large companies, it is suggested that you keep a close scrutiny and anticipate the day if they decide to break up into separate businesses each focused on its own strengths.
If you intend to invest in a conglomerate, you should do so with knowledge that a company with a single line of business will usually fare better as an investment, do not be alarmed to find that after a period of time, the conglomerate group may move to sell non-core or profitable businesses to others.
Lesson 3: You might not be able to hold your cherished shares for long term, as they may be called away one day against your will
I discovered to my regret that plans to keep a stock for perpetuity do not always work out. Just as bonds sometimes could get called away, Valued stocks can also get snatched away from my portfolio if an invested company suddenly was taken off the stock exchange and is taken private.
Do not get too attached to the business that are bought as you can lose your shares as they get subsumed into some private equity portfolio or get swallowed up by a larger company in M&A activities. These scenarios do happen quite frequently and I advise you practice detachment from your shares to avoid disappointment.
In conclusion, the stock market has great potential but it’s benefits cannot be exploited ny many due to misconceptions. Stock markets do inherent market risk associated due to fluctuation of stocks being determined demand and supply forces. For those that can master the stock market, it is a good place to make side income, build wealth and create capital over time.
Start from the basics, develop a gradual step by step approach to learn and understand these markets properly, why prices move, how they move, what triggers them etc. Careful and detailed studies are essential and this process takes time. Once you acquire a reasonable knowledge, continue learning and practice to improve each day. Avoid emotion based trading, keep up to date with markets, see how traders trade, be alert and do not give up. It will take months to understand the markets and finally bring some consistency and profitability to your trades. Be patient and you will be rewarded handsomely. Keep liquidity, diversify, have little patience and more wisdom. Be assured that your hard work will pay off.
““When you understand what’s involved in winning, as do professional gamblers, you’ll tend to bet more during a winning streak and less during a losing streak. However, the average person does exactly the opposite: he or she bets more after a series of losses and less after a series of wins.”
“The realization that you are responsible for the results you get is the key to successful investing. Winners know they are responsible for their results; losers think they are not.”
― Van Tharp
“To win in the markets, we need to master three essential components of trading: sound psychology, a logical trading system, and an effective risk management plan.”
“The public wants gurus, and new gurus will come. As an intelligent trader, you must realize that in the long run, no guru is going to make you rich. You have to work on that yourself.”
― Alexander Elder
““Human is always subject to his own emotion. How many of us can break free from the greed, fear, and unfounded hope that are so common in stock market?”
“The secret recipe for success in stock market is simple. 30% in market analysis skills, 30% in risks management, 30% in emotion control, and 10% in luck.”-
You are welcome to checkout our webpage EVERYDAY TRADING WON at www.everydaytradingwon.com and www.facebook.com/everydaytradingWON/. We provide education in stock investment, and trading in options and futures.