INVESTING 101: TOP 10 TIPS FOR SUCCESSFUL TRADING

Updated: Jun 29, 2020


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There is no doubt that trading stocks can be rewarding endeavour. Statically, over the long term, stocks always outperform other asset classes.


Unfortunately, investing in the stock market is not as straightforward as it may seem. One cannot expect to become a true investor overnight, it is a long and arduous journey. This article aims to simplify the complicated world of investing and to make your trading profitable as possible.


So here are my top tips, which I wish someone would have given me when I first started trading (10) ten years ago:


TIP 1 – INVEST IN YOU BEFORE INVESTING IN THE MARKET


The first step is to invest in you. You need to have sound knowledge of the financial markets prior to undertaking any investment endeavor. It is never recommended to make investments in financial products you do not understand or cannot explain.


I would strongly recommend that acquiring knowledge should be your top priority before undertaking any endeavor in the stock market.


I will be posting a separate blog about the books you can read to enhance your knowledge.


TIP 2 – START YOUNG


The longer you hold stocks the less risky they become…”


Warren Buffet


The most valuable commodity in life is time. The sooner you start investing, the greater are the chances of achieving stellar results.

There are other numerous benefits of starting early, such as developing better spending habits, sooner you learn the lesson, easier it will be for you to manage your finances prudently and avoid costly mistakes such as the expensive credit card debt.


TIP 3 – DIVERSIFICATION


“Nobody knows which company will prove to be a good long-term investment.”

Michael Lewis


Investing, in general, comes with risks but diversification can help you to minimize the risk. There are (9) nine types of risks which may affect the value of your investment:


i. Market Risk;

ii. Liquidity Risk;

iii. Concentration Risk;

iv. Credit Risk;

v. Reinvestment Risk;

vi. Inflation Risk;

vii. Horizon Risk;

viii. Longevity Risk;

ix. Foreign Investment Risk.

No one can be absolutely sure where the stock market will be heading in future, no one could have predicted the on-going COVID-19 and the devastating impact on the retail and airline industry.

Beware of over concentration in any single investment or sector. As a general investment philosophy, it is recommended that you should not have more the (2) two investments in the same sector.

Take a good look at your investments, if at is all stocks, think about adding exposure to other asset classes. If your investments are all in the USA, consider global investments. TIP 4 – RISK ONLY WHAT YOU CAN AFFORD

Before venturing into the world of investing, I would recommend that you should make a list of your expenses (rent, food, transportation, fees etc) and work out how much disposable income you have each month. You should not invest more than your disposable income, or even your entire disposal income for that matter. It is important to keep a liquid emergency cash reserve fund for a rainy day.

TIP 5 – DON’T USE LEVERAGE

“When you combine ignorance and leverage, you get some pretty interesting results”

Warren Buffet

Losing money is traumatic. It is even more so traumatic if you lose borrowed money. Leverage can amplify possible returns, but it can also amplify possible losses.


One of the most dreaded aspects of debt-fueled trading is the margin call; the margin is the difference between your investment portfolio value and amount of loan. I have seen too many traders losing money in excess of the initial margin in a matter of hours. The first rule of successful trading is to ensure capital preservation and leveraging can have a very devastating effect if the market moves against you.

TIP 6 - DON'T LET EMOTIONS GET IN THE WAY


All your investment decisions should be governed by logic and not emotion. Stock market will test your nerves. I have seen too many traders making decisions on headlines, there will be temporary setbacks. You should always be focused on the bigger picture.


Stock market will test your nerves. There will be temporary setbacks. You should always be focused on the bigger picture.

TIP 7 – DON’T TRY TO TIME THE MARKETS

“Far more money has been lost by investors trying to anticipate corrections, than lost in the corrections themselves.”

Peter Lynch

Timing the market is impossible, but it is also a fool’s errand. The decision to invest should not be based on timing alone, rather it should be based on the fundamentals of the business, and the likely future earnings.


Timing the market is impossible, but it is also a fool’s errand. The decision to invest should not be based on timing alone, rather it should be based on the fundamentals of the business, and the likely future earnings.

TIP 8 – PATIENCE IS THE KEY

“The stock market is a device for transferring money from the impatient to the impatient”

Warren Buffet

Patience is the key to success, stellar profits are not achieved overnight and the concept of buy and hold takes time to produce results. Time is of the essence, give it enough time, and you would be able to reach your financial goals successfully.

TIP 9 – DON’T CHASE THE FADS

“In the short run, the market is like a voting machine. But in the long run, the market is like weighing machine”

Benjamin Graham


Timing the market is impossible, but it is also a fool’s errand. The decision to invest should not be based on timing alone, rather it should be based on the fundamentals of the business, and the likely future earnings.



TIP 10 - TAKE EVERYTHING WITH A GRAIN OF SALT


I would say about everybody, even very smart investors. I take everybody with a grain of salt and that includes Warren Buffet, Ray Dalio, George Soros, Jim Rogers etc. I am not saying that they don't make sense but I would do my own research first, rather than blindly investing what Warren Buffet is investing in.

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