Set Firm Goals and Establish a Plan
The very first thing you do is set goals and make a plan. This is something that gets a lot of lip service, yet most people rarely do this or do it well. It absolutely essential hat you write down your goals. Yes, write them down. Dig out a spreadsheet, or fire up your favorite spreadsheet program on your computer, and start writing out your investment goals.
Goals should be derived from your disposable income. After all of your basic expenses have been paid, you should have some savings left over. This is where you start to build your plan.
Decide how much of your savings you want to invest. Some of the best traders only use 10 or 20 percent of their total savings for investment purposes, but you’re free to construct your plan any way you want. The important point is that you write down a dollar amount you’re willing to set aside every month for investment purposes.
Next, write out some basic rules for trading. If you’re not familiar with how trades are executed, now is a good time to pay your local library a visit and start reading about investment theories and philosophy. This is not a hobby you can casually start and stop at will. It’s a skill that needs to be developed over time.
A few basic goals might include a rate of return you want to shoot for every year, how much draw-down or loss you’re willing to accept on any given trade, how much leverage you want to use for trades, what current income goals (if any) you have. If you don’t plan to trade for current income, write down a dollar-cost averaging goal.
For every investment you make, you should also set an entry point and either a stop loss or trailing stop loss goal. Stop losses limit your losses if your investment turns against you. The exact stop loss or trailing stop loss you set will vary based on the specific investment you’re investing in since stop losses and trailing stops are either a fixed dollar amount or a percentage relative to the security you’re invested in.
Good goals take emotion and guessing out of the picture for the most part. Regardless of whether you’re feeling excited about your trades, or depressed, you simply stick to the plan. If you planned on exiting a trade after a 5 percent loss, you exit. You don’t rationalize or seek revenge on the market. You take your 5 percent loss and count up the money you did gain during the trade, if any.
Start digging into the company financial statements. Research the management. Does the company have good debt to income ratios? What is the industrial philosophy of the management? This is a lot harder to figure out than it sounds. Many times, a company’s financial statements won’t tell you the whole story. You’ll have to try to dig up the company’s primary customers and vendors. Does the company pay their bills on time? What’s it like working with them? Get feedback from other people or companies that work with or buy from them.
Historically, how has the company performed? How do they treat their shareholders? Do they pay a dividend? If so, how much? Does the company increase the dividend regularly, or is it unstable? If they don’t pay a dividend, why not? What do they do with the money they earn?
In your research, start with large, well-established, companies. Companies that have already been extensively researched. These would include the infamous dividend aristocrats and blue chip stocks. It’s unlikely you’ll uncover anything new about them, but it will give you lots of practice researching and ferreting out the truth about how the company operates and what its profit potential is.
Find a Good Broker
Honestly, finding a good broker is hard. Many brokers are going online, so you’ll have less interaction with them. The old-school offline brokers aren’t always good at researching stocks, so they can’t help you pick winners. Plus, they almost always charge more than online brokers for trades. Still, there are some goods ones out there that do run an online brokerage system How do you find them? By using services like BrokerStance.com.
Never Invest More Than You Can Afford To Lose
The mark of an amateur trader is over-investment. Most professionals never invest more than 10 or 20 percent of their total savings. There’s a reason for that. Being mostly liquid gives you choices – gives you options. Having all of your money tied up in one or two stocks forces you to substitute partnership in a business for savings.
All stock purchases represent partial ownership in a company. the more you commit, the more you stand to lose, especially if you’re day trading or swing trading. Keep you risk lower by retaining high cash reserves.
Jarryd Harden enjoys sharing investment resources online. His articles mainly appear on investment blogs.