I neither have too much money nor I am super-rich. Nevertheless I am interested in stock trading, and yes, I admit, I am gambling a bit. Gambling in terms of investing an amount of money in several companies which are well known to me and physically producing something (one of my personal ideological principles). Starting with stock trading I tapped into a few pitfalls resulting into some basic rules which I set up for myself, which I would like to share.
1.) Play only those games where you know the rules.
It is like with every game you play – before you start playing, get familiar with the rules. Trading stocks is also bound to certain rules, and believe me, the first time you enter an order you will notice. Furthermore please keep in mind, cheating is not allowed and in this particular case it might be illegal as well.
2.) Invest only money, which you do not need or you are dependent from.
Consider the risk of loosing 100% of the invested money. Sounds odd and improbably, but it’s a fact that it is possible. Never ever take a loan for buying stocks, even if the interest rate seems to be small.
3.) Spread your risk, by building up a portfolio.
Simple example: you have a single position, and there is an possibility of 50% that you will loose all your money. Now consider you have a second position, with the same amount, also with a possibility of 50% of loosing all your money – whats the overall probability of loosing all your money? 25% since 0,5 x 0,5 = 0,25! Of course the same goes for making profits – spreading risks means also that you might make less profits. Building up your portfolio is nothing you do within a couple of minutes. Consider also that certain branches (e.g. banking) or countries have certain dependencies and risks (e.g. foreign exchange risks). In addition think about ideological values which might be important to you. Speaking for myself I would never invest into any kind of military industry.
4.) Information is the key to success.
Before buying a stock get familiar with the branch, the driving technologies and trends as well as with the company itself. Information is the key to success. There are tons of books about technical chart analysis, but in the end if a business is doing well and the company is earning money, you are definitely on the save side. Information is also important when it comes to dividend payments as wells as merger & acquisitions or joint ventures. In regards to analyst opinions, be sure to consolidate more than one opinion. Further beware about any kind of once-in-a-lifetime chances (usually send via mail) into any kind of penny stocks!
5.) Make yourself a plan and stick to it.
I usually monitor the market in certain branches before I do any investments. By doing so I try to note down some targets or triggers for buying/selling stocks. Those could based upon a cap on the stock price, a time-bound target or based upon dependencies e.g. a good FX rate or a low gold price.
6.) Try to minimize your fees.
The same stocks are usually traded on different markets. Depending on the bank, the fees might vary between those markets. Try to utilize those markets where you have the lowest total costs. Total costs as the price of a stock might vary between different markets (arbitrage). If you would like to trade on arbitrage, please note that you would need higher amounts of money, since otherwise it would never be lucrative.
7.) Keep a buffer.
Never invest all your money. Always keep back something for arising chances or situation where you might need something. And be sure – this situation will come up sooner as you think.
8.) Limit your losses.
This is one of my hardest rules since it was not only once where I tried to omit this rule. When you are making losses it is hard to take the decision to sell it and to actually realize those losses. Never the less, if you don’t do it you run into the danger of loosing everything.