4 Tips to Know as a Stock Market Investor

Regina Thomas 3m 709 #stockmarket

The views of this article are the perspective of the author and may not be reflective of Confessions of the Professions.

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“Buy low, sell high” as the old saying goes in the stock market. Sadly, this classic phrase is better off treated as a slogan rather than an actual strategy. There are many things a stock market investor must acknowledge if he/she is to make money investing in stocks. With more than 3,800 possible stock picks and dozens of technical indicators, macroeconomic factors, and trading strategies, you’ll want to keep these four things in mind:

Know What You’re Comfortable Risking

Investing in stocks, or any asset for that matter involves a degree of capital risk that is unavoidable. Even the most brilliant economists and most successful hedge fund managers lose some of their bets. What differentiates them from the herd is that they have precise and effective risk management techniques. Start by identifying what dollar amount or account percentage you are willing to risk per trade, such as 5% or $100.

Regardless, know what you are comfortable losing or, better yet, what you can afford to lose per trade before your account drops to zero. Once determined, adjust your position size to reflect the potential loss per trade. In addition, consider using an automated stop loss to close out any losing positions automatically to avoid further losses. Proper risk calculation and management should be at the forefront of every investment plan.

Know What Moves a Stock

Stocks are essentially the extension of a company, and companies are impacted by different economic factors, ranging from geopolitical relationships between countries to scandalous misadventures of high-level company executives. Before you buy a stock, know what makes it move. Tech stocks, for instance, are broadly governed by how fast and how far they can innovate and scale.

Utility stocks, on the other hand, can be greatly affected by where consumer risk sentiment is currently at. Other catalysts that could trigger sharp price moves include global trade relations, government policies, consumer hype, etcetera. That being said, avoid solely basing your entry and exit prices on these factors alone. In many cases, the market has already factored in these events to the current stock price.

Find a Good Broker

On a superficial level, every broker might look and feel the same as the next one. Bear in mind that brokers may have different practices, offerings, and fees. Opening an investment account with the first broker you stumble upon online can have a serious impact on your long-term returns. Some brokers, for instance, do not offer the ability to trade options contracts on the stocks that you are interested in.

Others make it difficult for you to do any short-term investing by gouging you on execution fees. Find a good broker that has low to zero-order execution fees, a decent variety of stocks to buy, and fast execution speeds. You’d want your order to be executed as fast as a couple of seconds. In situations when market volatility is high, every second of delay can cost you, literally.

Know What Information to Look For

If you are buying into a gold-mining company, it’s obviously important to know what the price of gold is. A steady trend in either direction on the price of gold can indicate the gold mining industry’s health and the viability of your prospective investment. Nowadays, stocks are attached with a great host of key performance indicators, including its PE ratio, debt/equity ratio, company outlook, trailing twelve months of profit, etcetera.

It’s easy to get inundated with information regarding the stock you’re looking to buy. One minute you’re looking at the stock’s price and outstanding shares and the next minute you’ve got multiple browser tabs open on its balance sheets, executive information, marketing and branding campaigns, policies, and so on. Focus on what matters most – the underlying company’s value.

As a final piece of advice, keep your system simple. Keep in mind that returns on investment are not necessarily linked to the level of complexity used to secure those returns. There are countless strategies out there that can beat the S&P500 average yearly returns without so much as requiring a technical indicator on your price chart. Find an approach that you feel comfortable using, is built on logic and reasoning and can protect your capital from substantial losses.

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