8 Basic Lessons You Need to Know About Stocks Before Trading

Basic Lessons You Need to Know About Stocks Before Trading

Getting started with stock trading is intimidating, particularly if you don’t have prior experience in investment or trading in any form. New investors tend to make bad trading decisions very often. There is plenty of misinformation out there regarding stock online trading, which is one of the biggest reasons why so many novice traders fail so often.

As a beginner, you should try to cover the basics first. Cut through the junk that’s commonly found on untrustworthy platforms and learn from the pearls of wisdom left by experts. Here are eight basic lessons about stocks before entering online trading:

1) Start with a Plan… and Stick to it:

Learning how to trade stocks is complex and high-risk, so you need to have a plan first. Above all else, you must stay sensible. Don’t chase after more returns. Stay away from stocksdeemed “hot” by the pundits and prognosticators. Have a financial advisor help you craft a plan and stick to it. Stocks are volatile and the market will not always be in your favor. You need to keep a cool attitude and try not to react emotionally to emerging market crises. If you have a long-term plan to follow, you’ll be able stay calm and weather these storms.

2) Know How Much to Invest:

You need to understand how much of your portfolio should be in stocks. There’s no hard-and-fast rule for this, but here’s a general guideline. As you get closer to retirement, reduce your exposure to stocks and preserve your capital.If you’re still confused, just take your age and subtract it from 110. This will give you the percentage you should invest in stocks. You can always adjust this percentage depending on your appetite for risk.

3) Familiarize Yourself with Filings:

At this point, you shouldn’t be relying on your sixth sense to search for good companies. Like the rest of us, you should do your homework.Nothing can be a better starting point than checking the regular filings public companies make with the Securities and Exchange Commission (SEC). These SEC fillings include many important details, including companies’ finances, risk factors,and even potential conflicts. Regulatory fillings also let you check acquisitions and stock transactions made by senior executives and board members.

4) Dividends are your Friend:

Most stocks usually choose to distribute profits to shareholders in the form of dividends. Other stocks also let you use those profits for reinvesting in the growth of the company. Generally, dividend stocks are less volatile as compared to the non-dividend ones. However, keep in mind that just because a company is paying a higher dividend doesn’t mean it’s a better investment.

5) Only buy What you Know:

If you can’t explain what a company does in one or two sentences, then you shouldn’t invest in it. Only invest in businesses that are easy for you to understand, especially if you’re a beginner.

6) Keep up with Historical Trends:

Past performance doesn’t always guarantee future results, but there are some historical patterns that continue to trend. This specifically applies to stocks that have a long history of profitability. Stocks with a strong history of dividends are likely to increase their dividends in the future.Spend some time understanding the historical behavior of stocks you are considering to invest in.

7) Know how Volatile your Stocks are (or Could be)

When buying a stock, you should learn how volatile it can get. You can only determine this by looking at its beta. With a stock’s beta, you can compare its volatility to that of the market as a whole. In case the beta is less than 1, the stock will react less to swings in the market. On the other hand, if the beta is greater than 1, that means it will be more reactive.

8) Never Stop Learning:

If you ever ask an experienced investor how they became so successful, they’ll tell you that one of the most valuable lessons about trading in stocks is to never stop learning. Continue to absorb market information. Understand how the market works, learn different techniques for how to evaluate stocks, and keep up with trending news. This will make your trading skills grow over time and help you expand your portfolio.

These are not the only lessons you should hold on to. There are some dangerous traps you should watch out for at all costs. Penny stocks are one of them. These are the stocks that are traded for less than $5. You might be attracted to invest in them since they are the least expensive option. It’s in your best interest to avoid them. After this, don’t found your trading decisions on rumors. Perform thorough research about each potential investment and only make a decision to invest while keeping the long-term outlook in mind. Also, don’t use borrowed money. In fact, as a beginner, you shouldn’t even touch it. Amplified returns are exciting, but you could increase your losses, too.

In conclusion, the stock market is a complicated place for a beginner. The reasons why stock prices rise and fall can be very complex to grasp. It takesseveral years to become well-versed with the financial market and stocks. During this learning phase, it would be great if you could find an experienced trader to seek guidance from. A financial advisormight seem like an unnecessary expense, but since you’re wading into unfamiliarterritory, going it alone can wind up costing you much more.

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