How To Start Trading & Investing In Stock Market
Have you ever felt like trying something new, only to give up on it midway?
Perhaps you’re reading article this because you want to gain some tips and tricks to quickly see a little more money rolling in.
And that would likely be the most of us. After all, who couldn’t use a little more finances, right?
Well, there really is no lack of information on the “how-tos” of it. In fact, I would even say that there is too much information out there. Which might lead to overload, or overwhelm, or both.
This article is aimed at tackling 3 different sorts of keys. These keys will, in my opinion, lay the foundation for trading and investing.
It is also designed to spark introspection. Our financial journeys are as personal as any other. Having an awareness of what you really want and how you will get there can be entirely different from your friends and family.
Speaking of journeys, you might also want to check out our earlier series on the Road To Financial Freedom. It would widen your perspective of the terrain on personal finances.
Coming back to this, let’s see how many keys you already hold.
Key #1: When The Best Time To Start?
As the saying goes, the best time to plant a tree was yesterday. Since we can’t turn back the clock, the next best time would actually be now.
The question is: Where are you now when it comes to your finances?
Many a times, we only start to think about what else to do with our money in the bank when some, if not all of the following conditions are met:
- There is a steady stream of income, most likely from your day job.
- The cash in your bank has grown significantly, and it seems like the interest rate on your savings could do better elsewhere.
- Your expenses are in check – bills and loans are paid on time, with enough to spare.
- You have purchased all the medical insurance policies that you need.
- Life is comfortable enough as it is now.
These conditions function as safeguards in our minds. They seem to form a safety net, without which one should not do anything rash, such as channeling finances into trading or investing.
However, there is an opportunity cost to this.
The Power Of Compound Interest
One of the costs, is to lose time in compounding your wealth. Basically, the interest that you have earned gets added to your principal amount, thus generating a higher interest subsequently.
This also means that the earlier you start, the more time your investments have to compound. In that line of reasoning, it means that the longer the investment horizon, the greater the returns generated on the investment. Plus, it will also be able to ride out inevitable market volatilities.
Interestingly, there is a “Rule of 72” (from Money Sense) which you can use to calculate how long it would take to double your principal amount. When you divide 72 by the interest rate number, that will be the number of years required to double the original investment sum.
In the example of a 4% interest rate per annum product, taking 72/4 = 18 years required to double your principal amount. Imagine if you had started at 21. By the time you’re 39, that amount would have already doubled!
I know it can seem like the funds could be better channeled elsewhere. Perhaps it is a YOLO (you only live once) mentality that makes you reluctant to wait out 18 years for it to double.
Indeed, that is a decision for you to make. As for me, I am of the opinion that my future self will thank me for making that decision to start early.
This brings me to my next point.
The Power of Knowledge And Action
It always helps to gather information on what you think might be the most suitable course of action. However, don’t stop there – make plans to execute it.
One of the things which I personally felt could have been done better, was to work on my own financial literacy. Although managing my finances wasn’t an issue, the thought of learning how to trade and invest on my own was daunting in all its jargon and seemingly high risks.
It was on the back of my mind, and I conveniently left it there for a good number of years.
It wasn’t till I decided that “it was now or never”, that I immersed myself in the learning. As it turns out, it wasn’t as bad – and definitely not as scary as I had thought.
In fact, it even became a fun process to “shop” for stocks. Much like wanting to get the best product fit, I was looking for stocks that could reap a decent return. This can be determined by valuation or price action, which we will cover in detail in a later article.
Anyway, the point is to acquire knowledge first, and execute second. Without having a good understanding of what you are getting into, it could potentially spell sleepless nights and financial losses.
Or, you could let time run its course and lose out on opportunities along the way.
Key #2: Why Should You Start Now Anyway?
That was the exact thought that I had. I didn’t think I needed it, and neither did I really want it.
It was all good to have savings tucked safely in the bank. I was already dollar-cost averaging on some financial products too.
What more did I need, especially since my wealth was already compounding anyway?
This mentality persisted until circumstances changed. Essentially, it made me really want to be less dependent on my day job. I didn’t want to hold a slavish mentality towards job security.
It was less an issue of employability, but rather having an extra skillset to generate income on the sidelines. A peace of mind, if you will, that the labour market will not make or break my financial situation.
Furthermore, it could be done in the comfort of home, without having to exchange much of my time for income. I didn’t even need to be hustling!
The prospect of curing my financial illiteracy was also rather appealing. For many of you, the potential it provides to enable an early exit out of the rat race is enough reason to start.
Having the time to do the things that you love. Spending precious hours with people who matter.
When your motivations are strong enough, you will get rid of all excuses.
And get down to it.
Key #3: What Is Trading vs Investing?
Before all else, there is a key distinction to be made. When it comes to the stock market, there is a fundamental difference between trading and investing as explained on Investopedia.
While both allow you to profit from the market, they adopt vastly strategies. The key differentiators are:
- Holding timeframe
- Risk tolerance
What Is Trading?
When it comes to trading, the holding timeframe is comparatively shorter. Take for example position trading, where trades could be held from months to years. Swing trading, on the other hand, is a style that holds trades between weeks to months.
Then there is also day trading and scalping, which further shortens the timeframe to hours and minutes. These two types of trading warrants much more trading experience.
Regardless of the timeframe and style of trading, there is one commonality among that. Which is that there are no guaranteed wins.
In fact, one must learn to take losses, and cut them according to the exit plan. If anything was guaranteed, it is that you will have losing trades.
The key to being a successful trader, simple as it may sound, is to cut losses quickly and ride your gains for longer. Lose small, win big. Of course, this is easier said than done due to a variety of reasons. We will explore these factors in a subsequent article.
Should you find that you are unable to cut your losses, then it would perhaps be a wise move to stick to investing.
What Is Investing?
Investing holds a much longer horizon which spans years to decades. In general, investors hold on to their stocks and even ride out the downtrends. Over time, investing into fundamentally good companies would have their stock prices appreciate, as with the overall upward movement of the market.
This also means that much less attention on a short-term basis is required. This is unlike trading, where you do have to spend time to manage the trades.
Consequently, there will also be differences in stock selection. Some, while suitable for trading, might not make good investments over time. Similarly, fundamentally good companies that make good investments, may not be the best choice to trade over the short to mid-term.
To understand this, a simple analogy would be a selection of your choice accommodation.
Is it going to be your forever home? Meant to be a source of passive income via rental yields? Or perhaps a short stay for a holiday?
Depending on what the purpose is, your selection criteria would naturally differ. This is no different from trading and investing. Before buying into a stock, you should know whether it is meant to be traded or invested.
By the way, it is not uncommon to come across individuals who are confused. They know that they want to profit from the stock market, but are unsure what their strategy is. They follow tips and recommendations, not knowing if it is for trading or investing, and much less have any exit plan in mind.
Don’t let this be you. Without clarity in your decisions, it might as well be a dangerous gamble.
Conclusion: How To Start Your Investment Journey
Will your pursuit of financial literacy become a victim of the Shiny Ball Syndrome?
I certainly hope not.
While it is not the easiest subject to comprehend, it is one that is worthwhile, if not necessary.
With all the information available, there are two possible negative outcomes:
(1) You get paralyzed and overwhelmed, and decide not to start after all.
(2) You are tempted to jump into the “how-tos” of it, only to realize you lack clarity in execution.
Whichever the case, let us adopt a systematic approach to this.
With this first article to kickstart the series on our guide to stock trading, I hope you take a step back to assess your current situation. More than that, I hope you will stick around to pick up nuggets of trading and investing knowledge which are helpful for your financial journey.
Can anybody start trading and investing on their own? If you’ve read up to this point, the answer is a resounding yes. Stay tuned to the next parts of the series as we adopt a systematic approach in guiding any beginner on this rewarding journey.
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