As a beginner who wants to enter the world of stocks and does not know where to go, it is somehow easiest to catch some of the “rules” without thinking too much. I intentionally put “rules” in quotes because you can’t trust them, and they are often mentioned in books, literature, and forums.
While most of these “rules” do work in certain circumstances, what distinguishes the successful from the less successful is to recognize the circumstances and know which rule can be applied.
As you read the rules you must always keep in mind the following: someone is on the other side of the transaction. Whether you are buying a stock or selling it on the other side is someone who thinks the opposite of you. If you buy a stock because you estimate it is cheap someone has to sell it. Why would someone sell stock cheaply? Maybe he needs the money, maybe he bought it while it was even cheaper,
Let’s go in order:
Buy low sell high – sounds logical doesn’t it? Buy a share for USD 50.00 and sell for USD 80.00. The point is to find a cheap stock to buy it and later sell it more expensive.
Buy expensive to sell more expensive ( eng. Buy high sell higher ) – that means buying stocks whose prices have already started to grow and market participants are is recognized as a good and start shopping. We are buying stocks that are on an upward trend.
The trend is your friend – since we still cannot make money when stock prices fall, this means that following this rule we should buy shares when the price of that stock rises. The upward trend is best seen from the price chart.
Buy more shares that bring you earnings (average up) – this rule means that if you recognize a good stock whose price starts to rise, buy more of those shares, as the price rises, so you buy even more of that share. In fact, you are adding to the one that is good and that you are making money from.
Do not add to losing positions, average down – do not buy a stock that is falling. Contrary to the previous rule.
Let the good stocks rise and bad quickly sell ( eng. Years of your profits run and cut your losses quickly ) – in other words, if you start making the section do it immediately sold. It’s a stock that makes you money and lets it grow and still make money. On the other hand, if you accidentally made a mistake and the stock started to fall fast sell it with a small loss as it could happen to fall even more, and then you will have a big loss.
Bulls make money, bears make money, pigs get killed ( bulls make money, bears make money, pigs get slaughtered ) – bulls are the name for those people who believe that the stock price will rise, bears are those who believe that the stock price will fall. Who are the pigs then? Ordinary people who have no idea what is going on and who end up losing money.
Unfortunately, bears cannot make money when stocks fall.
Buy a stock when you hear rumors sell it when the news is published or rumors sell on the news – this is one of the rules you may have already experienced on your own. You read a great newspaper article, ran to a broker, and bought stock to realize how it lost value the next day even though the news was favorable.
Why? Because the uncertainty is gone. Most often, the rumors that come to you are known to other investors and are already included in the share price, and the announcement of the news is sometimes an opportunity to sell the share more expensively to people who read the news. 🙂
Don’t catch a falling knife – when a stock price starts to fall sharply – don’t buy that stock. Wait for it to fall through and then consider a possible purchase. Otherwise, they could be taxed.
Look what he’s doing masses of people and do the opposite ( eng. Watch the masses and do the opposite ) – if everyone is buying shares I should I sell?
There’s a lot more to it these are just some of the most common I’ve come across. Let me also mention the rule not to run after a stock when the stock price starts to rise sharply. Don’t buy it because you could be the last to buy it at the highest price. Upon closer analysis, you realize that the rules are impossible to apply literally and that some of them are mutually exclusive. Let’s say don’t follow the masses is just the opposite of the rule that you should follow the trend.
As a beginner, you have to decide whether you want to be a long-term investor and invest your money to fertilize it over the years, or you are a trader who wants to make a difference in price by trading or buying shares often. These are two quite different approaches and you don’t necessarily have to opt for just one approach.
For example, you can invest most of your money in quality companies from which you expect to make a profit in the long run, and you trade with the other 20%. So when you lose money, and you lose it for sure, at least you won’t lose everything.
As an investor, you are looking for quality “cheap” or undervalued companies that make a profit and do great business, but for some reason are not yet attractive. As a retailer you don’t care too much about the quality of the company and the only thing you care about is price movements and how to make a difference.
In my opinion, trading is a much harder and more demanding way to make money than investing, but it is more popular because we see results faster and because people are impatient by nature. Who has the time for a month or longer to study the business of an individual company to buy a stock and then wait 2,3 or 5 years? Everyone would like money now and for something to “happen”.
For both ways, it is necessary to invest a lot of time and effort in your own education, and if you are wondering which share to buy to start with, set aside approximately 1,000.00 dollars and get a few books. The best money invested by any beginner.