Buying stocks – money management tips to help you succeed

If you are really and utterly excited by the idea of buying stocks and making a profit from them then here are some tips and advice you can use to help you make your excitable dreams a reality. Most people will be utterly terrified by the idea of putting their own money into the stock market, but it’s like anything in life – you get out of life what you put into it!

I’m afraid to say that it all boils down to a good bit of old fashioned hard work. Yes, real and utter graft where you roll your sleeves up and break out into a bit of a sweat. Yep, if you want to know how to buy a stock, then it’s gonna take some real detective work and advice to help you unearth golden nuggets that you are prepared to give a go.

Perhaps you’d like to close your eyes and randomly point to any stock on a list. Sure, it might work but it’s what you may call a bit “random”, and is not really going to have any defined guarantee of success.

You could choose to find the larger companies such as Coke Cola etc., who traditionally grow year on year but perhaps only by a small amount. You’d have to work out if these stocks are any more profitable than putting your money into a savings account in the bank.

In order to buy stock, you need to look at certain facts and indicators relating to certain companies.

Knowing the path to walk is half the battle, the rest of the battle involves you putting your shoes on and starting to walk along that path. If you randomly go for a walk in the desert then the chances of coming out alive may well be slim! This is the same as “hoping for the best” when it comes to buying stocks, so don’t get upset if this method does not work for you!

If however someone gave you a compass, instructions and a detailed plan of what to look for, when to turn left, when to turn right (etc.) then your chances of seeing civilization once again are rapidly improved.

If you need a more detailed step by step then I can highly recommend the System Pro Trading stock market e-course and video series.

So without further ado, shall we begin?

Let’s start by saying that right now you MUST practice many many times before you take the plunge and lose all your money. It can and does happen and countless people have wiped out their entire life savings trying to chase the dreams, always looking for the next “big thing”. Buying stocks is an art, but it is an art which can be mastered by anyone who is committed enough to make it work for themselves.

There are many psychological barriers that you will have to overcome and there will be numerous times when your spirit is challenged so that you are left wondering what to do. If you play it safe and follow these tips then prosperity can come. It’s not an impossible dream. If you really do want to get involved in buying stocks and selling stocks then give it a go!

What sort of trader do you intend to be when buying stocks?

If you are a short term investor (taking many trades each day) then you are going to have to be very quick to react to changes in the markets and you are going to have to be glued to the screen (unless you’ve got software to help manage your trades, stop losses etc.), whereas if you are a long term investor, you can afford to do much more in-depth research and take your time, and it is this second approach that beginners should consider, especially during the first few months or years while you refine and hone your skills (and they will come if you work them slowly and methodically). Buying stock can actually be a lot of fun, especially when all the indicators tell you that you’ve got it right, and it turns into a profit for you.

Money management

This is the big one, and one of the most important lessons you must master – even if you think you are a normally sane and conscientious person, it’s weird how we can react when faced with stressful dilemmas.

Overall, people will have their own opinions but if you trade no more than 5% of your capital on a single trade then this approach will help steer you for many months ahead, especially important when you are learning the ropes. It’s times like this that can lead people to think that buying stocks is impossible, but yet others find their niche and discover a whole new exciting world awaits them. Which camp are you going to be in?

If you have a large enough lump of money to use as your capital sum, then when buying stocks you may even wish to reduce your “exposure” to risk, so that no more than 1% to 2% of your capital sum is used in any one single trade. This buys you time and a more contented life, which is very useful when the chips are down and the trade is going against you.

What you will need to do is set up a “stop loss” (automated exit from a trade based upon a key set if criteria you give it) so that you are taken out of the trade if a certain amount of loss (or profit) is made. This is good if a big swing downwards happens, at least you won’t lose all your mind and money and can play again real soon! The only downside is if your trade is stopped when a big swing up happens. You will be kicking yourself because you will have wished you had ridden the ride all the way to the top of the trade and enjoyed the bumper profits that go with it.

This is the emotional roller-coaster I mentioned, and is precisely what you need to curb because it’s the kind of emotion that can lead to painful mistakes, so if you only make a 2% profit and could have made 40%, then do not worry – your goal was achieved, and you can feel smug with yourself knowing that you’ve worked a safe and consistent plan which will enjoy the upper hand in the long term.

I hope you agree that when buying stocks, the safe option sounds the most fun (well, most of the time anyway!)

The only thing to remember with a stop loss is that if a big drop occurs overnight then you are going to have problems and won’t be protected, so that is something to consider.

If you are thinking of being an options buyer then you can purchase what is known as a “protective put” as this will help protect you more.

Now, back to what we were saying, after all you’d really like to know all the ins and out’s of how to buy and sell stocks wouldn’t you? Let’s assume you are playing it ultra-careful and only wish to invest 2% of your capital on each trade. If you do this, then no stock can take you below the 5% loss threshold.

Buying at these small prices allows you to buy extra positions of larger sizes if the stock reaches a second buy point, and so thus you turbo boost your earnings – sounds good doesn’t it! Simply buy more of the stock when the breakout point occurs, or conversely, if you are more of the sort of person who likes to buy in the dips then simply go ahead and buy whenever the stocks dip further down.

Limit purchases when buying stock.

If you have set yourself up to be a responsible investor who wants to make buying stocks as safe as possible then you should think about setting limit purchases. This essentially means that you can purchase stock quickly as it dips below a particular threshold of your choosing (and thus offering the ability to boost your earnings further).

You might want to accumulate a position and continue to purchase every 2% drop from your last purchase. As an alternative you could make it so that the purchases are staggered. With this method, when the first 2% drop occurs, you buy more stock. Then if you wish, at say 5% below that you could go ahead and buy another 2%. Keeping diversified allows you to continue to buy stock in any one particular stock without exposing your risk any more.

How to set out your stock buying portfolio

It’s important to bring a sense of good diversification into your portfolio as you really do want to be in the game for the long haul and not lose all your money within 3 months. You could (but shouldn’t) put all your investments into the technology niche, or Utilities niche but this would be foolhardy. Nobody can predict what will happen down the line. Scandals can happen, natural disasters can happen and if you’ve not yet thought about it properly, then chances are you will get caught out.

Here is an example of how you MAY decide to set out your plans:

• Consumer goods: 10% of portfolio
• Healthcare: 10% of portfolio
• Technology: 10% of portfolio
• Utilities: 5% of portfolio
• Industrial goods: 15% of portfolio
• Basic materials: 10% of portfolio
• Financial markets: 10% of portfolio
• Cash: 20% of portfolio
• Service: 10% of portfolio

All of the above adds up to 100% of your money, split well between the various industries and sectors of life. It’s good to protect your money. Imagine if technology got crippled by a virus – your technology sector would get hit, and thankfully it won’t wipe out your entire portfolio.

If you are only placing 2% of your money into any one stock, then within, for example the consumer goods sector, you could choose 5 different stocks which when added together come to 10% of your money/portfolio mix. Of course, rules can be changed a little. You don’t have to have five of each type – you could choose one really promising stock to buy and put 10% into it, although more diversification will always be better in the long term. Less is best is one adage you must adhere to when it comes to buying stocks.

You can also place more into one particular sector if you wish, just be sure to make sure that sufficient research has been carried out – if you are under any doubts then play the long and slow game and expose no more than 2%!
Use the many tools online to help you whenever you can. Setting certain restrictions on purchases can really help you in the battle.

If your position drops a lot, then you can use a “limit buy” to purchase more stock. This enables you to increase the amount of exposure to the stock you hold when the position decays from, say 10% to 5%. Then you can increase your cash positions when buying stocks to increase your stake in other areas of the market.

When your positions start to gain, you can choose to sell the stock if you want to, and even set it up so this aspect of stock buying is automated so that stocks are sold when you reach certain positions. Alternatively just go for what is known as a “trailing stop” and you will be able to ride along the wave when your stock is making new gains – this is the most fun part of buying stocks and stock trading – making money!

If you set your trailing stop at 20% (for example) then this means that your stock simply will not sell unless it goes down as far as 20% from it’s highest gain. This buys you more room for the small ups and downs you will encounter and enable you to stay in the game for longer without losing your shirt and mind in the process, let alone your money!

During the journey/rally, if your profits start to increase in a large way then it makes sense to tighten the belt that holds the trailing stop. What I mean by this is that you might ant to change it so that it stops at 15% instead of 20%, and continue on so that when you’ve eventually made a massive gain you will have dropped the percentages down to 15% to 10% and finally 10% to 5%.

The only time this method will struggle to work is if the stock market crashes (and we all know how that story can go!), so learning more about strategies for hedging should be something to look at a little bit more closely. Buying stocks can be as easy or as hard as you want it to be – you don’t want to lose it all in a moment of madness though, so slow and dedicated practice is vital.

Never ever invest money until you can safely make a good percentage of winning trades. Does it matter if it took you as long s 2 years to get there? Heck no! Do it right and you can create a career out of doing this. Do it wrong, greedily and impatiently and there is a good chance you will be pushing the idea to the back of your head, claiming that the method does not work – how sad, and really, there is no need for it. Buying stocks can make or break you – you decide.

So to start the ball rolling, begin looking at the fundamentals of various stocks. As well as this you need to know about choosing the right stockbroker and of course follow these sound money management principles and you will be ahead of many other people who have tried to walk this path. It may look exciting but there are a whole heap of hidden dangers waiting to take all your cash away from you.

I appreciate that this has been a lengthy article but sometimes certain messages need to ring out loud and clear. Buying stocks and shares will be as easy or as hard as you choose to make it.

Keep looking out for rising companies in various sectors and look at their fundamentals. You may see another company to invest in, and further diversify your portfolio when buying stocks.

Using stock screeners, you can actually limit each screen to various sectors so that only the top few can be focused on more readily by you. This helps you solidify your thoughts and come to meaningful conclusions that make all the difference.

Learning about all the companies and finding out facts about them can be time intensive but incredibly enthralling, so if you are ready to delve in to the murky world of stock buying, I hope this has really helped in some way.