1. Learn the Basics
Familiarize yourself with the following basics before making your first purchase.
• Definitions – Price earnings ratio (P/E ratio), earnings per share (EPS), return on equity (ROE).
• Stock Selection Methods – fundamental analysis and technical analysis (moving averages).
• Order Types – market orders, limit order, trailing stop loss orders.
2. Set Long-Term Goals
Identify your motive in trading stocks – increase your retirement nest egg, save for college, purchase a home, payoff mortgage, or leave estate for your beneficiaries.
3. Recognize Your Risk Tolerance
Do you get stressed out at the first sign of trouble? Can you take stress when the market tumbles? Risk tolerance is rather psychological. Yes, genetics play a part but environment, education and age join in. Young investors can take more risk while seniors should be more conservative. We are all different. There is no right balance. For example, I’m a grandpa but risk is not a primary factor when I choose stocks. It’s value (undervalued stocks) and upside (for the next 12 months) that I care about.
4. Control Your Emotions
If you panic and sell when stocks dive, you don’t belong in the stock market. You end up buying high and selling low – the exact opposite of buying low and selling high to make money in the stock market.
5. Understand Bears And Bulls:
A person who feels negative about the market is called a “bear,” while another who feels positive is a “bull.” There’s constant clash between the bulls and the bears that’s manifested in the rise and fall of prices. These short-term movements are partly driven by, you guessed it – emotions from rumors, speculations, and hopes, rather than logic and a systematic analysis of the company’s assets, management, and future growth. Understand these movements and take advantage.
6. Diversify Your Investments
There’s that typical adage about the dangers of keeping all your eggs in one basket. This is true with stock investing. Placing your money into one stock can be dangerous when that particular stock dives. Diversifying into several stocks in several sectors in several countries mitigates the risk of losing it all. Of course one stock can go down at some point but other stocks also go up to make up for that stock. This is why diversification is important especially in your first years of investing.
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Victor Santos Sy graduated Cum Laude from UE with a BBA and from Indiana State University with an MBA. Vic worked with SyCip, Gorres, Velayo (SGV – Andersen Consulting) and Ernst & Young before establishing Sy Accountancy Corporation in Pasadena, California.
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He has 50 years of experience in defending taxpayers audited by the IRS, FTB, EDD, BOE and other governmental agencies. He is publishing a book on his expertise – “HOW TO AVOID OR SURVIVE IRS AUDITS.” Our readers may inquire about the book or email tax questions at email@example.com.