You Choose How Much You Risk On a Stock

Always a great suggestion for when you are starting out, after having paper-traded for a while (trading with fake money as you practice a strategy), you can begin by opening a small account.  Many brokers allow you to open with very small accounts, often as low as $250 according to what I’ve seen.  The mantra is ‘never trade with money you can’t afford to lose’.  If you feel like $500 might be a good amount to start out with, you can give that a try.  Just make sure that if you somehow lost it all, it wouldn’t be totally devastating to your financial well-being. How do you prevent losing it all? I’ll talk about that briefly in the next section.

You Can Cut Your Losses Short Using Stop-Losses

Contrary to any type of ‘crash’, be it big or small, when you are doing your own trading you are able to assess your own risk tolerance, and place trades accordingly.  Let’s compare this to say, your 401k or a mutual fund you might have some stake in. Somewhere around the end of 2008 the stock market began to tank pretty bad. Many people had 401k’s or owned mutual funds that were affected by this. After polling a few open friends about this, it seemed to me that many saw losses up to 40 and 50% of their portfolio! On the other hand, those such as myself who take care of their own retirement are able to set what is called a ‘stop-loss’ on any given trade that will pull it out when it reaches a certain point.  As an example, if I had $20,000 in my account and had one trade open, I would be able to set a stop-loss that might close the trade if my account balance reached $19,000, making it so I would suffer only a 5% loss.  A far cry from the 50% that some people have seen recently. It’s this exact reason why I don’t understand why some people claim that trading your own money is more dangerous than things like mutual funds or 401k’s.

Buying Stocks is a Very Simple Process

Lastly, I think that some people are turned away from the idea of buying stocks because they think that opening a trading account will be a difficult process.  This simply is not true.  As I remember, the last time I opened an account it was all done online, and was only a couple of pages.  Most of this was material that you are supposed to read, with a few spaces to fill out. After that it takes about two or three days to be approved, and you can find yourself trading in no time.  You are able to deposit money into your trading by sending a check or by bank wire, and in some cases you can even fund your account with a credit card. Withdrawing money? That is where all the fun is.  You can also do this in the same way; a check to your doorstep, or bank wire.

A Lack of Trust

Frankly, I don’t trust in the fact that some stock broker out there can get me any better of a return that I can do myself.  This has never proven to be the case in the past. There are people who have been working for twenty, thirty, forty plus years, and who have seen almost half of their life-savings dwindle away within a matter of mere months.  I would never, and I mean NEVER allow that to happen while I am vigilantly watching my own portfolio.

We Are a Resilient People

Mostly however, I will continue to buy stock for that reason.  This is a great country; not the only great country in the world, but it is definitely a great one.  I understand the ebb and flow of the markets. Just before things came tumbling down we were experiencing a large real estate bubble.  Those things can’t go on forever, and in fact many people and hedge funds predicted that and capitalized on it greatly. An economy cannot continue to strengthen forever; you would begin to see serious inflation. There are times of recession, times of depression and times of economic boom.  Luckily, when you are trading your own portfolio of stocks, you can take advantage of it all.

Buy Low, Sell High

I almost hate to write the above-written title, because it almost sounds as if I’m saying “what goes up must come down”.  I am NOT saying that, and happen to know that markets trend.  Stocks tend to go up and tend to go down longer than you think they will.  Trying to buy a stock that is tanking downwards is like jumping in front of a steaming locomotive.  A very bad idea. Nevertheless, many stocks are at all time lows, and over the next months and years, as things in the economy begin to improve stock prices will surely have a good chance and rising once again.

Fine, I can see where you are coming from.  But there is more to it than that.  First of all there is the lack of incentive. A stock broker is going to make money whether you do or not. This is very different than say many hedge funds, who take a ‘performance fee’.  These types of funds will earn a percentage of the profits that they make you each year; a far better compensation plan in my mind. The incentive to do well is clearly there. This would put many stock brokers out of business.

If you are not buying stocks yourself, you have very little control over your financial future. I know I keep harping on the same examples, but I doubt that you do not know one person who has lost a huge chunk of a 401k or a mutual fund that they owned.  It is all over the place.  Stock trading for yourself is no guarantee of course, but there are so many checks you can put in place to prevent the sort of things that many people have had to go through, often shortly before their planned retirement date, only to have to postpone that for a few more years (or many more years).

Decide today that this scenario is not going to happen to you.  Buying stocks is not as difficult as it seems. People ask me all the time if there is someone that I DO trust to help with this. Yes, there is.  Very few out there, but I have become acquainted with the rare few. One such service is a company called Doubling Stocks.  Although I will always trade on my own, both because I love it and because I have done well, I will occasionally try out other service to see how they do. Doubling Stocks is one company that has really impressed me. I cannot say enough good about them, and you of course are welcome to check them out for yourself.

1. Decide how much you will risk – Open your trading account with an amount of money that if you were to lose it all, it would not ‘break the bank’, so to speak.

2.   Use proper money management – To avoid the above scenario from playing out, make sure that when you are buying stocks you only risk a small amount of your account per trade. This amount varies according to who you ask, but I don’t ever like to risk more than 1% on my main account.

3. Learn what kind of trading will work for you – You might decide that long-term, position trading is best for you, or that you just want to swing trade, holding positions for a few weeks at a time. Maybe you realize that day-trading is right for you.

4. Paper trade it first – Before you ever take a trading system to the real market, make sure you paper trade, or use fake money, first. Let the system prove itself, then begin with smaller amounts of money.

5. Have a second, more aggressive account (optional) – This one truly is optional, but something I have done, and have really liked, is having a second trading account where I started with about 25% of the amount of the original account. In this account I take the exact same trades, but am twice as aggressive. I risk 2% per trade here, but the rewards of course are twice as much.

6. Take profits from time to time – Buying stocks is not all about saving up for years or decades down the road. Use some of your earnings for living expenses, or for fun. It makes you realize that you really are dealing with money, and not just a virtual account of ‘nothing’. Treat yourself.

7. Be smart, always test – Continue to fine tune your trading abilities. Buying stocks is all about staying ahead of the markets, but know that things change. Sometimes the market is bullish, other times it is bearish. Make sure you are always aware of what is going on when you are buying stocks, and before you sell them as well.

There are many different brokers online, but I would suggest taking a good look first at some of the larger, more well-known ones. They are often this way for a reason, and have years under their belt of building a good reputation for themselves. Also, be on the lookout for deals. Often times brokers will offer you a certain amount of free trades when you start out, some will give you cash when you open an account with a certain amount of money, and others simply have cheaper rates per trade than the rest of the bunch.

Make sure you look into things such as extra fees. Some brokers will charge inactivity fees if you don’t place a trade within a certain amount of time. Get an idea first of how often you intend to be buying stocks, and then make this decision based on that. A couple of the more well-known brokers are:

Ameritrade

Scott Trade

E-trade

Of course that list is far, far from all-inclusive, but should give you a good starting point if buying stocks is something that you think you will be taking seriously.

Make Sure You Know What You Are Doing

My last bit of advice would be that. Before you go and invest your life savings into opening an account, thinking that buying stocks is what will take you to retirement ten times earlier than you originally planned, make sure you learn the ropes. Make sure you know everything about your broker, what they allow and don’t allow, and also make sure you are constantly learning about the stock market. It is constantly changing, and things that worked ten years ago might not work today. There are countless books available to you to teach you both the basics and finer, more advanced points of stock trading. Take advantage!