When I advocated for savings in my previous post, I did not say that investors should save their whole life and then die. The goal is to become financially independent, create enough passive income so an investor can stop working if he wishes and basically retire. However he needs to start somewhere first. It is my goal to buy enough assets, which will generate money for my mortgage, bills, vacation and savings. Jessie Livermore in Reminiscence of a Stock Operator says that it is a bad way wanting the stock market paying your bills. He says that his colleagues wanted the stock market to pay them for an expensive suit or whatever and they lost money instead. I see the point here, but I am talking about generating an income by trading stocks, stock options and commodities the same way as he did during his life.
Trading in the stock market is a business as many others. People do not see the market this way in many cases. They consider trading stocks very dangerous and risky. For about 80% of all investors it is a risky business.
The profit everyone can reach in trading stocks is equal to the risk the trader is willing to accept. The higher risk, the higher profit an investor can take. However every investor can get incredibly, awfully rich by trading stocks, he can get deep broke as well. Unfortunately all statistics show that the majority of investors belongs to the second group and they are responsible for it themselves. If any trader or an investor wants to make money in the stock market, get rich or trade for a living there is a chance on the market to make it. The first thing an investor should do is to consider the trading as a business. A business as many other businesses. An investor shall have his “company” (it can be imaginary one at the beginning) which trades stocks, stocks options and commodities, he would need a business plan and money management the same as other businesses. However unlike the conventional business an investor doesn’t care about overhead, employees, suppliers, clients, competitors, marketing and many other issues a conventional business does. Every investor can trade from his home or wherever she currently is – from a hotel on her leisure trip, from Europe, China, Brazil or wherever she can get an access to a computer and Internet. The only competitor and “enemy” in the stock market is the investor himself. He usually fights his lack of discipline and the way he treats the market.
Another advantage of this business is that unlike other businesses an investor doesn’t need a large starting capital. Today it is enough to start with $2000 or even smaller amount. It is better to start with larger one since a small account is riskier and it is earning smaller money. The ratio between the risk and the profit is too bad. For many new investors 2000 of dollars represent a large amount however. If an investor starts investing into mutual funds, and stocks which are less risky than commodities there is a great chance to become a successful trader. I do not recommend trading commodities at the beginning. Without proper experiences it is a sure way how to wipe off the portfolio. I did this mistake so do not repeat it. As a successful trader an investor doesn’t have to work 8 hours a day, it is enough to work couple minutes a day, however before an investor becomes successful in the stock market, she needs to work hard on her financial education, study a lot and practice a lot. Not everyone can make it however. Many new investors think that the stock market is easy money and they can get rich overnight without working.
The first step every new investor should do is to invest in his financial education. He should know about money, money management, risk management, savings, investing vehicles, stocks, commodities, how the stock market works and many other issues. By studying everyone can reveal the secret of making a lot of money in the stock market. However an investor shall avoid all mistakes and myths she can find during her stock operator career. I followed the same path as many unsuccessful investors. I didn’t know about investing anything and I started immediately even in commodities. I also believed that making millions in the market is a piece of cake and I can make it without any education, just buy low sell high. I also was trying to find the easiest way how to get rich overnight using my magical short cut. I was looking for information everywhere, asking for tips and suggestions, let brokers do my business and much later I realized that it is only my own education and experiences, which can make me rich. I paid a tuition for these lessons. A new investor shall be ready to pay his tuition too.
If you know someone who is already trading for a living and you would have the chance following such experienced trader, this wold be your best school ever. If you do not have such opportunity, the best way is to study books, attend seminars and paper-practicing your strategies prior starting investing with real money. I am a kind of person who do not like fake trading much when trading stocks. With virtual trading an investor can not feel the fear of loosing money because he actually doesn’t risk them. This is why I opened this small account and I do my practicing on it. I could afford it because I already know all basics how the stock market works, how to submit trade orders, how they are executed and so on. However testing the strategy I adopted I wanted with real money so I could test my psychological responses, which I couldn’t get with paper trading. However if a new investor doesn’t know anything about trading stocks I strongly recommend paper trading to get familiar with all basic principles. For example I have never traded stock options and I have no clue how to trade it. I do not know how to read option chains, evaluate options, etc. I am a person who like learning by examples and a real practice than just reading or listening to someone explaining how it works. This is why I opened a virtual account at CBOE and I started practicing and figuring out how option trading works. If a new investor is as green as I am in options, she can open her virtual account and try it first without risking her own money. A good web site is Investopedia and their Stock Simulator.
Trading stocks in the stock market is technically very easy. The most important and the hardest part on trading is investor’s own psychology. The greatest enemy of every new investor ever. All of the new investors make a lot of crucial mistakes in this field. The lack of trading records, money management, risk management, discipline and many other aspects, which are missing in most investor’s armament are sure ways to losing money. Many new investors don’t even think, it is important to have such management. Nobody can make money in the stock market without knowing risk and managing monies to protect the portfolio. I learned this lesson recently. I understood I need something, which would organize my trading, some rules and a risk management which would work and protect my account by strict following it. I found what I was looking for.