Thinking About Trading Stocks? Keep These 5 Things in Mind

With the recent headlines about companies such as GameStop (GME) and AMC Theatres (AMC) making their way into the mainstream news, many people have become interested in the stock market. Stories are being told of average people making life changing money by investing in the stocks of these companies. On its own, the explosion in GameStop’s stock price will go down in infamy as one of the largest short squeezes in history. Retail investors are making millions and hedge funds are losing billions! This has all raised a renewed awareness to average folk like you and I about the power of the stock market and the possibilities it holds to increase wealth and create opportunities. However, it’s important to keep a few things in mind if you are new to investing in stocks and itching to get some skin in the game. These concepts will help you to avoid any unnecessary stress and headaches. As well as helping you stay out of any financial struggles caused by bad decisions. So let’s get to it.

First, remember to never invest more money than you are willing to lose.

How much of your hard earned dough would you be willing to, let’s say, throw in a fire pit? Or many put through a paper shredder? It might seem extreme but you must realize that there is NO guarantee in anything when investing in stocks, especially if you are buying individual company shares. When buying a stock one of three things can happen. First scenario, the stock doesn’t change price, in this situation you neither gain or lose money unless the company pays a dividend, and you only get that payout if you hold the stock for long enough. Second scenario, the stock goes up in price. Congratulations, you now own something that is worth more than what you bought it for, that’s hard to do with most things you purchase in everyday life. Third scenario, the stock loses value and you’re stuck with something worth less than what you bought it for.

This is where the “don’t invest more than you are willing to lose” idea comes into play. You see, the beautiful thing about stocks is that they can, in theory, go up infinitely in value. But they can only go down to zero. In short, you can only lose as much money as you put into a stock, but you can make a limitless amount of money on the upside. Again, this is all theory. In reality a stock can’t go up to infinity, that’s not how money works, but the idea is that there is limited downside risk and unlimited upside potential. So the point is, never invest more than you are willing to lose, because if what you buy goes to zero, you still need to pay the bills.

Second, you probably can’t beat the market, at least not consistently.

Sure, there are stories of people making bank on Bitcoin, GameStop, Amazon, Google etc. But those who did are few and far between. You always hear about the winners, but very rarely the losers in these situations. The investors who make tons of money on stocks are those who either got in early on a wave, got lucky on a hunch they had, or had some kind of insider knowledge about a company. Truth is, nobody has a crystal ball to see into the future. There are thousands upon thousands of paid professionals working for large corporations who have spent years studying finance and markets that analyze stocks on a daily basis. If you think that you can outsmart these people or that you know something they don’t, then i say good luck to you. Again, this doesn’t mean there aren’t good opportunities that you can find or good bets you can place. But the tools at your disposal are like sticks and stones compared to the artillery of these large institutions.

Studies have shown time and time again that only a very small percentage of investors can beat the overall market performance year over year. Even the best mutual funds in which financial professionals trade stocks often don’t beat the market over the long term, especially if you take into account the fees and costs that go into such a fund. This is mainly because, like I said before, nobody can see into the future. Nobody knows for sure what a stock will do tomorrow, let alone a week, month, or year from now. So don’t expect to be smarter than the market.

Third, investing in stocks is not a get rich quick scheme.

Although there are a few exceptions, if you look at the majority of investors who have made their fortune through the stock market, most of them have done so over the course of their entire life. Figures such as Warren Buffett, Ray Dalio, and Benjamin Graham have created enormous amounts of wealth by consistency making smart investments and following certain principles over decades of holding stocks. However, on any given day you might take a look at stock prices and notice that some companies can increase or decrease in value by 50% or more. You might think to yourself that if you could just trade these companies everyday for a month you could turn $1000 into millions of dollars. But that is extremely unrealistic. The investors who take advantage of those huge price swings are often those that study specific industries or businesses for hours and have a full understanding of what is happening within that field. They usually also have a good amount of capital at their disposable to throw at these stocks and often times a huge amount of risk tolerance, aka, “balls of steel”.

Consistently, investing in stocks generates wealth over longer periods of time. The overall U.S. stock market has gone up in value over that last several decades while some business have not. Sure, you may be up on your investment 50% today, but that’s not to say you won’t be down 75% tomorrow. It’s always best to stick to a long term outlook when investing in stocks.

Fourth, you only gain or lose when you go to sell.

Unlike most other things, when you buy a stock you can see the price of it change in real time. You can become addicted to watching the minute by minute fluctuations in price, and this can be really exciting, or gut wrenching. The difference between buying a stock and let’s say buying a car for example, is that when you buy a car there isn’t a little screen on the dashboard that shows how much the car is worth. After driving around for a few weeks and seeing the price of your car slowly declining, you might start thinking about selling the damn thing. The same can be said for stocks, except there is a screen that constantly shows you how much it is worth. But the important thing to remember is that as long as you own a stock, you have neither gained or lost money until to sell it. As long as you still own the stock, the value of it can still go up or down. That’s why you can’t really say whether or not you have “lost money” or “made money” in any given day if you haven’t sold anything.

There have been too many investments I have made in which I buy it one day, see it go down the next day, and sell at a loss. Only to see the price go above what I originally paid for it just a few days after I sell. So keep in mind that when you see the price go up or down, you haven’t actually realized any gain or loss until you sell.

Fifth, the market does not care about your feelings.

Made a lot of money, lost a lot of money? Who cares? The answer is “not the market”. Sure YOU care, and maybe some of your family or loved ones might care, but the people buying and selling in the financial markets sure don’t care. On any given day there are millions of people making and losing money. If you’re in a bad money situation and you feel like the market should have sympathy for you and the stocks you own, well then that’s too bad, because they don’t. Emotions have no place or role in the stock market. You should NEVER trade a stock based on your feelings and you should never buy or sell because of your feelings. The hardest part of any break up with a significant other are the emotions you feel afterward. Emotions can cause us to do stupid things, whether it be in our personal lives or financial lives. Don’t get into a relationship with your investing.