3 Skills to Make Investing for Beginners Child’s Play
Lego is one of the most popular building games on the planet. You take lots of individual blocks and create something unique. Your imagination is just about the only limitation.
It may surprise you that a successful share portfolio isn’t all that different.
You see, beginner investors need to connect a series of “blocks”. This provides the framework of their strategy. Connecting them together is at the core of a profitable portfolio.
So what are these blocks?
Well, they involve three questions, each one aimed to make stock market trading easier for beginners:
1. How much will you invest in each stock?
2. When should you buy?
3. How will you decide when to sell?
Think of each question as a block of Lego. You then connect the blocks to create a plan for buying and selling shares. And just like Lego, good connections can lead to outstanding results.
Let’s go through each of them…
How much should I invest in stocks?
First up, you need to decide how much money you’re willing to invest in each trade. This will directly affect how much you could lose.
There are several ways to do this, and I won’t outline them all today. The point of this article is to get you thinking about the questions — not the specific strategies.
Many investing beginners stumble from stock to stock without any real plan. Their decisions around how much to invest are often more gut feel than strategic.
The problem these people face is consistency. Their performance relies heavily on getting the bigger investments right. It only takes a few large losses to ruin an otherwise good year.
A popular beginner investment strategy is to invest the same amount in each stock. This helps spread risk evenly. It’s also less likely you’ll invest too little in your best stocks, or too much in your worst.
Another method is to use a set percentage. This approach invests an equal percentage of capital in each stock. Many professionals use this strategy.
The percentage method involves a few more calculations. But the advantage is that it dynamically adjusts the size of each investment according to changes in your capital.
When to buy stocks
Many investing beginners focus all their attention on when to buy. They believe entries are the key to a profitable share portfolio. In their eyes, nothing else is as important.
But this isn’t true.
Your entry strategy is only as good as the “blocks” it connects too. Even the best buying tactics are useless without the other blocks. It takes more than a fancy front door to make a house.
But in brief, one professional approach is to trade with the trend. This involves buying as prices are rising. This can potentially increase the odds of investing profitably.
Strength is also an excellent screening tool. By only focusing on stocks that are rising, you automatically avoid many under-performers. This helps narrow your choices.
Deciding when to sell a stock
You need to decide:
1. When to sell a losing investment, and
2. When to sell an investment for a profit
Exits are hugely important. Nothing else has more impact on your results.
Many professionals use a pre-set exit point or stop loss. There’s no second guessing what to do if a stock’s share price falls to this level… you get out of the investment.
Letting losses run is a sure-fire way to fail. A stop loss is your safeguard. It helps protect your capital when a trade goes into reverse. Think of it as a line in the sand your stocks can’t cross.
Selling a profitable investment is just as important.
One of the biggest mistakes people make is to take profit too soon. People who cash-out early never get the big gains. They sell every winner before the shares really get going.
Many professionals avoid this problem by letting their winners run. They also set a “trailing stop” to act as their selling point. This helps them maximise profit, and exit when a stock falls.
This short video explains trailing stops in more detail:
Again, there are other ways of deciding when to take profit — there’s no Holy Grail. The key is to find a method that works for you, and then follow that process consistently.
Where to invest now?
Learn how to identify some of the best stocks to buy in this free video training. You'll learn a complete trading process for buying and selling shares with confidence.
If you're ready to get started, try a no obligation one month trial of Motion Trader, and see what a professional trading approach could do for you.
I'm Jason McIntosh, the creator of Motion Trader. My career began in 1991 on the trading floor at Bankers Trust. Nowadays, I trade my own systems from home in Sydney.
Motion Trader is for investors who value robust analysis, data driven entry and exit signals, commentary, and education. I use engineered algorithms to identify when to buy and sell ASX stocks. No biases or guesswork, just data driven signals.