You don’t learn to walk by following rules. You learn by doing, and by falling over.’ – Richard Branson
Many people get attracted to the stock market considering it to be a quicker and easier way to earn money. The ease of getting started with trading makes it more believable for them. However, you must know that trading in the market is an overwhelming process. Anyone who has been through the process himself knows that it is a long journey wherein experience is the best teacher. It is a marketplace where you can achieve financial freedom only through years of experience and by learning from your as well as others’ mistakes. In this article, we have compiled some of the most common realizations or lessons that people have come to or learned after years of trading in this ever-shifting market.
Lesson 1 – Avoid stock tips from unauthorized sources
Every trader might have made this one mistake once in their lifetime – Acting on the stock tips. Even if you hear your friends/relatives/investment professionals talking about how a particular company will grow in the near future, a company is about to release a new product, a company is about to go bankrupt, or anything else, it doesn’t necessarily mean that their stock prices will fluctuate. So, you shouldn’t be going ahead and trading based on that tip. However, if you do come across any attractive tips, firstly, check the authenticity of the source. The next thing you should do is gather all the information about the company like its history, current performance, future aspects, and more. You should base your decision on all the details compiled rather than blindly following the tips.
Lesson 2 – Understand money management
One of the most important aspects of trading that people often tend to overlook is money management. But what is money management in the context of trading? It means managing your overall trading money and analyzing how much money you are ready to put at risk for one trade. For instance – you made a rule that
- You won’t use more than 20% of your capital in any trade
- Won’t take more than 10% of the risk in any trade.
In this case, even if the situation gets worse, you won’t be losing more than 2% (i.e. 10% of the 20% mentioned in point 1 above) of your overall capital. Money management doesn’t expose you to risks on a broader level, even if you are losing money in a single trade. Apart from this, it also brings consistency in your growth with time. So, if you manage your funds for trading properly, it is half a battle won.
Lesson 3 – Diversify your portfolio
‘Don’t put all your eggs in one basket’ – it is wisely said and fits perfectly in the world of trading. As a beginner trader, ensure that you don’t put all your money into one trade. Rather than putting a random amount in each trade, you can fix a certain percentage for each trade. Also, you can allocate a fixed percentage to each sector. For instance, you have decided to invest 25% of your overall trading capital in the IT, FMCG, Pharma, and Media sectors. This will help you set off your losses, if any, from one sector with the other sector. Moreover, to minimize risk, you can also decide to invest 10% of these reserved funds (25% of your trading capital) for a particular scrip in each sector. This diversification will not only reduce your risks but increase your chances of surviving in the market.
Lesson 4 – Don’t do sentiment trading
Being human beings we all have emotions. However, it is better to stay away from your emotions and follow a disciplined approach in the stock market rather than doing sentiment trading. But what is sentiment trading? It involves entering into a trade driven by your positive, negative, or neutral attitude towards a particular scrip. Your attitude towards this scrip can be based on multiple factors such as macroeconomic reports, fundamental analysis, world news, historic performance, sector-wise performance, and many other factors. If you enter into a trade because of your emotional reasons, you will be exposed to unnecessary risks and may result in trading not being aligned with your goals. If you feel you are about to go ahead with a trade based on your sentiment, the first thing you should do is block market noises and then think logically.
Lesson 5 – Don’t be afraid of losses
From a very young age, we have been taught to win and with that same mindset, we enter into the world of trading. But what if you lose big gains on a particular stock only because you were afraid to lose? As a trader, you should know and understand that losing is a part of the process of becoming a successful trader. If you don’t lose, you are probably not taking enough risks in your trades. Once you accept the fact that losing in trade is unavoidable, you will be able to deal with it more effectively and quickly without any emotional distress.
As John Bogle said – Learn every day, but especially from the experiences of others. It’s cheaper!
We hope that these important trading lessons about diversification, money management, and sentiment trading will help you invest your hard-earned money wisely. You should know that things happen, but you shouldn’t ever take these setbacks as a failure. Instead, you should consider this as a lesson for improving. Always remember one thing – you shouldn’t let the results of your last trade affect your next trade.
Disclaimer: This blog is exclusively for educational purposes and does not provide any advice/tips on Investment or recommend buying and selling any stock.