What To Buy?
Now that you have some money burning a hole in your pocket and the stock market is going up you have decided to buy some stock or maybe a mutual fund, but you have the momentous decisions to what to buy.
At this point you have three decisions to make besides which equity to buy:
1. How much to buy.
2. When to buy.
3. When to sell.
Which of these is the most important decision? Let me tell you this as a professional trader. What to buy and when to buy are the two least important of these decisions. Maybe only 10%. I know that comes as a shock to you because everyone is trying to find that one perfect stock that will make him a millionaire almost immediately. It's not going to happen.
Trading is an occupation. Just like the business or profession you are in now it takes time to learn. There are certain basic rules that apply to every occupation. Most brokers and financial planners don't know them, but as a former floor trader I had to learn them or I could not have survived.
What to buy is the least important because there are always several good buying opportunities every day. When to buy is not anywhere as important and when to sell. Every professional trader I know will first determine the risk, his potential loss, before buying. At the same time he makes his buy he puts in a sell order called a stop-loss order to automatically exit the position should it go against him. He is not thinking about how much he will make on a trade. He is thinking about protecting his capital should he be wrong. Professional traders are right less than 50% of the time, but they never take big losses.
The loser's philosophy is always thinking about how much he will make and he refuses to face up to the very possible fact that he could lose money, a lot of money if he does not have a loss limit of some kind on his position. The loser is willing to be wiped out rather than admit he is wrong. Brokers tell you you have not lost money until you sell. Believe that and I will sell you my flying pig.
The other very important concern for your investments is how much of this stock should I buy. A good rule of thumb is between 10% and not more than 20% of your portfolio. Most mutual fund managers limit a risk position to about 5%, but they have other considerations. Never put all your money in one trade because it looks so good. That is super dumb.
Before you decide what to buy be sure you have in mind the amount you are willing to risk and the size of the position you wish to take (number of shares or dollars). When you have learned this you will be a successful stock market investor.