Stocks offer investors the greatest potential for growth (capital appreciation) over the long haul. Investors willing to stick with stocks over long periods of time, say 15 years, generally have been rewarded with strong, positive returns.
The primary reason most people invest in stocks is the potential return compared to alternatives such as bank certificates of deposit, gold, and Treasury bonds. For example, the average stock market return has been about 10% annually since 1926; long-term government bonds have returned 5% to 6% annually during the same period.
Stock market’s returns often significantly outpace the rate of inflation. For example, the long-term inflation rate has run about 3.1% annually since 1913. That compares to a double-digit annual return from stocks. Stocks have been a good way to hedge against inflation.
Many companies pay dividends, or a portion of their profits, to investors. The majority make quarterly dividend payments, although some companies pay monthly dividends. Dividend income can also help supplement an investor’s paycheck or retirement income.
Most stocks trade publicly on a major stock exchange, making it easy to buy and sell them. It also makes stocks a more liquid investment compared to other options such as real estate investments that takes time to sell.
Traders should develop a plan to maintain a disciplined and systematic approach to their trades. Also, a well-defined trading plan helps remove subjectivity from trading decisions. A trading plan incorporates risk management strategies such as setting stop-loss orders and determining position sizes based on risk tolerance. Without a plan, traders may expose themselves to excessive risk or fail to implement appropriate risk management measures.
Determine financial objectives, risk tolerance, and time horizon.
These items need to be clearly articulated to ensure that your trading activities can be achieved.
Determine trading style. It can include day trading, swing trading, position trading or long-term investing.
The chosen style should align with one’s objective.
Create a detailed strategy. This strategy outlines an approach to the markets. Also, a criterion for trade selection needs to be defined. This can include technical indicators, fundamental analysis or a combination of both. Finally, when building the strategy, entry and exit tactics, risk management techniques, and position sizing rules need to be specified.
Set a Realistic Goal. Trading involves inherent risks. Realistic expectations for returns need to be set and the potential for losses needs to be recognized. Avoid the trap of chasing quick profits or risking too much capital on a single position or trade.
Conduct thorough market analysis to identify potential trade opportunities. Analyze charts, study market trends, news and monitor economic indicators. Take a step back and consider the overall market condition.
Implement risk management strategies to protect the capital. Allocate a percentage of the portfolio for each trade and do not go above the amount which have been set and willing to lose per trade. Make use of stop loss-orders to limit potential losses and establish clear take profit targets to secure gains.
Determine how you will manage open positions. You should determine when to adjust stop-loss orders, take partial profits (possibly using trailing stops), or exit the trade entirely.
Stick to the trading plan. Do not abandon the trading plan impulsively because the market is doing something that elicits an emotional response from you like fear or greed. Embrace discipline and consistency when executing and exiting trades.
Record the trading activity, including entry and exit points, reasons for taking the trade, and the outcomes are essential. A frequent review and evaluation of trades is necessary to becoming a good trader. The evaluation and review of past trades will enable a trader to identify patterns, strengths, and areas for improvement.
Stay updated on market trends, economic news, and new trading techniques. Read books, attend seminars and webinars, follow reputable financial news sources, and interact with experienced traders to enhance your knowledge and skills.
