10 rules to help you trade stocks correctly



By Declan Yin // in Finance


Stocks are one of the most profitable investment vehicles. Unlike bank deposits with an average rate of 4–5% per annum, they can earn tens of percent per year, and long-term shares provide constant passive income. To start trading stocks on the stock exchange, you do not need to have a financial education or a lot of money.

How to trade stocks

To understand how to trade stocks correctly, check out these simple tips. They will help you avoid common investment mistakes and protect your money from market risks.

1. Determine your attitude to risk

The more an investor takes risks, the higher returns he can get. This is called the risk premium. According to the degree of risk, investors are of three types – conservative, rational and aggressive. The former react sharply even to a small loss, while the latter do not panic during price downturns and fluctuations. They are willing to take risks for high returns.

Determine your risk tolerance. Imagine what would happen if your investment portfolio depreciated by 20, 30 or 40%. Will you be able to calmly survive the drawdown or sell the assets.

2. Start stock selection

The more you are willing to take risks, the more you can invest in emerging stocks — growth stocks. Usually, these are companies that are engaged in alternative energy, IT technologies, biopharmaceuticals, and the production of unmanned vehicles.

Such shares can rise sharply in price, but are highly dependent on the market environment, news stories and general investor sentiment. Examples: Tesla, Amazon, Facebook , Yandex , Mail Group .

If you don’t want to take risks, choose blue chips – the largest companies in the market. Their business is crisis-resistant. Blue-chip prices do not rise as much as growth stock prices, but they do increase in the long term. Examples of companies: Gazprom, Sberbank, Rosneft, Coca-Cola, McDonald’s, Procter & Gamble .

 3. Start with a small investment

It is not necessary to invest large sums immediately. To find out how the process of buying securities goes, take a look at low-cost stocks. There are many well-known companies on the stock exchange whose securities are worth less than 2-3 thousand dollars, for example,  VTB, Tatneft , M.Video, Aeroflot , RusHydro, Severstal, Gazprom .

  4. Distribute money

For investments, choose 12-15 companies from different economic sectors. Two or three companies per industry. This is necessary to distribute the risks. Even if a global economic crisis breaks out, all industries will not fall immediately. Growth in some industries will offset the decline in others.

Industry examples:

  • Information Technology
  • Mechanical engineering
  • Real estate
  • Consumer goods and services
  • Raw materials industry
  • Telecommunications
  • Finance
  • Power engineering
  • Oil and gas
  • Green energy.

Also, don’t just stop at promotions. For even more protection, buy bonds. They are more reliable, but not more profitable than stocks. The higher the share of bonds in the portfolio, the lower the level of risk.

5. Divide the budget equally between the shares.

Try to keep the companies in your portfolio in equal proportions. You should not invest 50% of the total budget in one company, and divide the remaining 50% between others. If there are 12 companies in the portfolio, the share of the budget for each of them should be about 8-10%.

6. Invest long term

Long-term investors who invest money for a period of three years or more do not give in to emotions during market shocks. They calmly go through all the downturns, continuing to hold shares. If an investor sells securities in times of crisis, he will fix a loss and will not give a chance for prices to recover.

Historically, the market always overcomes recessions and continues to grow. For example, after the maximum decline in March 2020 due to COVID-19, the US and Russian stock markets recovered by the end of the year.

7. Invest monthly

Increase your capital by purchasing additional assets every month. To do this, determine a comfortable amount for yourself that you can spend on the purchase of stocks or bonds on a monthly basis. At the same time, do not invest all your savings, leaving yourself without money for basic expenses.

8. Don’t try to overtake the market

Don’t treat investments like a game of the lottery trying to outpace market returns. An investor who speculates on the rise and fall of the share price in the long run earns less than an investor who adheres to the buy-and-hold strategy.

9. Choose a broker and register on the exchange

Before you can trade stocks on the stock exchange, you need to choose a brokerage company . Because a private investor can invest on the stock exchange only through a broker – a legal entity that has a license for brokerage activities. You can’t trade stocks without a broker.

The broker opens a brokerage account for the investor , where all the investor’s transactions and assets are taken into account. To issue an invoice, fill out a short application, indicate your contacts and passport details. Everything is exactly the same as for a simple bank account.

Broker is the investor’s hands on the stock exchange . After opening an account, he gives access to his personal account, where the investor looks at all statistics on shares of different companies, buys or sells them.

Add money to your account with your card, find the necessary promotions in the catalog and place a purchase order. The broker will convert the money into securities, and you will become the owner of them.

 10. Watch the market

Look for new options for investing money. This is helped by investment ideas from brokerage analysts. Usually, brokers publish ideas on their websites. For example, at Tinkoff Investments they are placed in the “What to buy” section.

About the author, Declan Yin

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