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4 Things to Know Before You Trade a Single Stock

By: Allison Brown

 

Asian investor analyze, update the change of stock market on laptop

Stock market trading can be an excellent way for business owners to supplement their income and plan for their financial future. There is always some risk involved, as with any investment. But a careful, strategic approach can take the profits you take home from your business and turn them into more.

To this point, we have previously covered some of the ways in which business owners can profit from the stock market. Diversification, mutual funds, and low-fee arrangements, for example, can all put you on a path toward low-risk, gradual gains. Those strategies still stand today. But in this follow-up, we’re going to step back and cover a few of the things you ought to keep in mind before you even start trading.

1. Your Emotions Have to Go

This is a basic but all-important principle of investing. Simply put, if you allow your emotions to dictate your decisions, you’re likely setting yourself up for failure — or at least for a less rational investing effort.

If you’re excited about a business success, don’t recklessly invest with a sense of optimism; if you’re worried about a personal financial difficulty, don’t approach the market with a sense of desperation; and perhaps most of all, don’t make trades or buy into funds because of personal feelings you might have toward related assets or companies.

All of this is easier said than done. But for the most part, it comes down to self-awareness. As one financial advice expert put it, it comes down to understanding emotional triggers that each of us might have, and which might affect our trading. Try to figure out what triggers your emotions, and learn to ignore it with regard to investing decisions.

2. The Apps Work

If you’re only just exploring investment options, it’s likely that you’ve come across some articles representing mobile apps as modern-day brokers. They’ve gotten quite popular in recent years, and the simplest way to assess them is to say that they work. These apps are meant to make investing cheaper and easier, and to give investors more control over their funds. For the most part, they do just that.

This doesn’t mean that you have to use an app, nor even that you necessarily should. Ultimately, it’s most important to find a service you’re comfortable with, and which will handle your portfolio securely and as directed. But as you explore options, know that the major investing apps are largely legitimate.

3. CFDs Are Available for Stocks

If a mobile app can serve as an alternative tool for stock market trading, it’s worth highlighting contracts for difference as alternative methods for investors to consider. Beyond the most well known techniques — such as buying and selling stocks directly or playing the futures market — trading stocks via CFDs makes for a slightly different form of investment.

With these contracts, investors speculate about price movements, but never actually order the purchase or sale of stock. Essentially, if you believe Apple’s stock will go up (or down) in the next week, and you purchase a CFD to that effect, you stand to secure a positive return if the prediction is borne out. It’s an intriguing method for those drawn to the market, but wary of purchasing stock.

4. The Market is Not the Economy

One of the very most important things to understand before you get started with a stock portfolio is that the market is not the economy. All too often the two are synonymous with one another by everyone from low-level investors to high-ranking government finance experts. And yet, we consistently see the stock market and the broader economy behaving in ways that seem to have little to do with each other.

Case in point, the stock market did fine with the economy in free fall just a few months ago. Experts noted that the market at that time seemed “particularly divorced” from what was “happening on the ground,” indicating just how stark the difference can be.

This isn’t to say that there is no relation between the stock market and the economy, nor that they can’t correlate at times. But if you’re starting out with stock market investing, you should still do away with any notion that the market will exactly reflect economic trends.

Editor’s Note: CFD contracts are not allowed in the U.S. They are allowed in listed, over-the-counter (OTC) markets in other major trading countries like the UK. Any financial information or opinions contained in this article are the author’s own and do not represent endorsement or support by SmallBizClub.com.

Published: August 10, 2020
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Allison Brown

Allison Brown has been in the finance industry for over 10 years working as a trader for different kinds of assets. With a passion for writing, Allison aims to share her knowledge of the market to the youth today, to encourage them to invest more in their financial futures.

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