Before we do something in our life, almost anything (there are couple of exceptionals), we need to have a plan. For example, before we go on a trip or a vacation – we are gathering information about the destination, working on fun activities we want to do, searching for museums in our fields of interests, et cetera. Buying stocks is no different.
In this article we will talk about the importance of the definition, while in the next two articles we will talk about the difference between being an investor or a trader.
I am not going to tell you that everybody can make money in the stock market, I think its very nonprofessional to say something like that, and statistics support that. I am also not going to teach you how to make money in the stock market, not because I have something to hide, but because that if something works for one individual it still doesn’t necessarily work for another individual. My goal in the next three articles is to try and give you tools to increase your confidence on building your portfolio.
Before you do anything in the stock market, you need to understand the language. spend some time to learn and understand the important terms of the stock market and the money world, it will increase your confidence significantly. Wikipedia can be a very good source, especially for the beginners among you.
So what is this definition I am talking about? This definition is the key to control your investment and portfolio. It needs to be able to answer three simple, but still very important questions:
- What are you buying?
- Why are you buying?
- When are you selling?
If you can look at yourself in the mirror and answer those three questions, it seems that you are at the right direction, and that you are controlling your investments, and not the other way around.
There is one more thing you need to answer before you start to shape and build your definitions. You need to decide whether you are a trader or an investor. As I said at the beginning of the article, at the next two articles I will discuss about each of them separately. For now, we will try to see how to answer the three questions I mentioned before.
What are you buying? – This is the most simple, yet, most important question. It simple because the answer should be a company`s name, its important because this company`s stock performance will determine whether you will make money or lose money.
Why are you buying? – Now you need to start working. To answer this question you need to detail the entire elements which brought you to the buying conclusion (if you are a short seller – selling conclusion). The buying decision should be based on true and real data, or/and decent assumptions. It’s very important to write down what you expect from the stock/company and why, it`s also important to write down the risks involved with it. You need to remember that great returns comes with great risk, if it was easy – we were all rich and you know it doesn’t work that way. I believe, that if you understand the risk involved, in whatever it is that you are doing, you are much more in control because you are always on top of things – it`s harder to surprise you.
When are you selling? – This might be the most important question because it will determine what will be your maximum lose, yes, you read it right – the maximum lose. A stock can go up thousands and thousands of percentage, but you can only lose 100% (again, talking about stocks buying and not short selling). In the next two articles I will show you the definition different between an investor and a trader according to this question (and the other questions as well). The selling price can be updated (and should be updated), but only in one direction – up, it is also very important to obey your numbers and to remember that the only one you are cheating is yourself.
The answer to these questions will define your investing/trading strategy, but answering those three questions is one thing, following your answers is a different thing. In order to make sure you follow the rules you set to yourself, there are couple of things you can do, I will give you one good example that works for me, but each and one of us react differently to different things and situations, so it is important you find what works for you. What I suggests is to write it down and hang it in a place you can see it during the day, when you see it in front of you it is much easier to obey it then when it is somewhere you can`t see it.
In the next two articles, as I mentioned before, I will talk about the definition different between investing and trading, and you will see how the CEO game can help you work on shaping the right strategy that works for you.
The CEO Game.